SSE 107 Macroeconomics SG 5

FM-AA-CIA-15 Rev.
0 10-July-2020
Study Guide in (Course Code and Course Title) Module No._5_
SSE 107 - Macroeconomics
STUDY GUIDE FOR MODULE NO. 5
National Income Accounting
MODULE OVERVIEW
Module Outline
A. Approaches to National Income Accounting
1. Income Approach
2. Expenditure Approach
3. Industrial Origin Approach
B. Gross National Product (GNP) Accounting: Meaning, Purpose and Limitations
C. GNP vs. Gross Domestic Product (GDP)
D. Money GNP vs. Real GNP
Introduction
National income accounting provides us the measurement of aggregate economic activity as well as a
useful perspective on the way the economy works.
This particular module discusses the different approaches to national income accounting. It also deals
with a discussion of the GNP and GDP giving emphasis on their purposes and limitations. Money GNP and
Real GNP will be further discussed focusing on computing/calculating their values for a more elaborated
interpretation and analysis of these topics.
MODULE LEARNING OBJECTIVES
At the end of the module, students are expected to:
1. explain the important role of national income accounting to the national economy;
2. differentiate between GNP and GDP; and Money GNP and Real GNP;
3. calculate Real GNP and Money GNP; and
4. explain each of the three approaches to national income accounting.
LEARNING CONTENTS (title of the subsection)
Approaches to National Income Accounting
Though there is no perfect way of estimating national output and income, an economy nonetheless still
utilizes the national income system because of its role to national economy and government, viz:
1. National income accounting system permits us to measure the level of production in the economy at
some point in time and explain why it is at that level.
2. By comparing national income accounts over a number of years, we can track the long-run course of
the economy and see whether it has grown, been steady or stagnated.
3. Information supplied by national income accounts provides a basis for formulating and applying public
policies to improve the performance of the economy.
National Income is a measure of the money value of the total flow of goods and services produced in an
economy over a specified period of time. It consists of the following:
1. Wage or salary – those generated by labor
2. Interest – those generated by lenders of funds
3. Rent – those generated by owners of real estate
4. Profit – those generated by the entrepreneurs
5. Net factor – income from abroad
PANGASINAN STATE UNIVERSITY 1

FM-AA-CIA-15 Rev. 0 10-July-2020
Approaches to National Income Estimation
1. Industrial Origin Approach (or Value Added Approach). It measures the national income by
determining the sum of the market value of the total production of all the major industries comprising the
economy. The major industries consist of the following:
a. agriculture, fisheries and forestry
b. industrial sector
c. service sector

2. Product Approach (or Expenditure approach). It involves calculating the sum of all expenditures on
final goods. These are the expenditures of the end-users of the output produced in a given year. The end-
users are the households, business firms, the government and the rest of the population. This can be
summarized as follows:
GNP = C + I + G + (X – M) where:
GNP = Gross National Product

C = Personal Consumption Expenditure
I = Gross Domestic Capital Formation
G = Government Consumption Expenditure
X = Exports
M = Imports

3. Factor Income Approach. An approach where the total amount of earnings of the owners of economic
resources (land, labor, capital, entrepreneur) are aggregated into a single amount with the objective of
determining the national income.
LEARNING ACTIVITY 1
A. Direction: Identify in WHAT APPROACH the following items are used: EXPENDITURE or INCOME or
INDUSTRIAL ORIGIN.
___________________________ 1. General Government Consumption Expenditures
___________________________ 2. Exports of Goods
___________________________ 3. Household Economic Income
___________________________ 4. Net Foreign Factor Income
___________________________ 5. Government earnings from enterprises
___________________________ 6. Personal entrepreneurial profits
___________________________ 7. Service Sector contribution
___________________________ 8. Corporate Profits
___________________________ 9. Gross Domestic Capital Formation
___________________________ 10. Indirect Taxes

B. Identify in WHAT EXPENDITURES the following items are classified: Personal Consumption Expenditure
(C) or Gross Domestic Capital Formation (I) or Government Consumption Expenditure (G).
__________1. Pension payments to GSIS retirees
__________ 2. Computer machine of Banco De Oro
__________ 3. Your mother’s transportation expenses
__________ 4. Stock of new cars of Mitsubishi Philippines
__________ 5. Repair of South Expressway
__________ 6. Your snack purchases at the restaurant
__________ 7. Salaries of public school teachers
__________ 8. New disco lights and audio equipment at SSD Disco
__________ 9. Construction of flyovers at Roxas Blvd.
__________ 10. Food requirement of your family
LEARNING CONTENTS (title of the subsection)
Gross National Product (GNP) Accounting: Meaning, Purpose and Limitations
Gross National Product (GNP) refers to the market value of all the final goods and services
produced by nationals or citizens of a country in one year. This includes production within and outside of the
country under consideration. Gross Domestic Product (GDP) on the other hand refers to the total market
value of all final goods and services produced within the territories of a country in one year.
A clearer distinction between the two is illustrated Table 1.
Table 1 - GNP vs. GDP
GNP Production within the Philippines by Production within the Philippines by

Philippine Nationals Foreign Nationals
GDP Production within the Philippines by Production outside the Philippines by
Philippine Nationals Philippine Nationals
Functions of GNP
Gross National Product has the following functions, namely:
1. GNP reflects the value of the economy’s production.
2. GNP figures show the structure of production according to end use and factor contribution.
3. GNP accounting serves as a barometer of aggregate activities in the economy.
The main use of GNP measurement is that it affords a quantitative measure of economic performance. It
serves as indicator of the overall performance of the economy.

