The document discusses measures of national income and output, specifically Gross National Product (GNP). It provides definitions of GNP, explaining that GNP is the sum of the market values of all final goods and services produced within a country in a given period of time. It notes that GNP can be calculated using the expenditure approach, income approach, or industrial origin approach. The document also discusses what activities are excluded from GNP calculations and provides an example GNP calculation for the Philippines using both the industrial origin and expenditure approaches.

1. Daniel James Caballero y Dineros

2. MEASURES OF INCOME
AND OUTPUT
Whenever one sector is using their money for the
purchase of others’ output, it becomes an income of
that sector vice versa. Thus, in this simplified economy,
we can easily compute for national income.
For instance, ABC Company produces product M
worth Php4,000 using the equipment hired from Mr. Dela
Cruz which the latter received a total income of
Php3,000 after paying Mang Ambo who regularly
maintains the equipment. Another company, XYZ
Company, provides product N worth Php3,000 using the
expertise and skills of Mr. Santos and Mr. De Guzman
who in return receives 1,500 each.

3. The household sector is composed of four individuals
– Mr. Juan Dela Cruz, Mang Ambo, Mr. Santos and Mr.
De Guzman who spend their income for the basic needs
provided by ABC and XYZ Company in the following
manner:
Mr. Dela Cruz spends Php1,500 for product M and
another Php1,500 for product N
Mang Ambo purchases Php500 worth of product
M and Php500 worth of product N
Mr. Santos also purchases the goods he needs
from company ABC and XYZ worth of Php750 of
product M and Php750 of product N
Mr. De Guzman is spending just the same amount
as Mr. Santos

4. Adding the Financial Sector Into the Model
It’s unrealistic to assume that the household sector
consumes every peso of income earned on goods and
services. A portion of it is saved in some financial institutions.
This situation is likely true with the business leakage from the
circular flow or sometimes called as an outflow. In the same
manner, both sector spend most of their income on
investment. Investment is considered an injection in the
circular flow. Consider as an example that part of money or
income of both sectors that were saved in some financial
institutions, which in turn lend this fund to individuals or
invested in some profitable business.
In some cases of foreign investment, it may be
considered as an injection into the economy for it brings
employment and productions. However, most of these
foreign investors send back their profit to their own country
and this manifest a leakage from our economy. This process
is called as “profit repatriation”

5. Adding the Government Sector
Into the Model
The government sector plays a vital role in our economy.
The government imposes a variety of taxes to support a
wide range of budgetary programs. Both household and
business sectors are oblige to pay their corresponding taxes.
Therefore tax is a leakage in the circular flow. On the other
hand, the government spends its income generated out of
the taxes of the mentioned sectors on salaries of public
servants and capital expenditure on road construction,
repair of bridges, establishments of public hospitals, schools
and etc.
Hence, government expenditure or spending is an
injection into the circular flow.

6. Adding the Overseas Sector Into the Model
Philippines has an “open economy”. A certain
percentage of the Philippine consumption is made up of
goods and services produced overseas while some
products are being exported to other countries. Importation
is a leakage in the circular flow. This is because the money
that has been used to pay the imports does not circulate
back or into the economy On the contrary, exportation of
goods and services are considered as an injection into the
circular flow. This is because receipts of the sales of the
product return to the economy.
Hence, an increase in exports result to the increase of the
national income

7. In this “four-sector” circular flow model, an
outflow or leakage is that part of income that
leaks the circular flow and causes to slow down
the rate of movement on the income. This
includes savings, taxes, and imports. On the
contrary, inflows or injections allow the flow of
income to rise within a certain economy. It
includes the investments, government
expenditure, and proceeds from goods and
services to other countries.

8. 2
1
4
3
7
6
5
10 9 8
11
12
13
Household Business
1. Goods and Services
2. Factors of Production
(land, labour, capital
entrepreneur)
3. Factors of Payment
(rent, wage, interest
profit)
4. Payment of Purchase
of Goods and Services
5. Imports
6. Taxes
7. Savings
8. Financial
Sector
9. Government
Sector
10. Overseas
Sector
11. Investment
12. Government Expenditure
13. Payment of PurchaseCircular Flow of Income

9. Some economies use mathematical equation in
expressing the effect of inflows and outflows on the circular
flow and national income. As mentioned earlier, the
household sector either consumes or saves money.
That is,
Y = C + S
where:
Y = income
C = consumption
S = savings
The same is true with the business sector, where firms
spend their money either on the production that is
consumed in the period it was produced or on investment.

10. Therefore,
Y = C + I
where:
Y = expenditure or total spending
C = the production that is consumed in
the period it was produced
I = investment
Combining the two equations will give us:
Y = C + S and Y = C + I
Cancelling consumption or the C’s,
I = S
Hence, spending by the business sector equals income
received by the household sector. That is, national income
depends on the level of consumption by household sector,
and the level of investment by the business sector.

