Chapter 4-

National Income
Accounting
 Gross National Product

 Market value of all the final

products produced by the
resources of the economy
during a specified period of
time usually one year
 Market value- measurement
In money terms
 Peso- we value goods
 GNP- money value of the
total national production
 3 limitations of GNP
1. Does not include products
which are not produced by
the resources of the economy
like imports. Imports are not
Produced in the country, it is
excluded in GNP
2. Only includes those
products that can no longer
be used for higher stages of
production and have reached
the higher level of production
using the economy’s
resources
 Final products- can be used
for consumption and
therefore part of GNP
 Intermediate products- not
yet ready for final
consumption are not part of
GNP
 Ex: woods use to make
furniture, sugar for juice
3. time- eliminates those
products not produced by the
economy within the period of
time accounted
 Ex: shoes manufactured last
2011 and still unsold in 2012
are final in 2011 not 2012
 Goods and production
materials produced but
Unsold during the year
accounted fall under unused
final products in the form of
stocks or inventories
 GNP Purpose and Limitation

 GNP- reflects the value of

economy’s production since
it also includes value of
products from the lowest
stage of production
 GNP- show the structure of
Production according to end
use and factor contribution
 GNP Camera- formal tool
which cannot picture the
informal and undeclared
activities in the economy
 Final product- product sold
to household for practical
purposes
 Underground economy-
cigarette vendor activity I
undeclared and unrecorded
 GNP accounting- barometer
of aggregate activities in
the economy
GNP Accounting: Expenditure
Approach

 Identifies
the final products
and classifies them
according to end use such
as consumption,
government, investment
and exports
 Expenditure Approach
Equation
GNP=C+I+G+ (X-M)+-NFY
C-consumption Goods and
Services
I- Investment Goods
G- Government Spending
X- Export
M- Import
(X-M)- Net Exports
NFY- Net Factor income from
abroad
 Consumption Goods and
Services (C)- directly satisfy
human wants and used up
or consumed during income
period
- The largest part of nation’s
Current flow of output
Ex:
1. Consumer Durables-
appliances, household
furnishing
2. Consumer non-durables-
food, medicines
3. Consumer Services-
education, medical,travel
 Investment Goods (I)-
capital goods and
inventories used to produce
more goods and services
 Gross investment- all
capital goods used in
production of goods and
services
 Replacement investment-
Goods used up and worn out
and need to be replaced
Ex: new construction, new
housing and public
construction
 Government Spending (G)-
government expenditure
used to maintain the
operations of the
bureaucracy; form of public
goods and public services
 Public goods- roads,
bridges, public school,
public market, airport,
harbors
 Public Service- national
defense, police and fire
protection, toll ways
 Exports (X)- goods sold to
other countries
 Imports (M)- goods we buy
from other countries
 International Trade- country
maintain trade relation
with other countries
 Net Export (X-M)- export
minus import
 Balance of Trade- ratio
between country’s import
To export
 Favorable balance of trade-
more export than import
 Unfavorable balance of
trade- more imports than
export
 Net Factor Income from
Abroad (NFY)- difference
between aggregate flow of
Factor payments from (+) to
(-)
 Positive Net Factor Income-
attributed to inflows,
brought by increase in
exports, payment for use of
country’s resources, salary
remittances of OFW, profit
remittances of Filipino
investing abroad
 Negative Net Factor
Income- attributed to
outflows, more imports
than exports, salary
remittance of foreigners
working in the country
 Excluding Net Foreign
Factor Income from GNP-
leaves the value of Gross
Domestic Product which is
the value of final products
produced by the resources in
the economy
 Statistical Discrepancy-
account assigned to
Expenditure Approach,
theoretical account use to
out the practical difference
between the GNP figures
Arrived in the computation of
GNP using 2 approaches, may
positive or negative sign to
adjust overstated or
understated GNP estimate
 GNP Accounting: Income
Approach

 GNP Income Approach=

PY+CY+GY=NY
Add: IT-S
DA
 Where
PY= Income of Persons
CY= Corporate Income
GY= Government Income
NY= National Income
IT= Indirect Tax
S= Subsidies
DA= Depreciation Allowance
 Income of Persons (PY)

