National Income Accounting

National income accounting (NIA)

 is the measurement of indicators of national
output/income; .e.g. GDP, GNP
 Circular flow diagram
 summarizes the transactions between the
different economic agents

 agents: households, firms (business),

government, and foreigners (rest of the world)
 Circular flow diagram
 Assumption: The economy composed of households
and firms only
 Households: own factors of production, consume
goods and service
 Firms: hire factors of production to produce goods
and services
 payments for goods and services

goods and services

FIRMS HOUSEHOLDS

factor services

factor payments
(wages, interest, rent, profit)

FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between
firms and households in a simple economy.
In the upper loop, the arrow emanating from firms to households represents the sale by firms of
goods and services to households. On the other hand, the arrow from households to firms
represents the payments.
n the lower loop, the arrow originating from the households to the firms shows that firms hire
labor and capital from households in order to produce goods and services. The arrow
emanating from the firms indicates their payments for the use of the factors of production.
 Revenue Spending
(=GDP) (=GDP)
MARKETS FOR
GOODS AND
Good and SERVICES
Good and
services sold services
bought

FIRMS HOUSEHOLDS

Land, labor
Inputs for
and capital
Production MARKETS FOR
FACTORS OF
PRODUCTION
Wages, rent, Income (=GDP)
interest and
profit (=GDP)
Flow of goods & services

Flow of money: pesos

THE CIRCULAR FLOW DIAGRAM

 Circular flow diagram
 Assumption: The economy composed of
households and firms only
 Households: own factors of production,
consume goods and service
 Firms: hire factors of production to produce
goods and services
 Circular flow diagram
 Upper loop of the circular flow diagram:
transactions in the goods and services markets

 Lower loop: transactions in the factor markets

 With government and foreign
agents
 Need to account for :
a. Government purchases of goods and services.
b. Government payments for factor services (wages, rent,
interest).
c. Transfer payments between different agents.
d. Firms and households pay taxes to government.
e. Taxes paid on income, property, goods and services.
f. Transactions with the foreign sector.
 Transfer payments
 Transfer payments – are transactions wherein
one party is not obliged to deliver a good or
service in return for the payment.
 Examples: retirement benefits, unemployment
benefits, scholarships, and donations.
 Transactions with foreign sector
 Includes sales of goods and services, assets,
and transfers
 Exports - sales of domestically produced
goods to other countries
 Imports - goods bought from other countries
 Measurement of economy’s output:
The Gross Domestic Product (GDP)

 The GDP measures the market value of all final goods and
services produced within an economy in a given period.
 GDP only measures current production. Transfer payments
and transactions involving goods produced in other periods
are not included in the calculation of GDP.
 GDP is usually expressed in the currency of a particular
country, e.g., Philippine peso….indicates the market value of
the goods and services
 Definition of GDP
 The market value of good i (Vi) is equal to
PiQi
 GDP = sum of the market values of all final
goods and services produced within the
year.

n n
G
DPi 
V Pi  Q
i
i
1 i
1
 GDP includes final goods and
services only
 Final goods - goods and services that are not
purchased for the purpose of producing other goods
and services or for resale
 Eg. Rice (final) and palay or unhusked rice (intermediate
product)

 Including intermediate goods and final goods will

result in “double counting”.
 3 Approaches for measuring GDP
1. Expenditure Approach (upper loop) – measures
GDP as the sum of expenditures on final goods and
services.
2. Income Approach (lower loop) – measures GDP as
the sum of incomes of factors of production (wages,
rent, interest and profit.
3. Value-added Approach – measures GDP as the sum
of value added at each stage of production (from
initial to final stage)
 Expenditure Approach
 Uses the upper loop of
the circular flow
diagram.
 Example: Suppose the
economy has only one
product, namely, rice.
Good Price per Q sold Expenditure
unit
Rice 20 1000 20,000
GDP 20,000
 Income Approach
 Uses the lower loop of the circular flow diagram: sum of payments to the
various factors of production.
 Suppose that in the production of rice the sales and expenses are as
follows:

Sales P 20,000
Expenses:
Wages 8000
Rent 4000
Interest 2000
Total 14,000
Profit 6,000
GDP=Sum of Payments to 20,000 P 20,000
factors
 Value Added Approach

 Suppose that rice is the only final product of an economy: It

goes through several (3) stages of production.

