1. Macroeconomics
Week 5

2. NATIONAL INCOME ACCOUNTING
CIRCULAR
FLOW
DIAGRAM
REVISTED
is a visual model of the economy
that shows how money flows
through markets among households
and firms.

3. NATIONAL INCOME ACCOUNTING
CIRCULAR FLOW DIAGRAM REVISTED
TOTAL PRODUCTION = TOTAL INCOME = TOTAL EXPENDITURE
The primary economic activity of
the economy is production or the AGGREGATES
process of creating a good or Aggregate Demand is the
service that can be used to satisfy total amount of goods and services
human wants. demanded in the economy at a given
overall price level and in a given time
period.
Aggregate Supply is the total supply
of goods and services produced within an
economy at a given overall price level in a
given time period.

4. NATIONAL INCOME ACCOUNTING
NATIONAL INCOME ACCOUNTING
measures the economy’s overall performance. This accounting enables economists, policy
makers, and statisticians to:
Assess the health of the economy by
comparing levels of production at regular
intervals.
Track the long-run course of the economy
to see whether it has grown, been constant,
or declined.
Formulate policies that will safeguard and
improve the economy’s health.

5. NATIONAL INCOME ACCOUNTING
GROSS DOMESTIC PRODUCT (GDP)
is the primary measure of the economy’s performance.
In detail…
It is the total market value of a country’s output.
It is the market value of all final goods and
services produced within a given period of time
by factors of production located within a
country (whether the factors of production used
belongs to a Filipino national or foreigner).

6. NATIONAL INCOME ACCOUNTING
MEASURING GDP
Monetary Measure. GDP is the monetary value of the total output of goods
and services produced by an economy within a given period of time (quarterly or
annual).
No Double or Multiple Counting. GDP includes only the market value of
FINAL GOODS (goods and services that are purchased for final use by consumer, not
for resale, or further processing) and ignores INTERMEDIATE GOODS (goods and
services that are purchased for resale or for further processing) altogether.

7. NATIONAL INCOME ACCOUNTING
MEASURING GDP
Exclusion of Used Goods and Paper Transactions or Non Production
Transactions.
GDP is concerned only with new, or current, production. Old output is not
counted in current GDP as it was already counted back at the time it was
produced.
GDP ignores all transactions which money or goods change hands but in which no
new goods and services are produced.
Non production transactions including financial transactions (such as public and
private transfer payments, and stock market transactions), and second hand sales do
not form part of GDP computation.

8. NATIONAL INCOME ACCOUNTING
MEASURING GDP
Exclusion of Output Produced Abroad by Domestically Owned Factors of
Production.
GDP is the value of output produced by factors of production located within a
country.

9. NATIONAL INCOME ACCOUNTING
GROSS NATIONAL PRODUCT (GNP)
is the total market value of all final goods and services produced within a given
period by factors of production owned by a country’s citizens, regardless of where
the output is produced.
It takes into account the market price of a final good or service that has been
produced by a country’s factors of production within the country and the returns
to investments and other income from abroad derived by its nationals.
Thus: GNP = GDP + Net Factor Income from Abroad (NFIA)
NFIA is the difference between the factor income received from the rest of the
world and the payments to factors of production abroad for their investments in
the Philippines.

10. NATIONAL INCOME ACCOUNTING
APPROACHES TO MEASURING THE
ECONOMY
TOTAL PRODUCTION = TOTAL INCOME = TOTAL EXPENDITURE
There are three (3) approaches to measuring GDP/GNP:
By Expenditure
By Production
By Income

11. NATIONAL INCOME ACCOUNTING
EXPENDITURE APPROACH
is a method of computing GDP/GNP that measures the amount spent on
all final goods during a given period.
Expenditure Categories:
Personal consumption expenditure (C)
Gross private domestic investment (I)
Government consumption and gross investment (G)
Net Exports (X-M)
Thus: Y = C + I + G + (X-M)

12. NATIONAL INCOME ACCOUNTING
PERSONAL CONSUMPTION
EXPENDITURE (C)
is spending by households on current needs. These are expenditures on
food, beverages, tobacco, clothing and footwear, fuel, light, and water,
household furnishings, household operations,
transportation/communications, and miscellaneous expenses.
Three (3) main categories:
Durable goods are goods that last a relatively long time (automobiles, furniture,
and household appliances)
Non durable goods are goods consumed immediately or for a short time (food,
clothing, gasoline, and cigarette)
Payment for services are things that people buy that do not involve the
production of physical items (services of doctors, lawyers, and educational
institutions)

13. NATIONAL INCOME ACCOUNTING
GROSS PRIVATE DOMESTIC
INVESTMENT (I)
is the total investment in capital such as the purchase of new housing, plants,
equipment, and inventory by the private (or non government) sector.
The Philippine national accounts classify this into two general types:
Fixed capital equipment consists of spending on construction, durable equipment,
and breeding stock and orchards.
Residential investments are expenditures by households and firms on new houses
and apartment buildings.
Non residential investments are expenditures by firms for machine, tools, plants,
and so on.
Change in inventories is the amount by which firms’ inventories change during a
period. Inventories are the goods that firm produce now but intend to sell later.

14. NATIONAL INCOME ACCOUNTING
GROSS PRIVATE DOMESTIC
INVESTMENT (I)
is the total investment in capital such as the purchase of new housing, plants,
equipment, and inventory by the private (or non government) sector.
Thus: GDP/GNP = Final sales + change in business inventories
Gross Investment vs Net Investment
Gross investment is the total value of all newly produced capital goods (plant,
equipment, housing, and inventory) produced in a given period.
Net Investment is gross investment less depreciation.

15. NATIONAL INCOME ACCOUNTING
GOVERNMENT CONSUMPTION (G)
is expenditures by the government for final goods and services. These are
spending on salaries and wages of public school teachers, police, and other
public servants.
The unique feature of the Philippine national income accounting is consumption is
separated from the private sector’s while government investments are classified as
part of Investments (I).

16. NATIONAL INCOME ACCOUNTING
NET EXPORTS (X-M)
is the difference between the exports (X) and imports (M). Either positive
(X>M) or negative (M>X).
The unique feature of the Philippine national income accounting is consumption is
separated from the private sector’s while government investments are classified as
part of Investments (I).

17. NATIONAL INCOME ACCOUNTING
PRODUCTION OR VALUE-ADDED
APPROACH
is a method of computing GDP/GNP that measures the economy based on
the contribution of industries and sectors to the value of the final goods.
Traditionally, the industries are classified into three (3) sectors:
Agriculture, Fishery, and Forestry (AFF)
Industry (I)
Services (S)

18. NATIONAL INCOME ACCOUNTING
PRODUCTION OR VALUE-ADDED
APPROACH
is a method of computing GDP/GNP that measures the economy based on
the contribution of industries and sectors to the value of the final goods.
Agriculture, Fishery, and Forestry (AFF) comprises produce such as palay, corn,
coconut, copra, sugarcane, livestock, poultry, agricultural services, fishery, and
forestry.
Industry (I) comprises main sectors mining and quarrying, manufacturing,
construction, and electric, gas, and water.
Services (S) comprises the following sectors: transportation, communications, and
storage, trade, finance, ownership dwellings and real estate, private services, and
government services.

19. NATIONAL INCOME ACCOUNTING
INCOME APPROACH
looks at GDP in terms of who receives the income, not who purchases it.
It corresponds to the sum of the rewards to the owners of the factors of
production in national income.
It breaks down GDP into four (4) components:
National Income
Depreciation
Indirect taxes less subsidies
Net factor payments to the rest of the world

20. NATIONAL INCOME ACCOUNTING
INCOME APPROACH
looks at GDP in terms of who receives the income, not who purchases it.
It corresponds to the sum of the rewards to the owners of the factors of
production in national income.
It breaks down GDP into four (4) components:
National Income
Depreciation
Indirect taxes less subsidies
Net factor payments to the rest of the world

21. NATIONAL INCOME ACCOUNTING
INCOME APPROACH
looks at GDP in terms of who receives the income, not who purchases it.
It corresponds to the sum of the rewards to the owners of the factors of
production in national income.
National Income is the total income earned by factors of production owned by a
country’s citizen (compensation of employees, proprietors’ income, corporate
profits, net interest, and rental income).
Depreciation is part of GDP in the income approach. It is added in the
computation of GDP because it has been subtracted from the amount that
corporations actually receive. This is necessary to balance the income and
expenditures sides.

22. NATIONAL INCOME ACCOUNTING
INCOME APPROACH
looks at GDP in terms of who receives the income, not who purchases it.
It corresponds to the sum of the rewards to the owners of the factors of
production in national income.
Indirect Taxes Minus Subsidies.
Indirect taxes are sales taxes, custom duties, and license fees.
Subsidies are payments made by the government for which it receives no goods or
services in return.
Net Factor Payments to the Rest of the World are payments of factor income to
the rest of the world minus the receipt of factor income from the rest of the
world.

23. NATIONAL INCOME ACCOUNTING
LIMITATIONS OF NATIONAL INCOME ACCOUNTS
There are certain market transactions that give rise to payments and
transfers of goods and services but are excluded from GNP accounting.
Those that do not arise to useful economic activities or ILLEGAL
(drug traffic, prostitution, smuggling)
Goods and services produced but do not appear in the market
(housewives, home activities)
There are problems of valuation of goods and services that do enter into the
national income accounts
(assignment of value for unpurchased (non market) goods like crops consumed
by farmers themselves, rent of owner-occupied houses)

24. NATIONAL INCOME ACCOUNTING
LIMITATIONS OF NATIONAL INCOME ACCOUNTS
There are certain market transactions that give rise to payments and
transfers of goods and services but are excluded from GNP accounting.
Equal treatment given to a peso of good/service, whether it is given to a doctor
or cockpit owner.
Losses are not taken into account in the national income accounts
(repair and rehabilitation after typhoon)
Per capita measurements maybe misleading if the actual reality is that there is a
great disparity between actual individual incomes and the average income per
person.