MAC8CLCCnCMlCS Anu 1PL nA1lCnAL LCCnCM?

1hls chapLer wlll ouLllne Lhe scope of macroeconomlcs and how lL convenlenLly dlvldes Lhe naLlonal economy
lnLo dlfferenL secLors 1he overall economy ls so dlvlded so LhaL Lhe governmenL can have an ldea of whaL pollcles lL can
pursue Lo aLLaln growLh and employmenL ln Lhose secLors LhaL are lagglng behlnd

1nL SLCL CI MACkCLCCNCMICS
ln prevlous chapLers we were concerned wlLh mlcroeconomlcs whlch ls Lhe sLudy of lndlvldual prlces
quanLlLles and markeLs ln conLrasL macroeconomlcs deals wlLh Lhe behavlor of Lhe economy as a whole lL examlnes
Lhe forces LhaL affecL many consumers flrms and workers aL Lhe same Llme ln mlcroeconomlcs for example one
conslders how Lhe prlce of a cerLaln good can change wlLh Lhe changlng forces of supply and demand ln
macroeconomlcs Lhe prlces of all goods are consldered as are Lhe producLlon of all goods and servlces 1hls helps Lhe
governmenL Lo combaL problems of lnflaLlon or rlslng average level of all prlces deal wlLh economlc crlses and achleve
longLerm economlc growLh

1nL DIIILkLN1 SLC1CkS CI 1nL LCCNCM
LconomlsLs have found lL useful Lo dlvlde Lhe economy lnLo dlfferenL secLors 1hese are households flrms and
Lhe governmenL 1hese Lhree maln secLors lnLeracL Lo deLermlne how much goods and servlces socleLy wlll be able Lo
produce LeL us seL aslde governmenL for now and focus on Lhe Lwo oLher secLors households and flrms 1here Lwo
secLors make declslons LhaL affecL Lhe overall performance of Lhe economy
Pouseholds declde how much of goods and servlces Lhey wlll purchase Pouseholds also provlde Lhe labor LhaL
flrms need ln producLlon and aL Lhe same Llme declde how much work Lo provlde
llrms based on how much households are wllllng Lo purchase flrms deLermlne whaL goods and servlces wlll be
produces and ln whaL quanLlLles llrms also pay ouL compensaLlon or lncomes for Lhe labor provlded by Lhe households

1he comblned declslon of all households and flrms Lhen deLermlne Lhe LoLal expendlLures spenL on goods and servlces
by consumers and Lhls wlll be equlvalenL Lo Lhe LoLal value of goods and servlces produced by flrms 1hls Lhen
deLermlnes Lhe level of producLlon of Lhe economy as a whole

1he Interact|on of nouseho|ds and I|rms
lL can be seen LhaL Lhere ls a flow of goods and servlces from flrms Lo households Lhrough producLlon and a
flow of purchases of Lhese commodlLles from households Lo flrms 1he flrms produce ouLpuL and households ln Lurn pay
for Lhe flrms' ouLpuL Lhrough Lhelr expendlLures 1hen Lhere ls also a flow of labor servlces (and oLher lnpuL servlces llke
land and caplLal) provlded by households Lo Lhe flrms LhaL employ Lhem llrms ln Lurn pay for Lheses servlce
1able 201 descrlbes Lhese flows of commodlLles and paymenLs for lnpuLs more clearly Pouseholds are Lhe
owners of lnpuLs Lo producLlon whlle flrms malnly produce Lhe ouLpuLs LhaL households purchase 1he followlng polnLs
should be kepL ln mlnd whlle looklng aL Lhe Lable
1 overnmenL performs lmporLanL economlc funcLlons ln managlng Lhe economy alLhough for now we dld noL
lnclude lL ln our framework
1ab|e 201 IN1LkAC1ICN 8L1WLLN nCUSLnCLDS AND IIkMS
nouseho|ds I|rms
Cwners of lnpuLs or facLors of producLlon
(land labor caplLal)
Lmploy Lhe facLors of producLlon provlded by households
Lo produce Lhe goods and servlces Lhey sell
AccepL paymenLs from flrms for Lhe lnpuLs
Lhey supply
Make paymenLs Lo households for Lhe servlces (labor or
use of land and caplLal servlces) Lhey provlde
uy goods and servlces produced by Lhe
flrms
Sell goods and servlces Lo households
2 AlLhough lL ls noL shown ln Lhe Lable markeLs serve as Lhe common place where households demand for or
purchase of goods ls meL by flrms' producLlon

1he flow of producLlon lnpuLs and ouLpuLs and Lhe paymenLs Lo Lhem ls furLher lllusLraLed ln llgure 201 1he
lower porLlon of Lhe flgure shows Lhe expendlLures households make afLer flrms have produced Lhe commodlLles LhaL
household wanL 1hese commodlLles or goods and servlces may undergo several producLlon processes before Lhey are
flnally sold Lo households lL ls Lhese flnal goods LhaL are used Lo measure Lhe counLry's ross naLlonal roducL or n
1he n ls an aggregaLe measure of Lhe LoLal expendlLures made on flnal goods and servlces
1he upper parL of Lhe flgure shows Lhe flow of paymenLs made by flrms for Lhe labor and oLher lnpuL servlces
provlded by households 1hese paymenLs come ln Lhe form of salarles renLs for caplLal and land lL ls easy Lo see LhaL
Lhese paymenLs are Lhe source of lncome LhaL households use Lo purchase Lhe commodlLles produced by flrms lf
lncomes on Lhe lnpuL slde of producLlon are Lhe same as Lhe paymenLs made on Lhe ouLpuL slde Lhen n can also be
compuLed from Lhe lnpuL slde of producLlon lL ls a measure of Lhe flow of lncomes or paymenLs Lo Lhe dlfferenL facLors
of producLlon
ln oLher words households demand goods and servlces whlle flrms supply Lhem Cn Lhe oLher hand flrms
demand facLor lnpuLs and households supply Lhese lnpuLs Lo producLlon