Value of
Stage of Prod’n intermediate Value of Value-added
good Sales
Farmer - Palay 12,000 12,000
Rice Miller -Milled 12,000 15,000 3,000
Rice
Retailers - Rice 15,000 20,000 5,000
GDP= Total Value 20,000
Added
 Notes of the 3 approaches
 The expenditure approach, income approach, and the value-added
approach all come up with the same estimate of the GDP. They are
equivalent approaches.
 In the income approach, profit is also considered a payment to the
entrepreneur. So the incomes are (1) wages, (2) rent, (3) interest, and (4)
profit. Profit adjusts to make the sum equal to the final value of the good.
 In the value added approach, only the value added in each stage of
production are included. If we add the value of intermediate product with
the value of the final product, we commit the sin of “double-counting.”
 At each stage of production, the value-added is equal to wages, interest,
rent, and profit. Therefore the value of the final product is likewise the
same of all payments to the factors of production.
 Additional Topics
 GDP vs GNP
 Real vs current GDP
 Inter-country comparisons of GDP
 Convert to international currency like US dollars
 Convert to per capita measures
 THE NATIONAL ACCOUNTS OF THE
PHILIPPINES

 same principles as above but need to make adjustments in

order to accommodate the realities in modern economies
 Expenditure approach
 GDP = C + G + I + X –M+ SD
 Table. Expenditures on GDP, 2002 in million pesos.

Item Symbol Value

Personal Consumption C 2,750,9000
Expenditure
Government Consumption G 488,700
Expenditure
Gross Domestic Capital Formation I 776,200
Exports of Goods and Services X 1,968,500
Less: Imports of Goods and M 1,989,100
Services
Statistical Discrepancy SD 27,500
Gross Domestic Product GDP 4,022,700
 Expenditure Approach
 C - spending of households and private non-profit institutions on goods
and services
 Non-durables - goods and services that are consumed rapidly
 Durable goods - that last for a longer period of time
 I - investment spending of domestic agents. Its major components are
“changes in” Fixed Capital and Changes in Stocks
 G - government’s payments for the salaries of its workforce as well as
purchases of goods and services  used for the government’s day to day
operations and projects.
 X - the spending of the rest of the world on goods and non-factor
services produced in the country
 M- the country’s purchases of goods and non-factor services from the
rest of the world.
 SD - accounts for accounting and reporting errors in the accounts. Needed
to ensure that GDP value from all approaches are the same
 Income Approach

ITEMS SYMBOLS VALUE

Compensation of COE 1,093,800

Employees
Net Operating Surplus NOS 2,215,100

Depreciation D 357,200
Indirect Business Taxes less IBTS 356,600
Subsidies
Gross Domestic Product GDP 4,022,700
 Income Approach
 GDP = COE + NOS + D + IBTS
 In a simple world, GDP = COE + NOS. In practice, require
two adjustments (D and IBTS)
 D - accounts for the wear and tear of physical capital
 “D” is treated as a business cost  not included in NOS.
However, “D” is part of “I” in the expenditure side of the
national accounts
 IBTS - includes taxes on the use or purchase goods and
services and grants from government to firms. E. g sales
taxes, value added tax
 Not included in NOS but is part of the market prices, of
which the items in the expenditure accounts are quoted
 Value added or Industrial Origin approach

 GDP = value added of

different activities (sectors)

ITEM VALUE
Agriculture, Fishery and 519,400
Forestry
Industry 1,307,400
Services 2,123,900
Gross Domestic Product 4,022,700
 The distinction between GDP and GNP

 GNP = GDP + Net Factor Income from the

Rest of the World (NFIRW)
 NFIRW - measures the difference between the
earnings of Philippine residents in other
countries and foreign residents in the
Philippines
 The distinction between GDP and GNP