11. As mentioned earlier, the government also spent its
income through government expenditure and government
spending. This act of spending is an injection into the
circular flow. Hence,
Y = C + I + G
Going back to the circular flow model, import is
considered as leakage while export is injection to the
economy.
Y = C + I + G + (X - M)
Remember that the circular flow model is just a
framework that explain how each sector work in performing
complex economic activities.

12. THE GROSS NATIONAL
PRODUCT (GNP)
Nobody has cleared the discovery of the gross
national product, the name Simon Kuznet comes into
view for is path-breaking work on GNP. The concept of
GNP opened to the systematic understanding of how
economy performs on a macro level. Since then, the
gross national product has become the most basic tool
in measuring the economy
The gross national product (GNP), therefore, is the
sum of the market values of all goods and services
produced. It is also the sum of the money value of
consumption, investment, government purchases of
goods and services, and net exports.
In defining the GNP, value is a measurement in the
monetary terms, which is the value of goods and
services, usually in market price, in peso.

13. Activities that are Excluded in the
GNP Computation
We defined GNP as the sum of all final
goods and services. Hence, its only the value
of the goods and services should be counted,
and those values of intermediate goods which
are a part of final product are excluded.
Similarly, the value of goods and services must
be counted only once.
An approach in estimating the value of final
product is the value added. The next slide will
show the overestimate in the GNP if we count
the intermediate value and not just the value
added.

14. Hypothetical Value-Added Data
Items
Sales
Receipts
Cost of
Intermediate
Products
Value-
Added
Eraser 5 0 5
Wood 8 -5 3
Lead 12 -8 4
Pencil 25 -12 14
50 -25 25

15. To avoid double counting of products, the value of
goods and services must be counted only once (value-
added approach). Value-added is the difference between
the value of goods and the cost of the materials and
supplies used in production.
Non-productive transactions should also be excluded
from the GNP computation (ex. Financial transactions,
second-hand sales & underground economy). Public
transfer payments are those given by the government to
individuals or households but does not contribute
production in return for them (ex. Old age pension &
welfare payments). Private transfer payments involve funds
from a private individual to another and which is not part of
the production. (ex. Gift cheques from friends/relatives)
Some of these transaction were earned years ago,
hence, these do not contribute to the current production.
This will only result to double counting so it will be included
in the present GNP accounting.

16. For example:
The income of a father of a student amounting Php120,000
which is included in the 2004 GNP, and sums of Php30,000 to
the total allowance of the student for the same period. If the
student’s allowance is counted for 2004 GNP, an
overstatement shall occur because it was already recorded
as part of the father’s income.
Re-sale or second-hand sale transactions were also
excluded in the GNP calculation. All products produced in
2004 were measured in in 2004 GNP even if some of the
product were not sold in the same year. Hence, such unsold
products should not be included in year 2005 GNP
calculation. Another activity that is excluded in the GNP
computation is the so-called underground economy.
Underground economy has two kinds:
1. Activities that are illegal (i. e. Illegal drug trade); and
2. Activities that are legal but unrecorded for tax
purposes (i. e. Services of doctors, lawyers, tutors who
produces valuable services but might escape the net
of national input statisticians)

17. Computing the Gross National Product
Product or Expenditure Approach
How do we really go about measuring the GNP? Economist
have several approaches in measuring the GNP. One is the
product or expenditure approach.
There are 4 major components in measuring the GNP:
Personal Consumption Expenditure of goods and
services. This constitute the largest share of the nation’s
output.
Government Spending. It is the sum of expenditures
incurred by the government. This includes salaries and
wages of public servants and daily operations.
Net Exports (Export-Import). This is the difference
between exports and imports. A negative net export is
derived when imports are greater than exports. A positive
net export occurs when exports is greater than the imports.

18. Summing up these components will give a rise to the GNP.
The table below shows the major components of GNP
expenditure approach.
Household or Personal Consumption Expenditure (C)
+ Gross Domestic Capital Formation (I)
+ Government Purchase of Goods and Services (G)
± Net Export (Export-Import)
+ Statistical Discrepancy
= Gross Domestic Product (GDP)
+ Net Factor Income from Abroad
= Gross National Product
- Depreciation Allowance
= Net National Product
- Indirect Income Taxes
- Subsidies
= National Income
Gross National Product
(Expenditure Approach)

19. In the circular flow model, investment is done by the
business sector. But with no introduction into the government
sector in the model, the government invest as well.
Investment is an expenditure on new capital goods. This
consist an addition to the national stock of building,
equipment and inventories.
The government also provides basic services like
education, health, and etc. This is called Government
consumption expenditure which is separated from personal
consumption expenditure .Not all of the government’s
spending is included in the GNP computation. This includes
government on transfer payments, which are payments from
the government to the individuals. (ex. disability payments,
veteran’s benefits)
Net exports is the difference between exports and imports.
In some cases, products produced at home are sometimes
sold to other countries (exports). And in some of the goods
materials in production are brought abroad. (import)