I|gure 201 ILCW CI LkLNDI1UkLS AND INCCMLS


We should also be careful Lo noLe LhaL flrms also consume goods and servlces and also buy lLs lnpuLs from oLher
flrms aslde from hlrlng labor from households ln addlLlon noL all households are employed ln flrms some engage ln
buslnesses Lhemselves lor now however we avold Lhese varlaLlons for us Lo more fully appreclaLe how Lhe economy
works

1nL MAIN kC8LLMS CI MACkCLCCNCMICS
We now Lurn Lo Lhe maln lssues ln macroeconomlcs LhaL governmenLs Lry Lo solve 1hese problems arlse from
Lhe flow of boLh commodlLles and facLors of producLlon Cverall producLlon prlces and employmenL are Lhen affecLed

unemploymenL
As we sald lL ls Lhe flrm LhaL hlres Lhe labor servlces from Lhe households lL ls Lhe households LhaL supporL
producLlon Lhrough Lhe labor (and oLher lnpuLs) Lhey provlde Pouseholds may usually seek [obs ln flrms LhaL sulL Lhelr
skllls lL may happen however LhaL noL everyone who seeks work may flnd one 1hls ls whaL ls known as
unemploymenL Pow does lL happen?
1here may be much reason and economlsLs are always debaLlng abouL Lhe lssues uL one reason ls LhaL flrms
may noL be able Lo sell all Lhe goods and servlces Lhey produce llrms ln Lhelr goal Lo make proflLs make esLlmaLes of
how much goods Lhey would be able Lo sell and hlre Lhe needed labor and oLher producLlve servlces Lhey need
SomeLlmes how much Lhey acLually sell may fall shorL of Lhelr esLlmaLes 1hey Lhen accumulaLe unwanLed excess goods
or lnvenLorles as Lhey are called As Lhey accumulaLe more lnvenLorles Lhey flnd LhaL Lhelr ouLpuL or producLlon may
have Lo be reduced 1hls ls done so Lhey can balance Lhelr producLlon wlLh Lhelr lower sales ln dolng so Lhey hlre less
labor and oLher producLlve lnpuLs eople Lhen lose Lhelr [obs and Lhelr lncomes Loo because flrms become less
proflLable by malnLalnlng Lhem 1hls ls how unemploymenL may occur

lnflaLlon
1hls slmple means rlslng average level of all prlces Agaln Lhere may be varlous reasons why prlces rlse and one
ls when Lhe reverse slLuaLlon from unemploymenL occurs lnsLead of falllng shorL of Lhelr sales expecLaLlons flrms may
flnd LhaL Lhey are selllng more Lhan Lhey can handle 1haL ls consumers wanL more goods and servlces LhaL flrms are
produclng llrms can Lhen hlre more labor and more producLlve lnpuLs Lo ralse producLlon and be able Lo sell more ln
Lhls case prlces may noL ralse so much lf aL all uL flrms are noL always equlpped Lo hlre all Lhe labor and producLlve
facLors Lhey need When Lhe socleLy's demand for commodlLles runs hlgh flrms may have Lo produce aL Lhelr full
capaclLy AL Lhls sLage flrms may no longer be able Lo ralse producLlon lor Lhe economy as a whole Lhls means LhaL
mosL of lLs producLlve resources are already belng employed and lL becomes dlfflculL Lo produce more Lo meeL socleLy's
demand ecause ouLpuL cannoL rlse prlces wlll have Lo lncrease Lo balance producLlon wlLh hlgh demand

Lconomlc rowLh
1he growLh of Lhe economy may refer Lo Lhe growLh of producLlon of goods and servlces uL more lmporLanLly
Lhls occurs because socleLy's resources (land labor and caplLal) become more producLlve ln produclng commodlLles
1hls means LhaL a glven lnpuL wlll be able Lo produce more ouLpuL Cne way LhaL lnpuLs become more producLlve ls
Lhrough advances ln Lechnology A machlne for example may produce 10000 papercllps a day lL becomes more
producLlve when lL can produce more Lhan 10000 papercllps 1hls can occur Lhrough lmprovemenLs ln Lhe way Lhe
machlne operaLes or Lhrough advances ln Lechnology 1ypewrlLers for lnsLance were used before Lo Lype reporLs and
leLLers 1he lnvenLlon of compuLers has made Lhls an easler Lask More reporLs can now be made wlLh compuLers and
correcLlng mlsLake ls made easler



PCuSLPCLuS ll8MS
MarkeL for lacLors of roducLlon
MarkeL for oods and Servlces
lacLors of roducLlon
(Land Labor CaplLal)
aymenLs for lacLor of roducLlon
LxpendlLures on oods and Servlces
aymenLs for Labor
And CLher Servlces
aymenLs for Labor
and CLher Servlces
uemand
uemand
Supply
Supply
Slmple model
?C
DIIILkLN1 MCDLLS CI nCW INCCMLS AND LkLNDI1UkLS ILCW
We can develop a deeper undersLandlng of how Lhe overall economy works by glvlng acLual examples of how
lncomes and expendlLures move around our clrcular flow dlagram We wlll also be able Lo see Lhe flow of goods and
servlces and geL a gllmpse of how Lhe economy may grow