Gross Domestic Product GDP 4,022,700

Net Factor Income from the NFIRW 267,500

Rest of the World

Gross National Product GNP 4,290,200

 Nominal and Real GDP
 GDP at current prices or nominal GDP - GDP measured
using the prices of the year for which it is calculated
 Nominal GDP can be a misleading indicator of changes in
output or income because it also embodies changes in the
prices of goods and services.
 Real GDP or GDP at constant prices  measures the total
value of output using the prices of a selected year (the base
year).
 Real GDP better for analysis overtime because it eliminates
the effects of price changes
 Table 8.5

YEAR 1 YEAR 2

QUANTITY

Ice Cream 100 100

Buko Pie 100 100
PRICE

Ice Cream 50 100

Buko Pie 100 200
VALUE

Ice Cream 5,000 10,000

Buko Pie 10,000 20,000
NOMINAL GDP 15,000 30,000
 GDPyear 1 = (100) (50) + (100) (100) = 15,000
 GDPyear 2 = (100) (50) + (100) (100) = 15,000
 In practice, calculating real GDP using the previous approach
is a tedious process because there are so many goods and
services are produced in an economy. Can simplify the
calculation process by using the GDP deflator.
 GDP deflator - a price index that allows us to convert nominal
GDP into real GDP. (note: price index to be defined later)
 Real GDP

N
om
in
alG DP
R
ea
lGD
P 1
00
.
GD
Pd
e f
lat
or
 Calculation of Real GDP

Item 1990 1998 2002

GDP at current
prices (million 1,072,000 2,665,100 4,022,700
PhP)
GDP deflator (base
149.5 300.1 384.6
year 1985)
GDP at constant
prices (million 720,700 888,000 1,046,100
PhP)
 GDP Deflator, (1985=100), Philippines

500.0
450.0
400.0

350.0
300.0
250.0
200.0

150.0
100.0

50.0
0.0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Inflation Rate, Philippines

18.0

16.0

14.0

12.0
percent per year

10.0

8.0

6.0

4.0

2.0

0.0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
 TABLE A8.4. Weights used In the CPI, base year, 1994.

Item Weight
(In percent)

Food, Beverages and tobacco 55.1

Clothing 3.7
Housing and Repairs 14.7
Fuel, Light and Water 5.7
Services 12.3
Miscellaneous items 8.5
All Items 100.0

Source: National Statistics Office

 Inflation Rate

CIt 
P C PIt1
I
nfla
tio
nRte
a
C PIt1
Table A8.5 Estimates of the CPI and Inflation Rate, 1990-98

Year Consumer Price index Inflation rate

(CPI) (in percent)

1990 62.7 --
1991 75.6 20.6
1992 83.8 10.8
1993 91.6 9.3
1994 100.0 9,2
1995 108.2 8.2
1996 117.3 8.4
1997 125.1 6.6
1998 137.9 10.2
 Real GDP at 1985 prices
GDP (at 1985 Prices), Philippines

1300.0

1200.0

1100.0
1000.0
Billions

900.0

800.0

700.0

600.0

500.0

400.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Year
 GDP per capita
 Measures how much output or income was produced or
received, on the average, by an individual in an economy
 Useful for comparing the performance of a country overtime
and a country’s performance relative to its neighbors

GDP
G
DPp
erc
apita
p
opu
la
tio
n
 Population growth is quite high, about about 3% per year in 1980s
and 2.3% per year nowadays.

