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of aggregate economic activity, particularly national income and its components It measures the indicators of national output/income; .e.g. GDP, GNP
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.
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 Problems
Methods 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: 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
11,624.20
11,808.5
12,788.5
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
Base year: The year used for comparative analysis; the basis for indexing price changes
Inflation Rate
1990 1991
1992
1993 1994 1995 1996 1997 1998
83.8
91.6 100.0 108.2 117.3 125.1 137.9
10.8
9.3 9,2 8.2 8.4 6.6 10.2
price index
The price index represents a price level change as an index with a base of 100 100 percentage change
100
2006
3.30%
P12,456 P12,822 + P366
P $13,245
103.3 100
Investment: Expenditures on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories
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
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 VALUE
Refers 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 ADDED
Refers 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 Added
Intermediate 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
$0.12
0.16
0.60
0.75 $1.75
0.32
0.15 $0.75
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
CONSUMPTION
Refers 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
CONSUMER DURABLES
Refers
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 satisfaction.
INVESTMENT
An
activity that uses resources now in such a way that they allow greater production in the future, and hence, greater consumption in the future. It includes output of capital goods, net change in business inventories, and residential construction. Investment goods are the plant, machinery, and equipment that we
INVESTMENT
Investment
1. Fixed investment a good that is purchased to be used in order to make other goods and services. Ex: equipment purchase. 2. Inventory investment are those used to increase the amount of inventories of finished products.
GOVERNMENT EXPENDITUES
Refers
to the sum of government payrolls and purchases, which is the cost of government output. Such expenditure are used for the day-to-day operations and projects of the government. Resources purchased by the public sector are unavailable for consumption or investment
This is the difference between the income earned by citizens who own resources used in the production process abroad and the income of foreigners who own resources used in the production process here in the Philippines. If the difference is positive, it means the residents of this country earn more from their transactions overseas compared to what foreigners earn from their transactions in this country.
Net Exports
Net
1. Expenditure/Product Approach measures GDP as the sum of expenditures on final goods and services. 2. Income Approach measures GDP as the sum of incomes of factors of production (wages, rent, interest and profit). 3. Value-added/Industrial Origin Approach measures GDP as the sum of value added at each stage of production (from initial to final stage)
PRODUCT APPROACH
Referred to as the expenditure approach, is also a way of estimating national income. It involves calculating the sum of all expenditures on final goods. The formula used in estimating national income using the product approach is:
GNP (PCE,GDI, GCE, NFIFA) Capital consumption allowances (Depreciation,Obsolescence,Accidental Damage) Net National Product (NNP) Indirect Taxes Subsidies National Income
Brief explanations of the terms used is required to a full understanding of the formula
Refers to the spending by households on the ff. types of goods: 1. Durable consumer goods 2. Nondurable goods such as candies, newspapers, toilet papers, soft drinks and ball pen. 3. Services such as those provided by teachers, architects, interior decorators and electrician.
DEPRECIATION This term refers to the reduction in value of asset through wear and tear.
NET NATIONAL PRODUCT This refers to the GNP less the part of the output needed to replace the capital goods worn out in producing the output.
INDIRECT TAXES
These are taxes such as sales, excise, and business property taxes, license fees and tariffs which firms treat as costs of producing product or service and pass on (full or partial) to buyers by charging them high prices.
SUBSIDIES
This is the payment of funds, goods, or services by a government, business, or household for which it receives no good or service in return.
INCOME APPROACH
Current production is made possible through the use of economic resources of land, labor, capital, and entrepreneurship. The owners of these resources receive earning in the form of rent, wages and salaries, interest and dividends, and profit. When the total amount of earning of the owners are aggregated into a single amount, the objective of determining the national income is achieved.
DISPOSABLE INCOME
That part of the national income that is available to household for consumption or savings, is referred to as disposable income. It is estimated by deducting from GNP all taxes, business saving, and depreciation; then adding government and other transfer payments and government interest payments.
GOVERNMENT TRANSFER PAYMENT Those that are made by the government to individuals for which the individuals perform no current service in return. Examples are retirement and gratuity payments and unemployment insurance.
measures national income by determining the sum of the market value of the total production of all major industries comprising the economy. The major industries consist of the ff:
1. agriculture, fisheries and forestries 2. Industrial sectors 3. Service sector
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