1nkLL MCDLLS
We can use llgure 211 as our lnlLlal dlagram 1hls ls slmllar Lo Lhe prevlous dlagram only now we have added
hypoLheLlcal amounLs represenLlng how much households earn and spend on goods and servlces

I|gure 211 INI1IAL MCDLL

ln pracLlce mosL of Lhe lncomes LhaL households earn are used Lo purchase goods and servlces and Lhe resL are
saved for emergencles or fuLure use uL Lo make Lhlngs slmple leL us say LhaL everyLhlng LhaL households earn as
lncome ls also spenL on goods and servlces LhaL ls Lhelr savlngs ls 0 lf we leL ? represenL lncome and C consumpLlon
expendlLures Lhen lf households' lncome ls hp 100 000 Lhelr consumpLlon would be Lhe same amounL




1hls expendlLure by households ls also reflecLed as Lhe value of producLlon (or sales revenues) by Lhe flrms
(equal Lo hp 100000) as llgure 211 shows lor Lhe economy as a whole ? can be called naLlonal lncome and C
represenLs Lhe expendlLures of Lhe consumer or household secLor

now leL us conslder Lhe nexL shown llgure 212 where we add savlngs and lnvesLmenL As we sald households
generally dlvlde Lhelr lncomes lnLo expendlLures and savlngs So now leL us add savlngs lnLo Lhe equaLlon whlch we wlll
call S lf households save hp 10000 of Lhelr lncome we Lherefore have Lhe followlng




lor flrms on Lhe oLher hand we wlll also need Lo add lnvesLmenL (l) ln economlcs lnvesLmenL refers Lo Lhe
amounLs LhaL flrms spend on goods LhaL are used for furLher producLlon lf for example producers wlsh Lo expand
producLlon Lhey may have Lo buy more machlnery and equlpmenL uL where do buslnesses geL Lhe funds for Lhelr
lnvesLmenL needs? ln llgure 211 we show LhaL Lhese lnvesLmenLs come from Lhe savlngs of households AlLhough lL ls
noL shown ln Lhe flgure households usually place Lhelr savlngs ln banks for safekeeplng and Lo earn lnLeresL anks Lhen
use Lhese savlngs Lo lend Lo buslnesses LhaL may need funds for Lhelr lnvesLmenL needs lf households' savlngs ls hp
10000 Lhen Lhls can also be Lhe avallable amounL for buslness lnvesLmenL




1he equallLy of savlngs and lnvesLmenL means LhaL household savlngs can be used by Lhe buslnesses Lo purchase
machlnery equlpmenL and oLher lnvesLmenL goods as Lhey pursue Lhelr expanslon plans
Savlngs ls also an ouLflow" from Lhe expendlLures of households buL Lhese reLurn Lo Lhe expendlLure cycle
Lhrough lnflows of funds for lnvesLmenL purchases made by flrms


PCuSLPCLuS ll8MS
oods and Servlces
lacLors of roducLlon
aymenLs for lacLor of roducLlon
hp 100 000
ConsumpLlons LxpendlLures
(oods and Servlces) hp 100 000
? C
hp 100000 hp 100000
? C + S
hp 100000 hp 90000 + hp 10000
? C + l
hp 100000 hp 90000 + hp 10000
C + S ? C + l
1herefore S l
? C + l +
hp 100 000 hp 80 000 + hp 10000 + hp 10 000
IIGUkL 211 SLCCND MCDLL

We can now see LhaL naLlonal lncome (?) conslsLs of households' expendlLures on goods (C) and lnvesLmenL
expendlLures by buslness (l) slnce ? C + l ln llgure 213 we now add Lhe role of governmenL ln Lhe economy

I|gure 213 1h|rd Mode|


arL of Lhe governmenL's economlc role ls Lo lmpose Laxes on lncomes lor households Lhls means LhaL noL all of
lncome ls avallable for spendlng (C) and savlng (S) parL of Lhelr lncome goes Lo governmenL Laxes lf we leL 1 represenL
Laxes pald by households Lhen Lhelr lncome conslsLs of equaLlon below Assumlng LhaL households earn hp 100000 as
lncome spend hp 80000 save hp 10000 and are Laxed hp 10000 by Lhe governmenL and Lhen we have



WhaL are Laxes for? 1axes are Lhe maln source of revenues of Lhe governmenL 1hese are used Lo fund Lhe expendlLures
Lhe governmenL makes Lo dellver dlfferenL servlces Lo socleLy 1he governmenL uses Laxes Lo fund publlc educaLlon and
healLh servlces and Lo bulld roads brldges and Lrafflc llghLs LhaL we may ofLen Lake for granLed overnmenL also makes
purchases of compuLers paper and oLher goods and servlces for lLs operaLlons lf Lhere were no Laxes Lhen governmenL
would have no means Lo provlde Lhese publlc servlces lf Laxes (1) are hp 10 000 Lhen maxlmum governmenL
expendlLures are also hp 10 000 lf we leL represenL governmenL expendlLures Lhen we have

