Measuring

Gross Domestic Product (GDP)
INCOME APPROACH

Review
Gross Domestic Product (GDP)
Macroeconomic Variable Total Output

“Gawa Dito sa Pilipinas”

Everything that is produced within the territorial bound of the country in a given period in time

Three Fundamental Approaches in Measuring GDP
Product Approach

Expenditure Approach
Income Approach

Product Approach Income Approach
Expenditure Approach

• Output that producers produce during a period in time. • Calculates Market value of Goods and Services produced.

• Sums the income received by all producers in the country.

• Measures what everybody spends in the economy • Calculates the final spending on goods and services.

These three approaches are equivalent, with each rendering same results.

Why are they Equivalent?
Product Approach

Expenditure Approach

Income Approach

Expenditure Approach

Income Approach
• • • • • Rental Income Proprietor’s Income Corporate Profits Net interest Compensation of Employees:
– Wages – compensation for labor for a short period of time. – Salary – payment for labor in a longer period of time. (ex. Monthly salary).

Income Approach
Rental Income Proprietor’s Income Corporate Profits Net interest Compensation of Employees (wages / Salaries)

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Gross Domestic Product

Income Approach
It is important to recognise that only those incomes that are actually generated through the production of output of goods and services are included in the calculation of GDP by the income approach.

Income Approach
• We exclude from the accounts the following items:
– Transfer payments e.g. the state pension paid to retired people; income support paid to families on low incomes; the Jobseekers’ Allowance given to the unemployed and other forms of welfare assistance including child benefit and housing benefit. – Private transfers of money from one individual to another. – Income that is not registered with the BIR. Every year, billions of peso worth of economic activity is not declared to the tax authorities. This is known as the shadow economy where goods and services are exchanged but the value of these transactions is hidden from the authorities and therefore does not show up in the official statistics. It is impossible to be precise about the size of the shadow economy but some economists believe that between 8 – 15 per cent of national output and spending goes unrecorded by the official figures.

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