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Other economic activities/ agents not captured in CFD
• Government spending
– Spending of the government; payment to firms
• Government payments for factors (inputs)
– Payment of government to workers, rentals to
Introduction to Macroeconomics FIRMS HOUSEHOLDS buildings, etc.
Jason P. Alinsunurin/ Lecturer, EC102
FACTOR SERVICES • 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 • Transactions with the foreign sector
A world composed of only households and firms – Exports and imports

The Economic Output The Approaches would be equivalent
• Gross Domestic Product (total value of all final How do we measure GDP? • The three approaches just represents different views
goods and services produced of an economy) of the transaction.
• Expenditure Approach- Calculating the sum of all
– Market Value: price per unit of the good multiplied • In any sale of a final good or service, one party makes
by the quantity produced expenditures on final goods
a payment (expenditure) and another party receives a
• Vi=Pi * Qi payment (income)
GDP only measures final goods (vs. intermediate –Σ (Price per unit* quantity sold)
– Expenditure approach-GDP is calculated from the side
goods) • Income approach- Measures the contribution of making the payment
• When it is divided by the total population, we different factors of production to the value of a good. – For the income approach, we simply identify how the
would be getting the average per capita income or – GDP= wages + rent + profits + rent income is divided.
GDP of each person in the economy • Value Added- Calculated by taking the difference – For value added: firms pay factor payments to
• Thus the per capita GDP can be more comparable households. The payment is the income of households.
between the sales and the sales from other firms
with other countries – STATISTICAL DISCREPANCY- captures reporting and
– Value Added= sales – purchases from other firms recording errors that cause GDP estimates to differ.
Items in the Value Added or
Industrial Origin Approach
The Expenditure Approach Items in Income approach • Aggregated into industries
– Agriculture, fishery and forestry
• Compensation of employees
• GDP= C + I + G + NX – Salaries and wages • Production of agricultural crops, ornamental plants
– C is the personal consumption expenditure, I is for and livestock. Aquaculture, municipal fishing, and
• Net operating surplus- an item that lumps together
Gross Domestic Capital Formation or Investment sources of income other than labor
harvest of marine products. Also logging and
Spending, G is for Government Spending and NX is gathering of forest products
for Net Exports. • Depreciation
– Industry
– Consumption of existing capital stock, and allowance
– NX= X-M, where X is for Exports and M is for for wear and tear. • Mining, quarrying, manufacturing, constructions and
Imports. utilities.
• Indirect taxes less subsidies
• GNP= GDP + Net factor income – Services
– Taxes on the use or purchase of goods and services,
and also grants of the government to firms. • Transportation, trade, finance, real estate, private
from the rest of the world (eg: services, government services

Nominal and Real GDP
• Prices change Nominal and Real GDP
• How are we going to take account of the effects of • GDP at current prices: Nominal GDP Price index
• GDP at constant prices: Real GDP • Measures the cost of purchasing a given bundle of
changes in prices?
goods in one period relative to the cost of
Year 1 Year 2
purchasing a given bundle of goods in the base
Good Quantity Price Value Quantity Price Value year.
The Philippine GDP Accounts • Ex: price index is 125---prices are 25% higher in
Ice 100 50 5000 100 100 10000
cream that year compared to the base year.
Buko Pie 100 100 10000 100 200 20000 • GDP Deflator
Real GDP= (Nominal GDP/ GDP Deflator)*100
15000 30000
Selected Values and Indicators of
the Philippines selected years GNP for cross-country comparisons
Item 1984 1985 1986 1996 1997 Per Capita GDP
GDP at current
prices (million
524,481 571,883 608,887 2,171,922 2,423,640 • =GDP/ population • GNP in US dollars= GNP in pesos/ π
GDP Deflator (base
• Does nor necessarily translate to equal
85.01 100.00 102.95 255.78 271.40
distribution of wealth
GDP at constant
616,964 571,883 591,440 849,137 893,014 • Per capita GNP in US dollars= per
Per capita GDP at 9,890 10,524 10,935 30,208 32,961 capita GNP in pesos/ π
current prices
Per capita GDP at 11,634 10,524 10,622 11,810 12,145
contant prices
Population ( in
• Where π is the prevailing exchange rates
53.03 54.34 55.68 71.90 73.53
• In order to compare with different countries

Economic Indicators for Selected
Country Population in GNP in Per capita PPP adjusted
millions billions GNP per capita
Purchasing power parity (PPP)
France 54 1466.2 24490 22320
Germany 82 2122.7 25850 20810 • Exchange rate that adjusts for the costs of
Indonesia 204 138.5 680 2790 purchasing a given bundle of goods in one
Japan 126 4089.9 32380 23180 country relative to another.
Malaysia 22 79.8 3600 6990
• We can derive the PPP adjusted GNP or
Philippines 75 78.9 1050 3540
PPP adjusted per capita GNP.
Singapore 3 95.01 3060 28620
Thailand 61 134.4 2200 5840
UK 59 1263.8 21400 20640
USA 270 7921.3 29340 29340