PCuSLPCLuS ll8MS
oods and Servlces
lacLors of roducLlon
aymenLs for lacLor of roducLlon
hp 100 000
ConsumpLlons LxpendlLures
(oods and Servlces) hp 80 000
Savlngs
hp 10000
llnanclal lnsLlLuLlon
(ank)
lnvesLmenL
hp 10000
1axes
hp 10000
overnmenL

overnmenL LxpendlLures
hp 10000
PCuSLPCLuS ll8MS
oods and Servlces
lacLors of roducLlon
aymenLs for lacLor of roducLlon
hp 100 000
ConsumpLlons LxpendlLures
(oods and Servlces) hp 90 000
Savlngs
hp 10000
llnanclal lnsLlLuLlon
(ank)

lnvesLmenL
hp 10000
C
u
L
f
l
o
w

(
L
e
a
k
)

l
n
f
l
o
w

? C + S + 1
hp 100 000 hp 80 000 + hp 10 000 + hp 10 000
? C
? C + S
C + S + 1 ? C + l +
? C + l +
? C + l + + (x M)


Slmllarly


uL Lhls equallLy holds only lf 1 AL Llmes Lhe governmenL may spend more LhaL lL earns and when Lhls
happens wlll exceed 1 1he lmporLanL polnL Lo remember ls LhaL Lhe governmenL's sources of funds for lLs
expendlLures usually come from Lhe Laxes LhaL lL collecLs lor buslnesses Lhe savlngs of households (S) are Lhe source of
Lhelr lnvesLmenL expendlLures (l) for governmenL Laxes (1) are Lhe source of lLs expendlLures ()

When we add governmenL Lo households and flrms (or buslnesses) as parL of Lhe naLlonal economy we can now
see LhaL naLlonal lncome (?) conslsLs of Lhe expendlLures of Lhese Lhree secLors As above we have


lf we wlsh Lo make our model of Lhe economy more reallsLlc we musL go beyond households flrms and Lhe
governmenL 1hese Lhree secLors also engage ln buslness wlLh oLher counLrles Pouseholds may buy goods LhaL are
manufacLured ln dlfferenL counLrles We lmporL when we purchase goods from abroad We buy food lLems llke apples
oranges and chocolaLe bars form Lhe uS compuLers from 1alwan and cars from !apan 1he laLLer may be assembled ln
Lhe counLry buL mosL of Lhe componenLs are lmporLed from abroad 1he same ls Lrue of governmenL lL purchases
commodlLles LhaL are made ln oLher counLrles uslnesses also lmporL equlpmenL and raw maLerlals from Lhe resL of Lhe
world AL Lhe same Llme many buslness also exporL Lhelr producLs LhaL ls Lhey sell Lhelr goods Lo oLher counLrles
When we exporL Lhe earnlngs add Lo Lhe naLlonal economy when we lmporL we make paymenLs Lo oLher
counLrles and Lhls reduces our naLlonal lncome lf for example we exporL hp 8000 worLh of goods and lmporL hp
3000 worLh Lhen on balance we have neL exporLs of hp 3000 (exporLs lmporLs neL exporLs) 1hls means LhaL on
balance hp 3000 was added Lo Lhe naLlonal lncome

Aslde from households buslnesses and governmenL Lhe exLernal secLor ls also parL of Lhe economy and lL adds
Lo naLlonal lncome ld exporLs are x and lmporLs are M and Lhen overall naLlonal lncome lncludlng Lhe exLernal secLor ls


1he sum of Lhe expendlLures of Lhese four secLors ls also called aggregaLe demand lL refers Lo Lhe sum LoLal of
expendlLures of Lhe dlfferenL secLors of Lhe economy
ln summary recall LhaL savlngs (S) Laxes (1) and lmporLs (M) are all ouLflows or leakages from Lhe naLlonal
lncome and Lherefore reduce Lhe level or aggregaLe demand Cn Lhe oLher hand consumpLlon expendlLures (C)
lnvesLmenL expendlLures (l) governmenL expendlLures () and exporLs (x) are lnflows or ln[ecLlons Lo naLlonal lncome
and add Lo Lhe level of aggregaLe demand

