National Income
Accounting
ECON 3A. MACROECONOMICS
Measures of National Income: all of which
measure economic performance of a nation
1. Gross National Product (GNP)
2. Gross Domestic Product (GDP)
3. Per Capita GNP
Gross National Product
Used by the National Economic and Development
Authority (NEDA); previously Gross National Product
(GNP)
“… the market value…”
Market prices – reflect the value of the goods
“… of all…”
All items produced in the economy
And sold legally in markets
Excludes most items
Produced and consumed at home
“… final…”
Value of intermediate goods is already included in
the prices of the final goods
“… goods and services…”
Tangible goods & intangible services
“… produced…”
Goods and services currently produced
Y = C + I + G + NX
Y = GNI
C = consumption
I = investment
G = government purchases
NX = net exports (export - import)
Consumption, C
Spending by households on goods and services
Exception: purchases of new housing
Investment, I
Spending on capital equipment, inventories, and
structures
Household purchases of new housing
Inventory accumulation
Government purchases, G
Government consumption expenditure and gross
investment
Spending goods and services
By local and national governments
Does not include transfer payments
Net Exports, NX = Exports – Imports
Exports
Spending on domestically produced goods by
foreigners
Imports
Spending on foreign goods by domestic residents
Limitations of GNP
1. Excludes imports
2. Excludes intermediate goods
3. Excludes products not produced within the period of
time accounted
Approaches:
1. Expenditure approach
2. Income approach
3. By Industrial Origin
Gross Domestic Product
Refers to the market value of all final goods
and services produced within a country
Often not used by developing nations
because many firms are foreign-owned
Per Capita Income
Also known as income per person
Mean income of people
GNP or GDP / population
Per Capita GNP
GNP / population
Example:
Coffee Pandesal
Year Price Quantity Price Quantity
2012 Php 10 400 Php 2.00 1,000
2013 11 500 2.50 1,100
2014 12 600 3.00 1,200
Compute nominal GDP in each year: Increase:
2005: 10 x 400 + 2 x 1000 = 6,000
2006: 11 x 500 + 2.50 x 1100 = 8,250
} 37.5%
2007: 12 x 600 + 3 x 1200 = 10,800 } 30.9%
Example:
Coffee Pandesal
Year Price Quantity Price Quantity
2012 Php 10 400 Php 2.00 1,000
2013 11 500 2.50 1,100
2014 12 600 3.00 1,200
Compute real GDP in each year:
using 2012 as the base year: Increase:
2005: 10 x 400 + 2 x 1000 = 6,000
2006: 10 x 500 + 2 x 1100 = 7,200
} 20.0%
2007: 10 x 600 + 2 x 1200 = 8,400 } 16.7%
B. Inflation
Refers to the increase in the overall level of
prices
Can be measured using the GDP deflator
GDP deflator – measure of the overall level of
prices
Definition:
GDP deflator = nominal GDP X 100
real GDP
One way to measure the economy’s inflation rate is to
compute the percentage increase in the GDP
deflator from one year to the next.
Real versus Nominal GDP
The GDP deflator
Ratio of nominal GDP to real GDP times 100
Is 100 for the base year
Measures the current level of prices relative to the
level of prices in the base year
Can be used to take inflation out of nominal GDP
(“deflate” nominal GDP)
Real versus Nominal GDP
Inflation
Economy’s overall price level is rising
Inflation rate
Percentage change in some measure of the price
level form one period to the next
Inflation in year 2
= GDP deflator in year 2 – GDP deflator in year 1 X 100
GDP deflator in year 1
Example:
Year Nominal Real GDP GDP Deflator
GDP
2005 6,000 6,000 100.0
} 14.6%
2006 8,250 7,200 114.6
} 12.2%
2007 10,800 8,400 128.6
Compute real GDP in each year:
2005: 100 x (6,000/6,000) = 100.0
2006: 100 x (8,250/7,200) = 114.6
2007: 100 x (10,800/8,400) = 128.6
Expenditure Approach
1. Personal Expenditures (C) P XXXXX
2. Gross Domestic Capital Formation or Investment (I) XXXXX
3. Government Expenditures (G) XXXXX
4. Net Exports (X – M) XXXXX
5. Statistical Discrepancy (SD) P XXXXX
Gross Domestic Product (GDP) XXXXX
6. Net Factor Income (NFY) XXXXX
Gross National Product (GNP) P XXXXX
For easy recall:
C + I + G + (X - M) ± NFY = GNP
Notes: Expenditure Approach
The government has a share in domestic capital formation
Government consumption expenditures are for non-capital goods
Net increase in stocks – differences in inventory systems
1. Inflows may not entirely consist of final goods. Deducting
inventory outflows cancels out the portion that should be
excluded.
2. Some goods sold initially as final are attributed to the production
of previous goods, and should not form part of the present GNP
Notes: Expenditure Approach
Net Foreign Factor Income – difference between the aggregate
flow of factor payments from and to the rest of the world
Statistical Discrepancy – account to even out the practical
differences between the figures arrived at by the two alternative
approaches
Income Approach
1. Income of Persons (PY) P XXXXX
2. Corporate Income (CY) XXXXX
3. Government Income from Capital (GY) XXXXX
National Income (NI) XXXXX
4. Indirect Tax (IT) P XXXXX
Less: Subsidies XXXXX XXXXX
5. Capital Consumption Allowance or
Depreciation Allowance (DA) XXXXX
Gross National Product (GNP) P XXXXX
For easy recall:
PY + CY + GY = NI + (IT - S) + DA = GNP
Notes: Income Approach
Essential features:
1. Direct payments to resource owners factors
2. Resource owners contribute to transform products into higher
forms
3. Excludes imports and previously produced inventories
Other Concepts of NI Accounting
National Product – market value of final products equal to GNP less
depreciation
National Income – income earned by factor owners and equal to
NNP less indirect taxes, taxes on production
Personal Income vs. national income
Personal income – earned by persons or households
national income – non-personal accounts such as corporate taxes,
undistributed profits, and government entrepreneurial income
Other Concepts of NI Accounting
Personal income = NI – (S + T + GI) + TP
Where: PI = personal income; NI = net income; S = undistributed profits or
corporate savings; T = corporate taxes; GI = government entrepreneurial
income; TP = transfer payments
According to source: PI = W + D + E + TP
Where W = wages; D = dividends or distributed profits; E =
entrepreneurial and property income of persons
W + D + E all represent production or economic income of persons
Industrial Origin Approach
1. Agriculture (A) P XXXXX
2. Industry (I) XXXXX
3. Services (S) XXXXX
Gross Domestic Product (GDP) XXXXX
4. Net Factor Income (NFY) P XXXXX
Gross National Product XXXXX
For easy recall:
A + I + S = GDP + NFY = GNP