Limitations of GNP
While GNP has useful functions such as measurement of national economic performance as well as a
tool in both government and business planning, it also has several limitations, viz:
1. GNP does not show the allocation of goods and services among the members of the society.
2. GNP accounting is understated since not all goods and services are accounted for. Some goods do not
pass through the market system.
3. Double counting. In some instances, not only are the finals goods added in the GNP but intermediate
goods as well which are supposedly excluded.
4. The evils of economic growth like pollution, congestion and dirty environment are not reflected in the
GNP.
5. It only measures the quantity of goods and services but not the quality.
6. Incomes or products from illegal sources are not included in the GNP.
MONEY GNP vs. REAL GNP
Money GNP is the value of GNP at current price or market price. It is obtained by multiplying the
number of final products and services by prevailing market prices.
It is expressed as P x Q = GNP.
Table 2 shows the value of Money GNP calculated using the above formula.
Table 2 – Money GNP

Year Quantity Price GNP
1 100 P10 P1,000
2 100 P20 P2,000
3 100 P30 P3,000
4 100 P40 P4,000
5 100 P50 P5,000
Based from the table, the GNP accounts appear to progressively increase since year 1. To conclude
therefore that the national economy has been improving because of increasing GNP is wrong. Take note that
quantity remains the same from year 1 to year 5. So, there is no increase in the number of final products
produced within the last five years.
Real GNP on the other hand is the value of GNP in terms of the number of goods and services
produced.

It is calculated making use of the following formulas:
Real GNP = Money GNP X 100

Price Index
Price Index = Price in a given year x 100

Price in Base year

Table 3 shows the value of Real GNP using the above formulas.
Table 3 - Real GNP (or Adjusted GNP)

(Year 3 = Base Year)
Year Quantity Price Price Index GNP Real GNP

1 100 P10 33.33 P1,000 P3,000
2 100 P20 66.67 P2,000 P3,000
3 100 P30 100 P3,000 P3,000.00
4 100 P40 133.33 P4,000 P3,000
5 100 P50 166.67 P5,000 P3,000
Considering Year 3 as the base year, the Price Index of the base year is:
Price Index = P30 x 100 = 100%

P30
Price Index for Year 1 = P10 x 100 = 33%

P30
Price Index for Year 2 = P20 x 100 = 66%

P30
LEARNING ACTIVITY 2
Direction: Solve for the Price Index and Real GNP.
Real GNP (or Adjusted GNP)

(Year 2 = Base Year)
YEA QUANTITY PRICE PRICE GNP REAL GNP

R INDEX
1 200 P30 6,000
2 200 P60 12,000
3 200 P90 18,000
4 200 P120 24,000
5 200 P150 30,000
SUMMARY
The three approaches to national income accounting dealt with how the performance of an economy in
producing goods and services can be measured. Said approaches revolved around the circular flow of goods,
services and money. The circular flow of goods, services and money shows the transactions and movements
of commodities from one sector to another and the income generated by all these economic transactions;
hence, one can measure the economic performance of a country by analysing the different components of the
circular flow.

Gross Domestic Product is the total market value of all final goods and services produced in an economy
over a period of one year. It excludes production abroad by Philippine businesses and overseas Filipino
workers. Gross National Product, on the other hand, is the total market value of all final goods and services
produced by a nation’s residents regardless of where they are located.
GNP has its shortcomings or limitations but in spite of this, GNP accounting can still be a barometer of
aggregate activities in the economy through time.
REFERENCES
A. BOOKS
De Guzman, Rachele D., et al. (2013). General Economics, Taxation and Agrarian Reform. Meycuayan City,
Bulacan. IPM Publishing.
Medina, Roberto G. (2003). Principles of Economics. Manila. Rex Book Store.
Nebres (2008). Economics: Concepts, Theories and Applications. Mandaluyong City: National Book Store.
Pagoso, Cristobal M. et al. (1996) Introductory Economics. Manila: Rex Book Store.
Viray, et al. (2011). Macroeconomics Simplified. Mandaluyong City: National Book Store.
B. ONLINE SOURCES
https://www.britannica.com/topic/national-income-accounting
https://corporatefinanceinstitute.com/resources/knowledge/economics/national-income-accounting/
https://www.investopedia.com/ask/answers/030415/what-functional-difference-between-gdp-and-gnp.asp
https://www.investopedia.com/terms/g/gnp.asp
https://www.thebalance.com/gross-national-income-4020738

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FM-AA-CIA-15 Rev.

Study Guide in (Course Code and Course Title) Module No._5_