MLASUkING NA1ICNAL CU1U1
We already have lnLroduced Lhe dlfferenL secLors of Lhe economy 1hese are Lhe households flrms governmenL
and Lrade secLors ConsumpLlon expendlLures are Lhe expenses of households on dlfferenL goods and servlces 1hls can
lnclude lLems llke food cloLhlng shelLer educaLlon and healLh expenses Pousehold expendlLures can also lnclude so
called durable consumer goods (or durables) llke appllances auLomoblles 1hese are called durables because Lhey Lake a
long Llme Lo depreclaLe or lose value unllke perlshable goods llke food whlch spolls easlly ln [usL a few days lnvesLmenL
expendlLures conslsL of Lhose goods boughL by buslnesses LhaL are used for furLher producLlon uslness flrms buy
machlnery and equlpmenL and alloL expenses Lo expand facLorles or planL lnfrasLrucLure Llke households and
buslnesses governmenL also purchases goods and servlces Lo carry ouL lLs operaLlon 1he governmenL spends on Lhe
salarles of lLs personnel such as publlc school Leachers and governmenL docLors and purchases equlpmenL llke
compuLers and paper llnally Lhe Lrade secLor lncludes Lhe LransacLlons of Lhe counLry's resldenLs wlLh oLher counLrles
We buy commodlLles from abroad aL Lhe same Llme oLher counLrles purchase goods and servlces from Lhe hlllpplnes
GkCSS NA1ICNAL kCDUC1
1he economy produces all sorLs of goods and servlces every year All Lhese commodlLles are accounLed for by
Lhe counLry's ross naLlonal roducL or n More formally n ls deflned as Lhe markeL value of Lhe flnal goods and
servlces produced ln a glven year WhaL ls meanL by markeL value?" MarkeL value means LhaL foods and servlces are
expressed by Lhe expendlLures spenL on Lhem lor example leL's say LhaL 100000 loaves of bread were boughL ln a
glven year and a loaf cosLs hp 30 1he markeL value of all Lhls ls Lhe quanLlLy of bread boughL mulLlplled by Lhe unlL
prlce or 100000 x hp 30 hp 3 000000 uL man and Lhe economy as a whole do noL llve by bread alone Lhe
economy produces Lhousands of goods and servlces 1o compuLe n we mulLlply Lhe prlce and quanLlLles of each
good and servlce LhaL were sold ln a glven year and Lhen add all Lhese values LogeLher MarkeL value Lherefore also
means LhaL we have a common unlL Lo measure Lhe value of goods and servlces lnsLead of addlng all Lhe kllos of beef
chlcken and pork or Lhe number of penclls and chocolaLe bars we consume we mulLlply Lhem by Lhelr unlL prlce so
everyLhlng ls valued ln peso Lerms noLlce LhaL lL ls dlfflculL Lo relaLe quanLlLles of beef Lo Lhe quanLlLles of penclls or
denLal servlces lL becomes easler when we value all Lhese lLems ln pesos or uslng Lhelr markeL value
We also sald LhaL n refers Lo Lhe markeL value of flnal goods and servlces produced ln a glven year WhaL do
we mean by flnal?" 1he producLlon of many goods goes Lhrough dlfferenL sLages llnal means LhaL goods are valued
n C + l + + (x M) + neL lacLor lncome from Abroad + SLaLlsLlcal ulscrepancy
accordlng Lo Lhe lasL producLlon process Lhey have undergone read for example goes Lhrough varlous sLages before lL
ls sold as bread lL ls flrsL planLed as wheaL byu Lhe farmer 1he farmer Lhen may have sold lL Lo Lhe mlller who converLs
Lhe wheaL lnLo flour 1hen Lhe mlller sells lL Lo Lhe baker who Lurns Lhe flour lnLo bread 1hen Lhe baker may have sold
Lhe bread Lo Lhe supermarkeL before lL ls sold Lo households lf a loaf of bread sold by Lhe supermarkeLs ls hp 30 each
Lhls means LhaL lLs prlce already lncludes all Lhe cosL of Lhe dlfferenL sLages of producLlon 1herefore Lhe unlL prlce of
hp 30 lncludes Lhe cosL of Lhe wheaL Lhe mllllng process and Lhe baklng process of Lhose lnvolved Lhe farmer mlller
and baker 1hls also lncludes oLher lngredlenLs LhaL are parL of maklng bread We do noL add Lo Lhe value of Lhe bread
Lhe cosL of Lhelr conLrlbuLlon Lo lLs flnal producL because Lhelr addlLlons Lo Lhe bread's value are already lncluded ln Lhe
flnal prlce
GN and GD
ross uomesLlc roducL (u) ls slmllar Lo n as a measure of naLlonal ouLpuL lL ls also Lhe markeL value of
flnal goods and servlces produced ln a glven year uL Lhere ls a dlfference beLween Lhe Lwo n refers Lo Lhe value of
goods and servlces produced by a counLry's clLlzens whlle u measures Lhe value of commodlLles produced wlLhln Lhe
counLry's borders Any good wlLhln Lhe counLry LhaL ls produced by forelgners ls parL of u buL noL of n As we sald
n measures Lhe value of commodlLles produced by a counLry's clLlzens 1he lncome earned by overseas llllplno
workers (ClWs) Lherefore ls parL of n buL noL of u 1hls ls because u lncludes economlc acLlvlLy wlLhln Lhe
counLry's borders only 1he lncome of ClCs ls earned abroad and Lhus ls parL of n buL noL of u
Approaches to Measur|ng Nat|ona| Cutput
ln Lhe llgure 201 we showed LhaL Lhe amounL of expendlLures LhaL go lnLo purchaslng goods and servlces ls
equlvalenL Lo Lhe flow of lncomes earned ln Lhe producLlon of Lhose commodlLles 1haL ls Lhe flow of expendlLures on
Lhe ouLpuL slde of producLlon ls [usL LhaL same as Lhe flow of lncomes on Lhe lnpuL slde As a resulL Lhere are Lwo
meLhods used Lo measure n or u Lhese are Lhe LxpendlLure Approach and Lhe lncome Approach
1he Lxpend|ture Approach
lrom whaL we learned ln Lhe prevlous lessons Lhe expendlLures of households buslnesses Lhe governmenL
and our LransacLlons wlLh oLher counLrles LogeLher add up Lo make up Lhe naLlon's ouLpuL 1hls conslsLs of consumpLlon
expendlLures (C) lnvesLmenL expendlLures (l) governmenL expendlLures () and neL exporLs (x M) More formally
n ls measured by Lhe followlng equaLlon uslng Lhe LxpendlLure Approach
neL lacLor lncome from Abroad (nllA) ls Lhe dlfference beLween Lhe earnlngs of llllplnos abroad and Lhe
earnlngs of forelgn naLlonals wlLhln Lhe counLry 1hls ls usually a poslLlve amounL whlch means LhaL Lhe earnlng of
llllplnos abroad exceed Lhe earnlngs of forelgn clLlzens ln Lhe counLry Cn Lhe oLher hand SLaLlsLlcal ulscrepancy
accounLs for any errors ln measuremenL LhaL may occur As we sald Lhe measure of n should be Lhe same wheLher
Lhe LxpendlLure Approach or lncome Approach ls used uL Lhere may be errors or dlfflculLles ln measurlng expendlLures
or lncomes accuraLely 1he lLem on SLaLlsLlcal ulscrepancy Lherefore ls used Lo balance ouL Lhose errors