 GNP- equal to the additive

values of factor
contribution in the process
of transforming products
into final forms assuming all
factor contributions as paid
for resource owners
 Factor Contributions- direct
payments of producing units
to the resource owners,
represent the resource
owners direct contributions
to production
 Resource Owners
(household)- distinct from
producing units but provide
Producing units with the basic
factors of production
 Corporate Income

 Income earned by
corporations considered to
be undistributed
 When corporations earned,
part of income or dividends
will not be distributed to its
Stockholders but use this
income for expansion
programs or boost their
operational capabilities
 Government income from
capital (GY)

 Income earned by
government when they
assume the business role
and become factor
contributor in essential
areas where private
enterprise creates vacuum.
Government enterprise-
concerned part of production
system and produces private
goods and services
 Indirect Taxes (IT)

 Taxes indirectly paid to the

government and usually
shouldered by the
consumers
 Examples are sales tax,
value added tax,
amusement tax
 Subsidies

 Financial help granted by

government to private and
public enterprises
 Subtracted from indirect
taxes
 Excluded since they only
bloat profits and product
Values and do not entail
production and factor
contributions
 Capital Consumption allowance
or Depreciation Allowance (DA)

 Payments to the resource

owners for the consumption
of capital goods in the
production process and
considered as factor
contribution
 Represents fee for the
Present use of machines and
equipment installed in the
past
 Example of GNP
Computation
using Expenditure
and Income
Approach
 Compute 2005 GNP using
Expenditure and Income
Approach
Given: GNP Accounts in
Millions
Personal consumption 2,565,200
expenditure
Capital formation( Investment 125,000
Goods)
Government expenditure 628,000

export 895,300

import 903,200

Net factor income from abroad (12,500)

Factor income of persons 1,850,800

Corporate income 450,200

Government income from capital 734,600

Indirect taxes 49,350

subsidies 10,500

Capital consumption allowance 15,900

Personal consumption Php 2,565,200
expenditure (C)
Gross domestic capital 125,000
formation or investment (I)
Government expenditure (G) 628,000

Php 3,318,200

Export Php 895,300

Less: Import 903,200 (7,900)

Statistical discrepancy (207,450)

Gross Domestic Product GDP Php 3,102,850

Net factor income from (12,500)

abroad (NFY)

GNP Php 3,090,350

Gross National product GNP Income Approach

Income of persons PY Php 1,850,800

Corporate income CY 450,200

Government income GY 734,600

National Income NY Php 3,035,600

Add: indirect taxes IT Php 49,350

Less: subsidies S 10,500 38,850

Depreciation allowance DA 15,900

GNP Php 3,090,350

 Gross National Product

 Totalvalue of all final goods

and services produced
within a nation in a
particular year plus income
earned by its citizens minus
income of non-residents in
the country
 Measures the value of goods
and services that the
country’s citizens produced
regardless of their location
 One measure of economic
condition of a country
under the assumption that a
higher GNP leads to a
higher quality of living, all
other things being equal
 Estimate of the total money
value of all final goods and
services produced in a given
one-year period by the
factors of production owned
by a particular country’s
residents
 Final goods and services-
goods and services sold or
provided to their final
Consumers– to avoid double
counting
Ex: the value of steel sold to
GM to make a car is not
added separately into the
GNP or GDP total because its
value is already included
when we add in the final
sales price of the car to the
customer
 GNP- changed to GNI upon
the adaptation of
1993/2008 Philippine
System of National Accounts
(SNA) Changes in
Terminology
 NFIA- net factor income
from abroad changed to NPI
or Net Primary Income upon
1993/2008 Philippine SNA
Changes in Terminology
 Core Inflation- measure of
inflation that excludes
items which face volatile
price movements notably
food and energy
 In the Philippines, the
following items are
excluded from the
computation of core
inflation:
a. Rice
b. Corn
c. Fruits and vegetables
d. Liquefied petroleum gas
LPG
e. Kerosene
f. Oil, gasoline, diesel