MEASURES OF ECONOMIC

PERFORMANCE
PROF. ISIDRO APOLLO G. VALENSOY, JR.
 Simon Kuznets said…
• “It is necessary to have in any country a body
of expertise to bridge the gap between the
data, the concepts, and the measures…It is
typical of a developing economy that these
kinds of sophisticated resources are extremely
rare…”
• What happened to the economy last year and
what can be expected next?
 Basis of National Income
Measurement
• It is concerned with CURRENT TRANSACTIONS
in a given period.
• It measures the FLOW of activity, not the
STOCK of goods.
 Current Transactions
• These refers to the PERIOD in which an
activity takes place.
• What are specific examples of CTs?
• Income Statement of a firm
 Income Statement of Apollo Company
Period January 1, 2012 – December 31, 2012
(In Thousand Pesos)

Net Sales (after discounts and rebates) P700

Less:
Manufacturing Cost of Goods Sold 550
• Materials Purchase P280
• Labor Cost 140
• Depreciation 100
• Other Operating Costs 50
Add: Beginning Inventory 100
Deduct: Ending Inventory 120

Total Manufacturing Cost of

Goods Sold P 550 ____
Gross Profit P150
Less: Selling and Administrative Costs 20
Minus: Fixed Interest Charges 60

Net Earnings Before Taxes P 70

Less: Corporate Income Taxes 35
Net Earnings After Taxes P 35
Paid to Common Stockholders P 15
Earnings Retained in Business P 20
What’s the income statement for?
• The IS shows the receipts and payments of an
enterprise for a period, normally a year.
• It represents a FLOW of income or expenses
for a period.
• It shows the NET SALES of the enterprise for a
period, the COSTS OF MANUFACTURING, and
the PROFITS of the enterprise.
• Profits = Total (net) Sales - Costs
 FLOW vs. STOCK
• A flow is a quantity measure for a particular
period of time.
• All national income magnitudes are flows
(income, consumption, investment, value added)
• A stock is a quantity measured at a particular
unit of time.
• Capital goods in existence at a unit of time are
known as the capital stock.
 Balance Sheet of Apollo Company
December 31, 2012
(In Thousand Pesos)

Current Assets P200 Current Liabilities P250

Cash Equivalent 30 Short Term Loans 100
Accounts Receivable 120 Accounts and Notes Payable 150
Inventory 50
Total Current Liabilities 250

Fixed Assets 400 Long-Term Liabilities 200

Property, Plant, and Equipment 400 Long-Term Debt (DBP) 150
Bonds Payable 50

Net Worth 150

Capital – Common 150

Total Assets 600 Total Liabilities and Net Worth 600

==== ====
 What does the balance sheet tells
us?
• The BS shows the FINANCIAL STATUS of a
company at a given date.
• What the company owns are its ASSETS.
• What it owes are its LIABILITIES.
• What the owners own are its NETWORTH
(Net worth = Assets – Liabilities)
• The BS represents the level of activity at a
given point in time.
GNP: A single measure for all the things
produced in the given year.
• One View: measure of final sale value of all
final goods and services produced by the
economy.
• GNP ≡ final sale value of rice + bread + ……..
• GNP ≡ p1q1 + p2q2 + p3q3…+ all other values
of final sales.
 Commodity Price Quantity Final Value
(p) (q) (p x q)
Rice p1 q1 p1 x q1
Bread p2 q2 p2 x q2
Milk p3 q3 p3 x q3
Eggs p4 q4 p 4 x q4
Fruits p5 q5 p 5 x q5
Coffee p6 q6 p6 x q6
Sugar p7 q7 p 7 x q7
Cigarettes p8 q8 p 8 x q8
…and so on pn qn p n x qn
GNP: the sum of all the value added of all the
enterprises
• The VALUE ADDED of an enterprise is its NET
CONTRIBUTION to the total value of production
of all the goods it produced.
• It is the difference between the market value of
all the goods that the enterprise produced
minus the cost of all the goods and materials
produced from other producers.
• Value Added ≡ value of final sales – purchases
from other enterprises.
 Typical Rice Merchant’s Income Statement,
1985
(In thousand pesos)
• Value of Sales P 286
• Purchases from Other Enterprises 256
• Payments for Labor (Wages and Salaries) 12
• Rentals for Store and Warehousing 7
• Interest on Loans 3
• Allowance for Depreciation and Maintenance of
Store, Equipment, etc. 4
• Profits 4
 Value Added of Rice Merchant
(In thousand pesos)
• Payment for Labor (Wages and Salaries) P 12
• Rentals for Store… 7
• Interest on Loans 3
• Allowance for Depreciation…. 4
• Profits 4
• Total or Gross Value Added P 30
• Minus: Depreciation 4
• Net Value Added P 26
====
 FINAL SALE AND SUM OF VALUE ADDED
(In thousand pesos)
Stage of Sale Value of Sale Purchases from Value added at
other enterprises stage
Retailer (final sale) P 286 P256 P 30
Wholesaler 256 220 36
Miller 220 150 70
Farmer 150 50 100
Chemical company
and other
companies 50 --- 50
Final sale of rice merchant ≡ Sum of all value added by stages
P286 ≡ P30 + P36 + P70 + P100 + P50
P286 ≡ P286
GNP: sum of all value added by industry sector.