1able 221 shows Lhe dlfferenL componenLs of n and u We can see LhaL Lhe expendlLures of all economlc
secLors household buslness governmenL and Lrade secLors are lncluded We can also see LhaL Lhe dlfference
beLween n and u ls equal Lo Lhe value of nllA noLlce LhaL addlng nllA Lo u glves us n

1ab|e 221 GkCSS NA1ICNAL kCDUC1 AND GkCSS DCMLS1IC kCDUC1 8 LkLNDI1UkL
(19992002 IN MILLICN LSCS A1 CUkkLN1 kICLS)
1999 2000 2001 2002
1 ersona| Consumpt|on
Lxpend|tures
2161643 2333333 2363022 2730833
2 Government Consumpt|on 389238 438838 444834 488740
3 Cap|ta| Iormat|on
A I|xed cap|ta|
| Construct|on
|| Durab|e Lqu|pment
||| 8reed|ng Stocks
Crchard Deve|opment
8 Changes |n Stocks
338231
368248
273906
231341
41002

(9998)
710073
710489
367809
297484
43196

(416)
738460
720702
376813
294734
49133

37738
776191
774078
401113
321036
31909

2113
Lxports
A Merchand|se Lxports
8 Nonfactor Serv|ces
1332160
1343419
186741
1838376
1661703
196873
1783232
1600311
184721
1968334
1786143
182391
Less Imports
A Merchand|se Imports
8 Nonfactor Serv|ces
1327418
1213629
313789
1794717
1390873
203844
1899383
1721993
177392
1989104
1841742
147362
Stat|st|ca| D|screpancy (136971) (193398) 19324 27480
Gross Domest|c roduct 2976903 3334727 3673678 4022694
Net Iactor Income from Abroad 139264 211332 244992 267303
9 Gross Nat|ona| roduct 3136169 3366039 3918679 4290199
n l + l + Cl + l1 S + u
AgrlculLure llsherles and loresLry + lndusLry + Servlces u by lndusLrlal Crlgln
u + nllA n
1he Income Approach
1he LxpendlLure Approach measures naLlonal lncome as Lhe LoLal expendlLures of Lhe dlfferenL economlc
secLors on goods and servlces ln Lhe process of produclng al Lhe goods and servlces paymenLs are also made Lo Lhe
dlfferenL facLors of producLlon land labor and caplLal 1he paymenLs Lo Lhese lnpuLs Lo producLlon musL be equlvalenL
Lo Lhe value of goods and servlces produced

1he followlng lLems are parL of n uslng Lhe lncome Approach
1 ersonal lncome (l) 1hls generally lncludes lncomes of households whlch may come from varlous sources
a Salarles and wages Lhese are Lhe lncomes recelved by workers and employees
b roflLs and dlvldends Lhese are proflLs recelved by employers and lncomes earned from lnvesLlng ln
corporaLlons Lhrough Lhe sLock markeL
c 8enLs Lhese are Lhe paymenLs made on uslng or renLlng land lncludlng renLlng space ln bulldlngs or
facLorles
d lnLeresL Lhls ls Lhe lncome earned from deposlLlng money ln banks or oLher flnanclal lnsLrumenLs llke
bonds
2 overnmenL lncome (l) esldes households Lhe governmenL also earns lncomes from lLs operaLlons lL owns a
few corporaLlons for example whose lncomes become parL of Lhe naLlonal lncome 1he earnlngs of Lhe
naLlonal ower CorporaLlon and Lhe overnmenL Servlce lnsurance SysLem are parL of governmenL revenues
and Lhe naLlonal lncome or n
3 CorporaLe lncome (Cl) 1hls lncludes Lhe lncomes of prlvaLe corporaLlons llke San Mlguel CorporaLlon or Lhe
corporaLlons of Lhe Ayala and Lopez groups of companles

When Lhe Lhree forms of lncomes are added one arrlves aL a measure of Lhe naLlonal lncome or n (wlLh Lhe
addlLlon of oLher lLems)
l l and Cl are already deflned above lL ls lndlrecL Laxes 1hese are Lhe revenues of governmenL from Laxes
LhaL are noL based on lncome or one's ablllLy Lo earn Lhese are usually sales Laxes on dlfferenL goods and servlces
S ls for Lhe subsldles or paymenLs made Lo governmenL acLlvlLles LhaL are noL earnlng well u sLands for depreclaLlon or
Lhe amounL placed on Lhe gradual decllne ln value of Lhe equlpmenL or bulldlngs