20. Industrial Origin Approach
It is another method in computing the GNP. It measures GNP
by determining the sum of the market value of the total
production of all the major industries comprising the economy
Gross National Product
(Industrial Origin Approach)
Agriculture, Fisher and Forestry Sector
+ Industry Sector
Mining
Manufacturing, Construction
Electricity, Gas and Water
+ Service Sector
Transportation, Communication & Storage
Trade, Finance
Owner Dwelling and Real Estate
Service (Private & Government)
Equals : Gross Domestic Product
Less International Factor Income
Equals : Gross National Product
Less Net Indirect Taxes & Depreciation Allowance
Equals : National Income

21. Income Approach
Still, another method in computing the GNP is the
Income Approach as shown in Table 26. in our
circular flow, recall that the household sector
receives earning fro the business sector as payment
for the economic resources. A component for this
approach includes all income received as the
owner of economic resources known as factor
payments. Part of the factor payments include
wages and salaries to labour, rent paid for allowing
the use of one property, profits and dividends paid
to capital.
In reality, it is not only the household sector that
has income. Government, too, has an income
generated mainly from the so-called government
owned and controlled corporation.

22. Gross National Product
(Income Approach)
Compensation of Employees
Private Compensation of Employees
Public Compensation of Employees
Entrepreneurial and Property Income
Government Income from entrepreneurial property
Corporate Income
Corporate Tax
Corporate Savings
National Income
+ Depreciation
+ Indirect Business Tax (IBT)
- Subsidies
= Gross National Product (GNP)

23. Philippine GNP Actual Account
Table 27 presents the Gross National Products
accounts in actual numbers/data of the Philippine
GNP economy. The right side of the component of
expenditure approach. It measures the flow of the
product which is usually represented by economic
symbols: C for personal expenditure, I for gross
domestic investment, G for government purchases
of goods and services, and X for net exports. The left
side shows the components of industrial origin
approach. Note that each approach adds up to
exactly the same Gross National Product. This is
because whatever income the consumers receive
out of the payment of factors of production, they
spend it on goods and services produced by the
other sector.

24. Net factor income from abroad refers to the
difference between the net income earned by the
citizens who earned resources used in the
production process abroad and the income of
foreigners who own resources used in the
production process here in the PH. Whereas,
depreciation allowance refers to the decline in the
value of an asset has been worn out a period of
time. Indirect tax refers to tax imposed on goods
before they reach consumers who ultimately pays
for them not as a tax but as part of the purchase
price to which it is added. On the other hand,
subsidies refer to the payment of funds, goods, or
services by government, business, or household for
which it receives no goods or services in return.

25. Gross National Product By
Industrial Origin and
By Expenditure Approach
(At Current Prices)

26. 1. Agriculture, Fishery & Forestry 742,112
2. Industrial Sector 1,542,240
A. Mining and Quarrying 53,032
B. Manufacturing 1,116,163
C. Construction 217,699
D. Electricity, Gas, & Water 155,346
3. Services Sector 2,559,098
A. Transpo., Commun., and Storage 370,228
B. Trade 680,762
C. Finance 215,136
D. Owners’ Dwellings and Real Estate 293,750
E. Private Services 605,719
F. Goverment Services 393,503
Gross Domestic Product 4,843,450
Net Factor Income From Abroad 352,454
Gross National Product 5,195,904
GROSS NATIONAL PRODUCT BY INDUSTRIAL ORIGIN
At Current Price
(in million pesos)

27. GROSS NATIONAL PRODUCT BY EXPENDITURE
At Current Price
(in million pesos)
1. Personal Consumption Expenditure 3,343,973
2. General Government 488,795
Consumption Expenditure
3. Gross Domestic Capita Formation 825,484
A. Fixed Capital Formation 802,172
B. Increase in Stacks 23,312
4. Exports of Goods and Services 2,432,681
5. Less: Imports of Goods and 2,434,672
Non-Factor Services
6. Statistical Discrepancy 187,419
Expenditure on Gross Domestic Product 4,843,430
Net Factor Income From the 352,434
Rest of the World
Expenditure on Gross National Product 5,195,504

28. GNP versus GDP
The distinction between two measurements of
economic performance is based on the differences
in counting production by foreigners in a country and
by citizens outside the country, such that, there are
some cases where final goods and services are part
of GDP but not of GNP, or vice versa. For instance,
production by foreigners within a particular country is
part of GDP but not of GNP and that production of
citizens outside their country is included in the GNP
but not in GDP. Thus, GNP is the sum of market value
of all goods and services produced by a citizen of a
country during a given time regardless of their
physical location, while GDP if the sum of all final
goods and services produced within the country.

29. Generally, we use the price to determine the market
value of goods and services. However, considering the
price differ over time, it is not usually appropriate to use
variant yardsticks of measurement. This is because in
the case of inflation, prices tend to increase, needless
to say, GNP at current price increases, based on the
fundamental equation.
GNP = price x quantity
Thus, in order to deal with the ambiguity of using
price as measurement for market value of goods and
services, macroeconomist have categorized GNP into
real and nominal GNP.
Nominal GNP is the sum of all goods and services at
current price. This is obtained simply by multiplying the
number of final goods and services by the prevailing
market price.
Real GNP versus Nominal GNP

30. Daniel James D. Caballero
Prepared by: