Chapter 5 National Income Accounting a - Macro

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Text of Chapter 5 National Income Accounting a - Macro


Measuring the Economy Measurement

of aggregate economic activity helps answer such questions as: How much output is being produced? What is it being used for? How much income is being generated? Whats happening to prices and wages?

What is National Income Accounting? Measurement

of aggregate economic activity, particularly national income and its components It measures the indicators of national output/income; .e.g. GDP, GNP

What is National Income?

National income (also referred to as net national product) may be defined as a measure of the money value of the total flow of goods and services produced in an economy over a specified period of time. The owners of economic resources are engaged in earning incomes by allowing their resources to be used in producing goods and services. Changes in the incomes they receive indicate changes in the level of economic activity.

National income 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 state; 4. Profit those generated by the entrepreneurs; 5. Net factor income from abroad.

Important Terms Used in Measuring National IncomeIn measuring national income, an understanding of the following terms are important: 1. Gross Domestic Product (GDP) 2. Gross National Product (GNP) 3. Market Value 4. Value Added 5. Consumption 6. Investment 7. Consumer Durables 8. Government Expenditures 9. Net Factor Income from Abroad


The GDP is a measure of the total flow of goods and services produced by the economy over a particular time period. The factors of production must be located in the domestic economy regardless of who owns these factors. The owners of the factors of production consist of citizens of the local economy and those of foreign countries.

Measurement ProblemsMethods of calculating GDP entail measurement problems in accounting for all economic activity: Non-Market Activities- goods and services produced that are not sold/does not go through in a market or formal market sectors. Unreported Income market activities not reported to tax or census authorities. They are illegal activities like drug trafficking, prostitution,

GDP per Capita

GDP per capita: Total GDP divided by total population; average GDP GDP per capita is commonly used as a measure of a countrys standard of living Measures how much output or income was produced or received, on the average, by an individual in an economy Measures of per capita GDP tell us nothing about how GDP is actually distributed or used Useful for comparing the performance of a country overtime and a countrys performance relative to its neighbors

Per capita GDPGDP GDP per capita populationItem GDP at constant (million pesos) Population (millions) 1990 720,700 62.0 1998 888,000 75.2 2002 1,046,100 81.8

Per capita GDP at constant prices




Real Versus Nominal GDP

Nominal GDP: The value of final output produced in a given period, measured in the prices of that period (current prices) Real GDP: The value of final output produced in a given period, adjusted for changing prices

Computing Real GDP

Inflation: An increase in the average level of prices of goods and services Inflation tends to uncertain actual declines in real output

Base year: The year used for comparative analysis; the basis for indexing price changes

Inflation Rate

CPI t CPI t 1 Inflation Rate CPI t 1

Estimates of the CPI and Inflation Rate, 1990-98 Year

Consumer Price index (CPI) 62.7 75.6

Inflation rate (in percent) -20.6

1990 1991

19921993 1994 1995 1996 1997 1998

83.891.6 100.0 108.2 117.3 125.1 137.9

10.89.3 9,2 8.2 8.4 6.6 10.2

Computing Real GDP

The general formula for computing real GDP is:nominal GDP in year t Real GDP in year t price index

price index

The price index represents a price level change as an index with a base of 100 100 percentage change100

Computing Real GDP20051. Nominal GDP (in billions) 2. Change in nominal GDP


P12,456 P13,245 + P789

3. Change in the price level, 2005 to 20064. Real GDP in 2005 pesos 5. Change in real GDP

3.30%P12,456 P12,822 + P366

P $13,245103.3 100

Real GDP is the inflation-adjusted value of nominal GDP.

Changes in GDP: Nominal Versus RealIncreases in nominal GDP reflect higher prices as well as more output. Increases in real GDP reflect more output only.

Net Domestic ProductWe wont be able to produce as much output next year unless we replace factors of production we use this year Depreciation: The consumption of capital in the production process; the wearing out of plant and equipment

Net Domestic Product

Net domestic product (NDP): GDP less depreciation

NDP GDP depreciation The amount of output we could consume without reducing our stock of capital

Net Domestic Product

Investment: Expenditures on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories

Net Domestic Product

The distinction between GDP and NDP is mirrored in the difference between gross investment and net investment Gross investment: Total investment expenditure in a given time period Net investment: Gross investment less depreciation

Net Domestic Product

The stock of capital the total collection of plant and equipment will not grow unless gross investment exceeds depreciation


GNP is a measure of the market value of the final goods and services produced only by nationals or citizens of a country in a particular time period. This includes production within and outside of the country under consideration.


GNP is a measure of the total production of the economy for a specified year. It follows therefore, that the nonproductive transactions must be excluded.

Nonproductive transactions consist of the following: 1. Purely financial transactions and 2. Secondhand sales 1. 2. 3.

Purely financial transactions consist of the following: Public transfer payments Private transfer payments Buying and selling of securities.

Secondhand sales do not involve current production and so, they are excluded from the GNP.Ex: when an appliance was bought last year, that transaction was included in last years GNP.

Public transfer payments those given by the government to individuals or households but which do not contribute to current production.Ex: old-age pensions, welfare payments, and widows pensions.

Private transfer payments involve the transfer of funds from one private individual to another and which does not entail production. Ex: gift checks from friends or relatives

Buying and selling of securities do not directly involve current production. As such, they are excluded from the calculation of the GNP.

MARKET VALUERefers to the current price of goods and services produced in the economy. It is important because they facilitate computing for aggregate value of the various goods and services produced.

Ex: It would be difficult to determine the total value of 10,000 metric tons of fish and 50,000 cavans of rice. Computing will be easier if market values are assigned to commodities.P5,000 for fish and P14,000 for rice.

VALUE ADDEDRefers to the difference between the value of goods produced and the cost of materials and supplies used in producing them. Ex: a newly constructed house is valued at P1 M. if the cost of materials and supplies used in constructing the house is worth P650 T, value added is equal to P350 T. The production of most goods and services involves a series of stages To accurately measure GDP we must distinguish between intermediate and final goods.

Value AddedIntermediate goods: Goods or services purchased for use as input in the production of final goods or services Value added: The increase in the market value of a product that takes place at each stage of the production process

Value Added in Various Stages of ProductionStages of Production1. Farmer grows wheat, sells it to miller2. Miller converts wheat to flour, sells it to baker

Value of Value Market Added Transactions$0.120.28


3. Baker bakes bagel, sells it to bagel store4. Bagel store sells bagel to consumer Total

0.600.75 $1.75

0.320.15 $0.75

The value added at each stage represents a contribution to total output.

Two Ways to Calculate GDP You

can compute the value of final output in one of two ways: Count only market transactions entailing final sales and sum over all Count only the value added at each stage of production and sum over all

The Uses of Output The

major uses of total output conform to the four sets of market participants: Households consumption Business Firms investment Government government spending International participants net exports

CONSUMPTIONRefers to expenditures by consumers on final goods and services. the total amount spent by consumers on newly produced goods and services (excluding purchases of new homes, which are considered investment goods). Goods and services used by households are called consumption goods, which includes all household purchases made in product markets


to consumer goods, such as appliances and furniture, that is usually last for several years. Expenditures on consumer durables are meant not for current but for future sati