1. Northern Iloilo Polytechnic State College
Estancia, Iloilo
SCHOOL OF GRADUATE EDUCATION
ECONOMICS IN EDUCATION
1st Semester – 2012-2013
Professor: Dr. Leonisa G. Babas
CHAPTER 10 – National Income Accounting
Reporter: Mrs. Ma. Theresa S. Casorla
Introduction
National income accounting is a set of meaning for measuring economic activity in the
aggregate economy, that is the, entire economy. National income accounting provides a way of
measuring total production broken down into sub-aggregates such as consumption, investment,
and personal income; defines the relationship among these sub-aggregates to analyze how much
the nation is producing and consuming.
Measuring Economic Output
Economists’ initially measure of domestic output: real gross domestic product (real
GDP). Gross Domestic Product (GDP) is the aggregate market value of all final goods and
services in an economy in a one-year period. Economists and other analysts talk about GDP
how much it has increased or decreased.
The economic actions of the citizens and businesses of a country is measured by Gross
National Product (GNP), the total final output of citizens and businesses of an economy in a one
year period. So the economic activity of Filipino citizens working abroad is counted in the
Philippine GNP. To this extent, GDP characterizes the economic output within the physical
boarders of a country while GNP characterizes the economic output produced by the citizens of a
country. To shift from GDP to GNP we must add net foreign factor income to GDP. Net Foreign
Factor Income is the income from foreign domestic factor sources minus foreign factor income
received domestically. We must add the foreign income of our citizens and subtract the income
of residents who are not citizens.
Calculating GDP
For total final output (GDP) consists of thousands of various services and products:
banana, mangoes, assembled computers, haircuts, legal advice, and so on. To reach aggregate
output, we have to add them all into composite measure. You cannot add banana and mangoes
and assembled computers. You can only add like things measured in the same units. To add like
things, we must convert them into like things by multiplying each goods by its price. Economists
describe this as weighing the importance of each good by its price.
Multiplying the amount of each good by its market price changes the conditions in which
we trash out each good from a quantity of particular product to a value measure of that good.
As soon as all goods are definitely stated in that value measure, they can be added
simultaneously.

2. The final goods and services produced in a year, multiplying the quantity produced by the
market price per unit, we have the economy’s outputs stated in units of value. If we add up all
these units of value, we have that year’s Gross Domestic Product.
GDP represents a flow of an amount per year, not a stock of an amount at a particular
moment of time. It pertains to the market value of final output.
GDP is a flow notion. This refers to the amount of total final output a country produces
per year. The per year is always left unstated, but it is important and essential. How much you
earn is a flow concept; it has meaning only when a time period is related with it such as per
week, per month, per year. A stock concept is the amount of something with it. (You weigh 160
pounds; you don’t weigh 160 pounds per week.)
GDP measures ultimate output. GDP does not measure total transactions in an
economy; it measures final output, goods and services bought for final use. At the time one
business company sells products to another business company for use in manufacturing of
another good, the first firm’s products are not taken into account as final output. They are
intermediate products, products used as input in the production of some other product. To count
both intermediate goods and final goods as part of GDP would be to double-count them. An
example of an intermediate good would be wheat sold to a baker. If we counted both the wheat
(intermediate good) and the bread (final good) made from the wheat, the wheat would be double-
counted thereby overestimating final output.
If we did not exclude intermediate goods, a change in organization would seem like
change in output. A firm that produced tire combined with a firm that produced cars. Both then
produce exactly what each did separately before the merger. Final output and intermediate output
has not changed. The only disparity is that the intermediate output of tire is now internal to the
firm. Each firm’s sales of goods to final consumers, not sales to other firms, preclude mere
changes in organization form having an effect on the GDP measure of output.
Eliminating Intermediate Goods. This refers to the two ways to eliminate intermediate
goods from the measure of GDP. One is to add up only final sales. Business companies would
have to set apart goods they sold to consumers from intermediate goods to produced other goods.
Another way to exclude double counting is to be guided by the value added approach.
Value added is the rise in value that a business company helps to bring about a product or
service. It is determined by subtracting intermediate goods, the cost of materials that business
company uses to produce a good or service, from the value of its sales.