GN by Industr|a| Cr|g|n
AnoLher way Lo arrlve aL n ls by addlng up all Lhe value of producLlon of Lhe dlfferenL producLlon secLors of
Lhe economy 1he goods and servlces purchased represenL Lhe expendlLure slde of Lhe economy 1hls ls equal Lo Lhe
lncome slde for Lhe paymenLs made Lo lnpuLs ln producLlon oLh of Lhese wlll also equal Lhe economy's value of
producLlon lf expendlLures are Lhe demand slde of Lhe economy Lhe value of producLlon represenLs Lhe supply slde
1he economy's producLlon secLors are agrlculLure lndusLry and servlces 1able 222 shows LhaL u ls equal Lo Lhe sum
of Lhe values of producLlon ln Lhese secLors noLlce agaln LhaL addlng nllA Lo u glves n We have Lhe followlng
equaLlon for u and n

1ab|e 222 GkCSS NA1ICNAL kCDUC1 AND GkCSS DCMLS1IC kCDUC1 8 INDUS1kIAL CkIGIN (1999 2002 IN MILLICN LSCS A1 CUkkLN1 kICLS)
Industry 1999 2000 2001 2002
1 Agr|cu|ture I|sher|es Iorestry
a Agr|cu|ture and I|shery
b Iorestry
310494
306438
4036
328868
323483
3383
348739
346333
2404
392414
391338
803
2 INDUS1k SLC1Ck
a M|n|ng uarry|ng
b Manufactur|ng
c Construct|on
d L|ectr|c|ty Gas Water
911074
18016
644009
162927
86122
1082431
21788
743837
217273
97311
1191707
21707
831396
222083
116319
1308219
33324
913183
233394
124116
3 SLkVICL SLC1Ck
a 1ransportat|on Commun|cat|on Storage
b 1rade
c I|nance
d Cwnersh|p of Dwe|||ngs kea| Lstate
e r|vate Serv|ces
f Government Serv|ces
1333337
139323
419327
141622
208876
333404
290783
1743428
198936
473004
149062
220947
381648
319811
1933241
247338
317349
160063
236672
433674
337723
2122334
276886
336299
170494
232836
484911
380888
Gross Domest|c roduct 2976903 3334727 3673687 4022694
Net Iactor Income from Abroad 139264 211332 244992 267303
Gross Nat|ona| roduct 3136169 3366039 3198679 4290199

Piice Inuex =
Piice in the Cuiient Yeai
Piice in the Base Yeai

Current Versus Constant Cutput
We sald earller LhaL n ls Lhe markeL value of Lhe flnal goods and servlces produced ln a year n ls Lhe sum
of Lhe producLs of prlces and quanLlLles (prlce mulLlplled by quanLlLles) of commodlLles produced So how do we know
LhaL n ls rlslng?
When n rlses lL may be because of Lwo reasons quanLlLles are rlslng or prlces are rlslng (usually boLh occur)
lf economlsLs wanL Lo flnd ouL lf Lhe economy ls growlng Lhey are more lnLeresLed ln Lhe parL of n LhaL rlses wlLh
quanLlLy raLher Lhan prlce 1haL ls Lhey wanL Lo know lf ouLpuL has rlsen As Lhe populaLlon grows Lhen ouLpuL has Lo
rlse Loo lf Lhere ls enough Lo go around LconomlsLs Lherefore dlsLlngulsh beLween Lwo measures of ouLpuL real nC
and currenL Llme usually ln an upward dlrecLlon CurrenL n (or n ln currenL markeL prlces) ls n wlLhouL
ad[usLlng for changes ln prlces as Lhey rlse every year 8eal n refers Lo n whlle keeplng prlces consLanL so LhaL any
changes ln n as Llme passes reflecL Lhe expanslon of producLlon only noLlce LhaL when currenL n rlses we don'L
know wheLher Lhe lncrease ls Lhe resulL of rlslng prlces or rlslng producLlon CurrenL n does noL make Lhls dlsLlncLlon
8eal n on Lhe oLher hand says LhaL by keeplng prlces Lhe same over Llme any lncrease ln n ls Lhe resulL of a rlse
ln producLlon Pow ls Lhls done? Pow do we make prlces consLanL when Lhey rlse every year?
LconomlsLs usually use a prlce lndex Lo arrlve aL real n 1here are Lhousands of commodlLles ln Lhe economy
and each good has lLs own prlce LconomlsLs lump all Lhese prlces LogeLher lnLo a slngle number Lhe prlce lndex Lo
represenL Lhe overall level of prlces
1o undersLand how all Lhls works leL us look aL 1able 223 We can see LhaL from 2000 Lo 2002 Lhe prlce of
blblngka rose buL producLlon remalned Lhe same aL 10000 unlLs lf we mulLlply prlce and quanLlLy we geL Lhe value of
producLlon ln Lhe lasL column of Lhe Lable We can see LhaL Lhe value of producLlon rose over Lhe Lhree years from
300000 ln 2000 Lo 320000 ln 2002 uL Lhe rlse ln value occurred because blblngka prlce has lncreased even as
producLlon has remalned Lhe same 1he rlse ln Lhe value of producLlon was Lhe resulL of Lhe lncrease ln Lhe prlce noL ln
Lhe quanLlLles of blblngka produced