Total population, Philippines, in million

90.0
80.0
70.0
60.0
million

50.0
40.0
30.0
20.0
10.0
0.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Year
 Per capita GDP

Item 1990 1998 2002

GDP at constant
720,700 888,000 1,046,100
(million pesos)
Population (millions)
62.0 75.2 81.8

Per capita GDP at

constant prices 11,624.20 11,808.5 12,788.5
 Per Capita GDP, Philippines, (at constant 1985 prices)

16.000

14.000

12.000
Thousand Pesos

10.000

8.000

6.000

4.000

2.000

0.000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Year

Modest and erratic growth in GDP plus high population growth

means the per capita GDP growth is low.
 TABLE 8.7. Selected output Indicators for the Philippines, selected years

Item 1984 1985 1995 1996 1997

(1) GDP at current prices

524,481 571,883 608,887 2,171,922 2.423.640
(million pesos)

(2) GDP deflator (base

85.01 100.00 102.95 255.78 271.40
year -1985)
(3) GDP at constant
prices (million 616,964 571,883 591,440 849,137 893,014
pesos)
(4) Per capita GDP at
current prices 9,890 10,524 10,935 30,208 32,961
(pesos)
(5) Per capita GOP at
constant prices 11,634 10,524 10,662 11,810 12,145
(pesos)
(6) Population (million
53.03 54.34 55.68 71.90 73.53
persons)
Source: NSCB (1998), Philippine Statistical Yearbook.
 GNP for cross country comparisons

 Convert a country’s GNP to US dollars, or

some common currency, by using the
country’s exchange rate
 When comparing income across countries, it
also makes sense to use per capita estimates
 eliminates differences in population size.
E.g. (data is for 1998)
 PPP Adjusted GNP
 PPP – purchasing power parity
 GNP is adjusted to account for the fact that 1
USD when spent in one country does not buy
the same quantity of goods when spent in
another country
 E.g. Philippines, 1998 per capita GNP (in USD) =
1050
 per capita GNP (PPP adjusted, in USD) = 3,540
 Exchange Rate 1988-2002

Exchange Rate (P/US$), Philippines, 1988-2005

60.00

50.00

40.00
Pesos per dollar

30.00

20.00

10.00

0.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
 PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)

Per Capita GNI Per Capita GNI Poverty rate

Myanmar b 217 26.6
Nepal 250 30.9
Cambodia 350 34.7
Lao PDR 390 33.5
Bangladesh 440 49.8
Viet Nam 540 19.5
Pakistan 600 32.6
India 620 26.1
Sri Lanka 1010 22.7
Indonesia 1140 18.2
Philippines 1170 30.0
China 1500 3.1
Thailand 2490 9.8
Malaysia 4520 7.5
Korea, Rep. of 14000 3.6
Taiwan 14770 0.8
Singapore 24760 0.0
 GNP Per Capita (in US$), 1998 and 2003

4500

4000

3500

3000

2500 1998
2000 2003

1500

1000

500

0
China Indonesia Lao PDR Malaysia Philippines Thailand Viet Nam
 GDP Per Capita PPP$, 2000 prices

20,000
18,000
16,000
14,000
12,000
1980
10,000
2005
8,000
6,000
4,000
2,000
0
s sia sia nd p. m na
ne e l a e na
i
pi
on al
ay ai ,R ie
t Ch
i lip nd M T h
re
a V
Ph I
K o
 Annual Growth GDP, 1980-2005 (% per year)

9 8.49

6 5.53
4.87
Percent

5 4.59

4 3.7 3.65

1 0.63

0
Philippines Indonesia Malaysia Thailand Korea, Rep. Vietnam China
 Annual Growth GDP, 2000-2005 (% per year)

9.0 8.6

8.0

7.0
6.1
6.0
Percent

5.0 4.6
4.1
4.0 3.3
3.0
3.0 2.5

2.0

1.0

0.0
Philippines Indonesia Malaysia Thailand Korea, Vietnam China
Rep.
 TABLE 8.8. Economic indicators for selected countries, 1998.

