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National income accounting ppt @ mba

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    National income accounting ppt @ mba National income accounting ppt @ mba Presentation Transcript

    • 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 betweenfirms and households in a simple economy.In the upper loop, the arrow emanating from firms to households represents the sale by firms ofgoods and services to households. On the other hand, the arrow from households to firmsrepresents the payments.n the lower loop, the arrow originating from the households to the firms shows that firms hirelabor and capital from households in order to produce goods and services. The arrowemanating 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 boughtFIRMS HOUSEHOLDS Land, labor Inputs for and capital Production MARKETS FOR FACTORS OF PRODUCTION Income (=GDP) Wages, rent, 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). 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 GDP = ∑ V = ∑P i=1 i i=1 i ⋅ Qi
    • 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 GDPExpenditure Approach (upper loop) – measures GDP as the sum of expenditures on final goods and services.Income Approach (lower loop) – measures GDP as the sum of incomes of factors of production (wages, rent, interest and profit.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. Price per Good unit Q sold Expenditure 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 ValuePersonal Consumption C 2,750,9000ExpenditureGovernment Consumption G 488,700ExpenditureGross Domestic Capital Formation I 776,200Exports of Goods and Services X 1,968,500Less: Imports of Goods and M 1,989,100ServicesStatistical Discrepancy SD 27,500Gross 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 VALUECompensation of COE 1,093,800 EmployeesNet Operating Surplus NOS 2,215,100Depreciation D 357,200Indirect Business Taxes less IBTS 356,600 SubsidiesGross 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 VALUEAgriculture, Fishery and Forestry 519,400Industry 1,307,400Services 2,123,900Gross 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 GNPGross Domestic Product GDP 4,022,700Net Factor Income from the NFIRW 267,500 Rest of the WorldGross 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 2QUANTITY Ice Cream 100 100 Buko Pie 100 100PRICE Ice Cream 50 100 Buko Pie 100 200VALUE Ice Cream 5,000 10,000 Buko Pie 10,000 20,000NOMINAL 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 Nominal GDPReal GDP = ⋅ 100. GDP deflator
    • Calculation of Real GDP Item 1990 1998 2002GDP 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), Philippines500.0450.0400.0350.0300.0250.0200.0150.0100.0 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 14.0percent per year 12.0 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 55.1Clothing 3.7Housing and Repairs 14.7Fuel, Light and Water 5.7Services 12.3Miscellaneous items 8.5All Items 100.0 Source: National Statistics Office
    • Inflation Rate CPI t − CPI t −1Inflation Rate = CPI t −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 1000.0 900.0Billions 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 GDP per capita = population
    • 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 60.0million 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 2002GDP at constant 720,700 888,000 1,046,100 (million pesos)Population (millions) 62.0 75.2 81.8Per 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 12.000Thousand 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 yearsItem 1984 1985 1995 1996 1997(1) GDP at current prices (million 524,481 571,883 608,887 2,171,922 2.423.640 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$), Philippines, 1988-2005 60.00 50.00 40.00Pesos per dollar 30.00 20.00 10.00 0.00 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
    • PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)Per Capita GNI Per Capita GNI Poverty rateMyanmar b 217 26.6Nepal 250 30.9Cambodia 350 34.7Lao PDR 390 33.5Bangladesh 440 49.8Viet Nam 540 19.5Pakistan 600 32.6India 620 26.1Sri Lanka 1010 22.7Indonesia 1140 18.2Philippines 1170 30.0China 1500 3.1Thailand 2490 9.8Malaysia 4520 7.5Korea, Rep. of 14000 3.6Taiwan 14770 0.8Singapore 24760 0.0
    • GNP Per Capita (in US$), 1998 and 200345004000350030002500 19982000 200315001000 500 0 China Indonesia Lao PDR Malaysia Philippines Thailand Viet Nam
    • GDP Per Capita PPP$, 2000 prices20,00018,00016,00014,00012,000 198010,000 2005 8,000 6,000 4,000 2,000 0 nd na sia p. m s sia ne na Re i la ne Ch ay pi ai et do a, ilip al Th Vi M re In Ph Ko
    • Annual Growth GDP, 1980-2005 (% per year) 9 8.49 8 7 6 5.53 4.87 4.59Percent 5 4 3.7 3.65 3 2 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 4.6Percent 5.0 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 22,320Germany 82 2,122.7 25.850 20,810Indonesia 204 138.5 680 2,790Japan 126 4,089.9 32,380 23,180Malaysia 22 79.8 3,600 6,990Philippines 75 78.9 1,050 3,540Singapore 3 95.1 30,060 28,620Thailand 61 134.4 2.200 5,840United Kingdom 59 1,263.8 21.400 20.640United 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-Philippines 100.0 15.0 31.8 53.2 -2003 (%) 3.1NCR 275.8 - 37.1 62.9 3.4CAR 129.9 11.0 56.5 32.5 6.4Ilocos 53.7 36.0 8.9 55.1 2.5Cagayan Valley 52.3 45.8 7.5 46.7 2.8C. Luzon 75.2 20.5 32.7 46.8 3.0S. Tagalog 85.7 20.2 37.5 42.3 3.5Bicol 43.3 22.7 16.1 61.2 22W. Visayas 83.5 22.6 25.7 51.7 2.9C. Visayas 93.4 10.4 27.9 61.7 3.7E. Visayas 50.5 29.9 25.7 44.4 2.0W. Mindanao 62.1 40.2 14.8 45.0 2.4N. Mindanao 101.8 28.6 30.2 41.2 2.7S. Mindanao 92.4 25.2 25.2 49.6 1.7C. Mindanao 76.6 40.2 28.0 31.8 3.4ARMM 23.2 48.6 10.3 41.1 2.5Caraga 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 1975-2003Philippines 2.5 2.5 3.9 3.2Luzon 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 3.4Visayas 2.4 2.1 4.0 3.2 Central 2.7 2.6 4.8 3.7 Visavas Other Visayas 2.3 1.7 3.4 2.8Mindanao 2.2 1.7 3.6 2.6
    • PHILIPPINES: Share of National GDPREGION 1975-85 1985-95 1995-200 1975-200 3 3Philippines 100 100 100 100Luzon 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 10.2Visayas 16.7 16.3 15.8 16.2 Central 6.4 6.5 6.7 6.5 Visavas Other Visayas 10.3 9.8 9.1 9.7Mindanao 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 pesosItem 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