Other economic activities/ agents not captured in CFD • Government spending

– Spending of the government; payment to firms

• Government payments for factors (inputs)
Introduction to Macroeconomics
Jason P. Alinsunurin/ Lecturer, EC102 FACTOR SERVICES



– Payment of government to workers, rentals to buildings, etc.


• Transfer payments (payments wherein one party is not obliged to deliver a good or service in return for a payment) • Taxes
– Taxes paid on income, property, goods and services,.

The Circular Flow Diagram
A world composed of only households and firms

• Transactions with the foreign sector
– Exports and imports

The Economic Output
• Gross Domestic Product (total value of all final goods and services produced of an economy)
– Market Value: price per unit of the good multiplied by the quantity produced • Vi=Pi * Qi GDP only measures final goods (vs. intermediate goods)

The Approaches would be equivalent How do we measure GDP?
• Expenditure Approach- Calculating the sum of all expenditures on final goods • The three approaches just represents different views of the transaction. • In any sale of a final good or service, one party makes a payment (expenditure) and another party receives a payment (income)
– Expenditure approach-GDP is calculated from the side making the payment – For the income approach, we simply identify how the income is divided. – For value added: firms pay factor payments to households. The payment is the income of households. – STATISTICAL DISCREPANCY- captures reporting and recording errors that cause GDP estimates to differ.


(Price per unit* quantity sold)

• When it is divided by the total population, we would be getting the average per capita income or GDP of each person in the economy • Thus the per capita GDP can be more comparable with other countries

• Income approach- Measures the contribution of different factors of production to the value of a good.
– GDP= wages + rent + profits + rent

• Value Added- Calculated by taking the difference between the sales and the sales from other firms
– Value Added= sales – purchases from other firms

Items in the Value Added or Industrial Origin Approach The Expenditure Approach Items in Income approach
• Compensation of employees
– Salaries and wages • Net operating surplus- an item that lumps together sources of income other than labor

• Aggregated into industries
– Agriculture, fishery and forestry • Production of agricultural crops, ornamental plants and livestock. Aquaculture, municipal fishing, and harvest of marine products. Also logging and gathering of forest products – Industry • Mining, quarrying, manufacturing, constructions and utilities. – Services • Transportation, trade, finance, real estate, private services, government services

• GDP= C + I + G + NX
– C is the personal consumption expenditure, I is for Gross Domestic Capital Formation or Investment Spending, G is for Government Spending and NX is for Net Exports.

• Depreciation
– Consumption of existing capital stock, and allowance for wear and tear.

– NX= X-M, where X is for Exports and M is for

• GNP= GDP + Net factor income
from the rest of the world (eg: remittances)

• Indirect taxes less subsidies
– Taxes on the use or purchase of goods and services, and also grants of the government to firms.

Nominal and Real GDP
• Prices change • How are we going to take account of the effects of changes in prices?

Nominal and Real GDP
• GDP at current prices: Nominal GDP • GDP at constant prices: Real GDP
Year 1

Price index
Year 2

Quantity 100 100

Price 50 100

Value 5000 10000

Quantity 100 100

Price 100 200

Value 10000 20000

The Philippine GDP Accounts Ice cream Buko Pie Nominal GDP



• Measures the cost of purchasing a given bundle of goods in one period relative to the cost of purchasing a given bundle of goods in the base year. • Ex: price index is 125---prices are 25% higher in that year compared to the base year. • GDP Deflator Real GDP= (Nominal GDP/ GDP Deflator)*100

Selected Values and Indicators of the Philippines selected years
GDP at current prices (million pesos) GDP Deflator (base year=1985) GDP at constant prices Per capita GDP at current prices pesos) Per capita GDP at contant prices Population ( in millions)

1984 524,481 85.01 616,964 9,890 11,634 53.03

1985 571,883 100.00 571,883 10,524 10,524 54.34

1986 608,887 102.95 591,440 10,935 10,622 55.68

1996 2,171,922 255.78 849,137 30,208 11,810 71.90

1997 2,423,640 271.40 893,014 32,961 12,145 73.53

Per Capita GDP
• =GDP/ population • Does nor necessarily translate to equal distribution of wealth

GNP for cross-country comparisons • GNP in US dollars= GNP in pesos/ π • Per capita GNP in US dollars= per capita GNP in pesos/ π • Where π is the prevailing exchange rates • In order to compare with different countries

Economic Indicators for Selected Countries
Country Population in millions 54 82 204 126 22 75 3 61 59 270 GNP in billions 1466.2 2122.7 138.5 4089.9 79.8 78.9 95.01 134.4 1263.8 7921.3 Per capita GNP 24490 25850 680 32380 3600 1050 3060 2200 21400 29340 PPP adjusted per capita GNP 22320 20810 2790 23180 6990 3540 28620 5840 20640 29340

France Germany Indonesia Japan Malaysia Philippines Singapore Thailand UK USA

Purchasing power parity (PPP)
• Exchange rate that adjusts for the costs of purchasing a given bundle of goods in one country relative to another. • We can derive the PPP adjusted GNP or PPP adjusted per capita GNP.

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