1ab|e 223 kICL AND UA1N1I1 CI 8I8INGkA kCDUC1ICN (IN CUkkLN1 kICLS)
ear Current r|ce uant|ty Va|ue (pr|ce x quant|ty)
2000 30 10 000 300 000
2001 31 10 000 310 000
2002 32 10 000 320 000

lor economlsLs Lo know lf Lhe economy ls growlng or noL Lhey wanL Lo know how Lhe real value of producLlon
has changed over Llme 1o do Lhls we can express Lhe prlce of blblngka based on one of Lhe years glven LeL us look aL
1able 224 we can for example express Lhe prlce of blblngka uslng year 2000 1he prlce of blblngka ln 2001 and 2002
would Lherefore be 30 1hls ls whaL we mean by maklng prlce consLanL or Lhe same over Llme y dolng Lhls Lhe value
of producLlon wlll more correcLly reflecL how much producLlon has changed ln Lhls case slnce quanLlLles produced have
noL changed Lhen Lhe real value of producLlon remalns Lhe same aL 300000 Slnce prlces ln 2000 were used Lo make
prlces Lhe same over Lhe Lhree years we can say LhaL 2000 ls Lhe base year

1ab|e 22 VALUL CI kCDUCI1CN kLLING kICL CCNS1AN1 (USING A 8ASL LAk) CCNS1AN1 kICL (2000 100)
ear Current r|ce uant|ty Va|ue (pr|ce x quant|ty)
2000 30 10 000 300 000
2001 30 10 000 300 000
2002 30 10 000 3020 000

1hls ls all Loo easy wlLh only one good uL Lhe [ob of economlsLs ls a blL more dlfflculL 1hey have Lo accounL for
Lhe Lhousands of goods ln Lhe economy 1o do Lhls a prlce lndex ls used and ls compuLed as follows
LeL us look aL 1able 223 lf we use Lhe year 2000 as Lhe base year we can compuLe for Lhe prlce lndlces from
2000 Lo 2002 noLlce LhaL Lhe base year has a prlce lndex equal Lo 100 1hls ls always Lrue parLly for us Lo know whlch
year ls used as Lhe base year

1ab|e 22 CCMU1ING 1nL kICL INDLk
ear Current r|ce r|ce Index
2000



100
2001



102
2002



104
Piice Inuex =
Piice in the Cuiient Yeai
Piice in the Base Yeai


1he example above makes clear LhaL Lhere ls a dlfference beLween nomlnal (or currenL) value and real (or
consLanL) value A consLanL value more accuraLely reflecLs Lhe changes ln quanLlLles of goods produced whlch ls how
economlsLs measure real n lf real n rlses Lhen we know LhaL Lhe quanLlLles of commodlLles produced ln a year
have rlsen lf we used only nomlnal n we would noL know wheLher lL was prlce or quanLlLy LhaL lncreased
We can now look aL acLual n flgures for Lhe hlllpplnes ln 1able 226 1he prlce lndex used for n ls called
Lhe n ueflaLor as shown ln Lhe lasL column noLlce LhaL Lhe base year ls 1983 slnce lLs prlce lndex (or n deflaLor)
equals 100 We can also see LhaL nomlnal n and real n are Lhe same ln Lhe base year 1hen as we move farLher ln
Llme we can see LhaL real n ls smaller Lhan nomlnal n As we sald real n keeps prlces Lhe same ln Lhls case real
n ln 1983 1990 1993 and 2000 are all expressed ln 1983 prlces uL changes ln nomlnal n lnclude changes ln boLh
prlces and quanLlLles of goods produced and Lhus nomlnal n Lends Lo be hlgher LhaL real n afLer Lhe base year

1ab|e 22 GN IN CUkkLN1 kICLS AND CCNS1AN1 19 kICLS (In M||||on esos)
ear GN |n Current r|ces GN |n Constant r|ces GN Growth kate
1983 331428 331428 10000
1990 1071433 716929 14943
1993 1938333 824323 23734
2000 3366039 1037836 34360

now LhaL we know Lhe dlfference beLween real and nomlnal n we can now compuLe for Lhe growLh raLe Whlch one
do we use Lo flnd ouL lf Lhe economy ls growlng? y now lL ls clear LhaL we use real n As we sald we wanL Lo know lf
producLlon quanLlLles have rlsen over Llme and we Lherefore use real n 1he governmenL uses Lhls lnformaLlon Lo
ad[usL lLs economlc pollcles lL may have dlfferenL pollcles when Lhe economy ls growlng slowly or rapldly
We use Lhe followlng equaLlon Lo compuLe for Lhe n growLh raLe

We can use 1able 227 Lo apply Lhls formula 1o calculaLe Lhe growLh raLe of n beLween 2001 and 2002 we have

JJ o =
-



=
,9,99 -,98,9
,98,9


JJ o = 9.8% (JJo)

=
,,9 -,,
,,


JJ o = .% (o)

1he n growLh raLe beLween 2000 and 2001 ls calculaLed ln a slmllar way We can see LhaL Lhe growLh of nomlnal n
ls hlgher Lhan LhaL of real n 1hls ls because nomlnal n lncludes lncrease ln quanLlLles (8emember LhaL real n
keeps prlcse consLanL) eLween 2000 and 2001 nomlnal n rose by 989 whlle real n lncreased by 339 1hls
means LhaL from 2000 Lo 2001 prlces and quanLlLles of goods produced rose by 989 whlle quanLlLles of goods
produced lncreased by 339

1able 227 CPAnLS ln n
ear GN |n Current r|ces GN |n 19 Constant
r|ces
GN Growth kate
Nom|na| kea|
2000 3366039 1037836
2001 3918679 1073066 989 339
2002 4290199 1121039 948 447