Country Population GNP1 Per capita GNP1 PPP adjusted per capita
(in millions) (in billions) In US Dollars GNP*

France 59 1,466.2 24,940 22,320

Germany 82 2,122.7 25.850 20,810

Indonesia 204 138.5 680 2,790

Japan 126 4,089.9 32,380 23,180

Malaysia 22 79.8 3,600 6,990

Philippines 75 78.9 1,050 3,540

Singapore 3 95.1 30,060 28,620

Thailand 61 134.4 2.200 5,840

United Kingdom 59 1,263.8 21.400 20.640

United States 270 7,921.3 29.340 29.340

 PHILIPPINES: Key Economic Indicators, 2003
Per Capita Composition of GRDP(%) GRDP Growth
Region GRDP Index Rates,
Agriculture Industry Services
Phil=100 (1985- -2003
(%)
Philippines 100.0 15.0 31.8 53.2 3.1
NCR 275.8 - 37.1 62.9 3.4
CAR 129.9 11.0 56.5 32.5 6.4
Ilocos 53.7 36.0 8.9 55.1 2.5
Cagayan Valley 52.3 45.8 7.5 46.7 2.8

C. Luzon 75.2 20.5 32.7 46.8 3.0

S. Tagalog 85.7 20.2 37.5 42.3 3.5
Bicol 43.3 22.7 16.1 61.2 22
W. Visayas 83.5 22.6 25.7 51.7 2.9
C. Visayas 93.4 10.4 27.9 61.7 3.7
E. Visayas 50.5 29.9 25.7 44.4 2.0
W. Mindanao 62.1 40.2 14.8 45.0 2.4
N. Mindanao 101.8 28.6 30.2 41.2 2.7
S. Mindanao 92.4 25.2 25.2 49.6 1.7
C. Mindanao 76.6 40.2 28.0 31.8 3.4
ARMM 23.2 48.6 10.3 41.1 2.5
Caraga 47.8 38.0 18.0 44.0 2.1
PHILIPPINES: Average growth of regional GDP (in 1985 prices)

REGION 1975-85 1985-95 1995-2003 1975-2003

Philippines 2.5 2.5 3.9 3.2
Luzon 2.6 2.8 4.0 3.4
NCR 2.4 2.8 4.3 3.4
Central Luzon & 2.6 3.1 3.6 3.4
S. Tagalog
Other Luzon 3.0 2.3 4.3 3.4
Visayas 2.4 2.1 4.0 3.2
Central Visavas 2.7 2.6 4.8 3.7

Other Visayas 2.3 1.7 3.4 2.8

Mindanao 2.2 1.7 3.6 2.6
 PHILIPPINES: Share of National GDP

REGION 1975-85 1985-95 1995- 1975-

2003 2003
Philippines 100 100 100 100
Luzon 62.6 64.8 66.4 64.5
NCR 28.8 31.6 34.4 31.5
Central Luzon & 23.3 23.2 21.9 22.8
S.Tagalog
Other Luzon 10.5 10.0 10.1 10.2
Visayas 16.7 16.3 15.8 16.2
Central Visavas 6.4 6.5 6.7 6.5

Other Visayas 10.3 9.8 9.1 9.7

Mindanao 20.8 19.0 17.2 19.1
 Personal Disposable Income

 Personal disposable income represents the income

that households are free to spend or save.
 It excludes the components of national income that
do not accrue directly to households.
 It also includes a few items that are not part of
national income but nonetheless influence the
amount of income that households can spend.
Table 8.9 Personal Disposable Income, Philippines, 1998 (in million pesos
Item Number Item Amount

1 Net operating surplus of households and unincorporated business 1,062,091

2 Compensation of employees, net 910,259
3 Total (Items 1 and 2) 1,972,350
4 Interest on public debt from the general government 73,957
5 Other property Income 188,699
6 Social security benefits 138,846
7 Casualty insurance claims 1,304
8 Current transfers 68.396
9 Total (Items 4 to 8) 371,202
10 Interest payments on consumer debt 7,984
11 Other payments 22,634
12 Direct taxes 90.268
13 Compulsory fees, fines and penalties 29,181
14 Net casualty insurance premiums 1304
15 Social security contributions 53,629
16 Other current transfers 11,797
17 Total (Items 10 to 15) 216,797
18 Disposable Income (Item 3 +Item - Item 17) 2,126,755
 Some Limitations of GDP or GNP as
measures of growth
 Ignores income distribution
 Ignores environmental degradation
 Does not include activities that do not go
through the formal markets sectors
 Does not include “illegal” activities like drug
trafficking, prostitution, moonlighting