• Services (transport, banking, insurance, etc.)

• Commerce (retail, wholesale)
• Manufacturing (rice milling, sugar milling,
chemical company, etc.)
• Mining (extraction)
• Agriculture (farming, livestock, etc.)
SIMPLIFIED FLOW OF GOODS AND OF PAYMENTS
PURCHASES
OF FINAL
Payments GOODS
Goods

RESOURCE BUSINESS
OWNERS ENTERPRIS
ES
FACTOR INCOMES
Wages, Rents,
Resources Interests, Profits, Payments
Depreciation
or
VALUE ADDED OF
SECTORS
Agriculture
Industry
 GROSS NATIONAL PRODUCT
• It is the total income earned by a nation’s
permanent residents (nationals).
 GROSS DOMESTIC PRODUCT
• It is the total income earned by the domestic
residents of the country including the value of
production produced by foreign workers in
the country.
 GNP vs. GDP
• GNP = GDP + NFFY
• NFFY = Factor income from the rest of the
world – Factor income to the rest of the world
Components and Computation of GNP
• EXPENDITURE APPROACH
• VALUE-ADDED APPROACH
• INCOME APPROACH
 EXPENDITURE APPROACH
Personal Consumption Expenditures P xxxx
Government Expenditures P xxxx
Gross Domestic Investment P xxxx
- Fixed Capital
Construction xxxx
Durable Equipment or Machinery xxxx
Breeding Stocks and Orchard Development xxxx
- Changes in Stocks xxxx
Net Export (X-M) P xxxx
- Exports xxxxx
- Imports (xxxxx)
Statistical Discrepancy P xxxx
Gross Domestic Product P xxxx
Net Foreign Factor Income P xxxx
- Factor Income from the rest of the world xxxxx
- Less: Factor income to the rest of the world (xxxxx)
Gross National Product P xxxx
 VALUE-ADDED APPROACH
• Agriculture, Fishing, and Forestry P xxxx
• Industry P xxxx
- Mining and Quarrying xxxx
- Manufacturing xxxx
- Electricity, gas, and water xxxx
• Service P xxxx
- Transportation, Communication and Real Estate xxxx
- Trade xxxx
- Finance xxxx
- Ownership and Dwellings Real Estate xxxx
- Private Services xxxx
• Gross Domestic Product P xxxx
• Net Foreign Factor Income P xxxx
- Factor Income from the rest of the world xxxx
- Less: Factor Income to the rest of the world (xxxx)
• Gross National Product P xxxx
 INCOME APPROACH
• Personal Income P xxxx
• A. Compensation of Employees xxxx
• B. Entrepreneurial and Property Income of Persons xxxx
• Government Corporate Income P xxxx
• Private Corporate Income P xxxx
• A. Corporate Tax xxxx
• B. Corporate Savings xxxx
• National Income P xxxx
• Indirect Business Taxes Pxxxx
• Less: Subsidies (xxxx)
• Capital Consumption Allowance P xxxx
• Gross National Product P xxxx
• Manufacturing 18,148
• Subsidies 12,493
• Fixed Capital 11,210
• Net Foreign Factor Income 1,255
• Payment to Salaries of Government Employees 12,509
• Transportation, Communication, Storage and Utilities 8,215
• Export of Goods and Non-factor Services 15,256
• Entrepreneurial and Property Income of Persons 18,798
• Other Government Expenditures 3,660
• Increase in Inventories 20,005
• Commerce 18,916
• Corporate Tax 5,394
• Import of Goods and Non-factor Services 12,113
• Personal Consumption Expenditures 78,717
• General Government Income from Property and Entrepreneurship 2,617
• Mining and Quarrying 21,010
• Indirect Business Taxes 21,260
• Services 30,505
• Compensation of Employees 69,524
• Agriculture, Fishing, and Forestry 13,655
• Construction(Value Added) 18,996
• Corporate Savings 3,317
• Depreciation Allowance 22,283
• Gross Domestic Capital Formation 31,215
 VALUE-ADDED APPROACH
• Agriculture, Fishing, and Forestry P 13,655
• Industry P 58,154
- Mining and Quarrying 21,010
- Manufacturing 18,148
- Construction 18,996
Service P 57,636
- Transportation, Communication, Storage and Utilities 8,215
- Commerce 18,916
- Private Services 30,505
• Gross Domestic Product P 129,445
• Net Foreign Factor Income P 1,255
• Gross National Product P 130,700
 INCOME APPROACH
• Personal Income P 88,322
• A. Compensation of Employees 69,524
• B. Entrepreneurial and Property Income of Persons 18.798
• Government Corporate Income P 2,617
• Private Corporate Income P 8,711
• A. Corporate Tax 5,394
• B. Corporate Savings
3,317
• National Income P 99,650
• Indirect Business Taxes P 21,260
• Less: Subsidies (P12,493)
• Capital Consumption Allowance P 22,283
• Gross National Product P 130,700
 INCOME APPROACH
• Personal Income P 88,322
• A. Compensation of Employees 69,524
• B. Entrepreneurial and Property Income of Persons 18.798
• Government Corporate Income P 2,617
• Private Corporate Income P 8,711
• A. Corporate Tax 5,394
• B. Corporate Savings
3,317
• National Income P 99,650
• Indirect Business Taxes Net of Subsidies P 8,767
• Capital Consumption Allowance P 22,283
• Gross National Product P 130,700
 EXPENDITURE APPROACH
Personal Consumption Expenditures P 78,717
Government Expenditures P 16,169
- Salaries of Government Employees 12,509
- Other Government Expenditures 3,660
Gross Domestic Investment P 31,215
- Fixed Capital 11,210
- Changes in Stocks 20,005
Net Export of Goods and Non-factor Services P 3,143
- Exports 15,256
- Imports (12,113)
Statistical Discrepancy P 201
Gross Domestic Product P 129,445
Net Foreign Factor Income P 1,255
Gross National Product P 130,700
 Computing SD…
Personal Consumption Expenditures P 78,717
Government Expenditures P 16,169
Gross Domestic Investment P 31,215
Net Export of Goods and Non-factor Services P 3,143
Net Foreign Factor Income P 1,255
Gross National Product (Partial) P 130,499

Thus:

GNP Income/Value Added: P 130,700

Less: GNP Expenditure (Partial) 130,499
SD ……………………………………………… P 201
vvvvvvvvvv
• Manufacturing………………………………………………………………………………… 28,544
• Fixed Capital……………………………………………….…………………………………… 27,800
• Net Foreign Factor Income………………………………………………………………. (338)
• Payment to Salaries of Government Employees………………………………. 5,443
• Transportation, Communication, Storage and Utilities…………………….. 5,828
• Export of Goods and Non-factor Services………………………………………… 21,272
• Entrepreneurial and Property Income of Persons…………………………….. 30,339
• Other Government Expenditures……………………………………………………… 5,502
• Increase in Stocks……………………………………………………………………………… 7,905
• Commerce………………………………………………………………………………………… 25,459
• Corporate Tax…………………………………………………………………………………… 2,003
• Import of Goods and Non-factor Services…………………………………………. 29,057
• Personal Consumption Expenditures…………………………………………………. 76,165
• General Government Income from Property and Entrepreneurship …. 493
• Mining and Quarrying……………………………………………………………………….. 2,000
• Indirect Business Taxes Net of Subsidies……………………………………………. 11,989
• Private Services…………………………………………………………………………………. 12,834
• Compensation of Employees…………………………………………………………….. 55,015
• Agriculture, Fishing, and Forestry…………………………………………………...... 32,996
• Construction (Value Added)……………………………………………………….. 7,060
• Depreciation Allowance…………………………………………………………………….. 11,304
• Corporate Savings………………………………………………………………………………. 3,240
 GNP versus NI
GNP = is the total market value of all final
goods and services produced by
citizens in one year.
NI = is the total income of the factors of production in
one year.
WHICH ONE IS GREATER? GNP or NI?
WHY IS GNP GREATER THAN NI?
WHAT DOES NI REFLECT? TOTAL COST OF PRODUCTION or
TOTAL SALES?
 PCI versus PC GNP
• Per Capita Income = NI/Population
• Per Capita GNP = GNP/Population
 GNP and GDP
• If incomes derived from investments or
wealth in foreign countries by Filipino Citizens
are (excluded/included) in the accounting.

• Which one is usually higher in amount? GNP

or GDP? Why?
 Real GNP versus Money GNP
• In measuring real economic achievements,
what is more important? Quantity or market
value of goods and services produced?
• How does inflation or deflation affect the
market value of GNP?
• During inflation, GNP value is high
• During deflation, GNP value is low
 Money GNP
YEAR QUANTITY PRICE (PhP) GNP
1 100 10
2 100 20
3 100 30
4 100 40
5 100 50

YEAR QUANTITY PRICE (PhP) GNP (PhP)

1 100 10 1,000
2 100 20 2,000
3 100 30 3,000
4 100 40 4,000
5 100 50 5,000
 Real GNP
Real GNP = (Money GNP/Price Index) X 100
RGNP = (GNPM/P.I.) x 100

Price Index = Price in any given year X 100

Price in base year
P.I. = (Pc/Pb) x 100
 Real GNP (Adjusted GNP)
YEAR QUANTITY PRICE (PhP) PRICE MONEY REAL
INDEX GNP GNP
(Year 3 as (PhP) (PhP)
base year)
1 100 10
2 100 25
3 100 50
4 100 75
5 100 100
YEAR QUANTITY PRICE (PhP) PRICE MONEY REAL
INDEX GNP GNP
(Year 3 as (PhP) (PhP)
base year)
1 100 10 20 1,000 5,000
2 100 25 50 2,500 5,000
3 100 50 100 5,000 5,000
4 100 75 150 7,500 5,000
5 100 100 200 10,000 5,000
Solve for P.I., MGNP, and RGNP
YEAR QUANTITY PRICE (PhP) PRICE MONEY REAL
INDEX GNP GNP
(Year 2 as (PhP) (PhP)
base year)
1 100 10
2 100 25
3 100 50
4 100 75
5 100 100
YEAR QUANTITY PRICE (PhP) PRICE MONEY REAL
INDEX GNP GNP
(Year 4 as (PhP) (PhP)
base year)
1 100 10 100 1,000 1,000
2 100 25 250 2,500 1,000
3 100 50 500 5,000 1,000
4 100 75 750 7,500 1,000
5 100 100 1,000 10,000 1,000
YEAR QUANTITY PRICE (PhP) PRICE MONEY REAL
INDEX GNP GNP
(Year 3 as (PhP) (PhP)
base year)
1 100 10 40 1,000 2,500
2 100 25 100 2,500 2,500
3 100 50 200 5,000 2,500
4 100 75 300 7,500 2,500
5 100 100 400 10,000 2,500
YEAR MONEY GNP PRICE INDEX REAL GNP
(In Million (1985 Base (In Million
Pesos) Prices) Pesos)

1983 655,962 20
1984 598,099 50
1985 556,074 100
1986 579,143 110
1987 605,861 130
1988 652,411 135
1989 690,801 140
1990 721,762 155
1991 722,330 170
1992 729,770 210
1993 748,014 220