National income is defined as the sum total of factor incomes earned by normal residents of a country within an accounting year. It can be measured using the production, income, and expenditure approaches. The value added method sums the value added at each stage of production to measure GDP. The income method measures GDP as the sum of incomes from wages, rent, interest, and profits. The expenditure method measures GDP as the sum of final consumption and investment expenditures. National income provides important information about a country's economic activity and living standards.

1. National IncomeNational Income
AnalysisAnalysis

2. National Income- MeaningNational Income- Meaning
 It is a sum total of factor incomesIt is a sum total of factor incomes
accruing to normal residents of aaccruing to normal residents of a
country within an accounting year.country within an accounting year.
 ThThee concept of National Income canconcept of National Income can
be explained from three sides –be explained from three sides –
I) ProductionI) Production
II) Income andII) Income and
III) ExpenditureIII) Expenditure

3. DEFINITIONSDEFINITIONS
 Central Statistical Organization: -Central Statistical Organization: - “National“National
Income is the sum total of factor incomes earned byIncome is the sum total of factor incomes earned by
the normal residents of a country in the form ofthe normal residents of a country in the form of
wages, rent, interest and profit in an accountingwages, rent, interest and profit in an accounting
year”.year”.
 Prof. Kuznets: -Prof. Kuznets: - “The sum total of the market“The sum total of the market
value of final goods and services, produced byvalue of final goods and services, produced by
normal residents of a country in one year is knownnormal residents of a country in one year is known
as national product.”as national product.”

4. Circular flow diagramCircular flow diagram
 summarizes the transactions betweensummarizes the transactions between
the different economic agentsthe different economic agents
 agents: households, firms (business),agents: households, firms (business),
government, and foreigners (rest ofgovernment, and foreigners (rest of
the world)the world)

5. Circular flow diagramCircular flow diagram
 Assumption: The economy composed ofAssumption: The economy composed of
households and firms onlyhouseholds and firms only
 Households: own factors of production,Households: own factors of production,
consume goods and serviceconsume goods and service
 Firms: hire factors of production to produceFirms: hire factors of production to produce
goods and servicesgoods and services

6. FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between
firms and households in a simple economy.
In the upper loop, the arrow emanating from firms to households represents the sale by firms of
goods and services to households. On the other hand, the arrow from households to firms
represents the payments.
n the lower loop, the arrow originating from the households to the firms shows that firms hire
labor and capital from households in order to produce goods and services. The arrow
emanating from the firms indicates their payments for the use of the factors of production.
factor payments
(wages, interest, rent, profit)
factor services
goods and services
payments for goods and services
HOUSEHOLDSFIRMS

7. MARKETS FOR
FACTORS OF
PRODUCTION
MARKETS FOR
GOODS AND
SERVICES
FIRMS HOUSEHOLDS
Good and
services
bought
Good and
services sold
Revenue
(=GDP)
Spending
(=GDP)
Inputs for
Production
Land, labor
and capital
Wages, rent,
interest and
profit (=GDP)
Flow of goods & services
Flow of money: pesos
Income (=GDP)
THE CIRCULAR FLOW DIAGRAM

8. Transfer paymentsTransfer payments
 Transfer payments – are transactionsTransfer payments – are transactions
wherein one party is not obliged towherein one party is not obliged to
deliver a good or service in return fordeliver a good or service in return for
the payment.the payment.
 Examples: retirement benefits,Examples: retirement benefits,
unemployment benefits, scholarships,unemployment benefits, scholarships,
and donationsand donations..

9. Concepts/Aggregates of NationalConcepts/Aggregates of National
IncomeIncome
 Gross Domestic Product at Market Price (GDPGross Domestic Product at Market Price (GDPMPMP))
 Gross National Product at Market Price (GDPGross National Product at Market Price (GDPMPMP))
 Net National Product at Market Price (NNPNet National Product at Market Price (NNPMPMP))
 Net Domestic Product at Market Price (NDPNet Domestic Product at Market Price (NDPMPMP))
 Gross Domestic Product at Factor Cost (GDPGross Domestic Product at Factor Cost (GDPFCFC))
 Gross National Product at Factor Cost (GNPGross National Product at Factor Cost (GNPFCFC))
 Net National Product at Factor Cost (NNPNet National Product at Factor Cost (NNPFCFC))
 Net Domestic Product at Factor Cost (NDPNet Domestic Product at Factor Cost (NDPFCFC))
 Factor Income From Net Domestic ProductFactor Income From Net Domestic Product
Accruing to Private SectorAccruing to Private Sector
 Private IncomePrivate Income


10. Basic Concepts -Basic Concepts -
 Domestic and National ConceptsDomestic and National Concepts
1.Domestic Income = National Income – NFYA1.Domestic Income = National Income – NFYA
2. National Income = Domestic Income + NFYA2. National Income = Domestic Income + NFYA
 Market Price and Factor Cost ConceptsMarket Price and Factor Cost Concepts
1.1. Market Price = Factor Cost + NITMarket Price = Factor Cost + NIT
2.2. Factor Cost = Market Price – NITFactor Cost = Market Price – NIT
 Gross and Net ConceptsGross and Net Concepts
1.1. Gross Product = Net Product + DepreciationGross Product = Net Product + Depreciation
2.2. Net product = Gross Product – DepreciationNet product = Gross Product – Depreciation

11. Definition of GDPDefinition of GDP
 The market value of good i (VThe market value of good i (Vii ))
is equal to Pis equal to Pii ⋅⋅QQii
 GDP = sum of the market valuesGDP = sum of the market values
of all final goods and servicesof all final goods and services
produced within the year.produced within the year.
= =
= = ×∑ ∑
n n
i i i
i 1 i 1
GDP V P Q

12. GDP includes finalGDP includes final
goods and services onlygoods and services only
 Final goods - goods and services that areFinal goods - goods and services that are
not purchased for the purpose of producingnot purchased for the purpose of producing
other goods and services or for resaleother goods and services or for resale
– Eg. Rice (final) and palay or unhusked riceEg. Rice (final) and palay or unhusked rice
(intermediate product)(intermediate product)
 Including intermediate goods and finalIncluding intermediate goods and final
goods will result in “double counting”.goods will result in “double counting”.

13. Approaches for measuringApproaches for measuring
National IncomeNational Income
1.1. Value-added ApproachValue-added Approach – measures GDP– measures GDP
as the sum of value added at each stageas the sum of value added at each stage
of production (from initial to final stage)of production (from initial to final stage)
2.2. Income ApproachIncome Approach (lower loop) – measures(lower loop) – measures
GDP as the sum of incomes of factors ofGDP as the sum of incomes of factors of
production (wages, rent, interest andproduction (wages, rent, interest and
profit.profit.
3.3. Expenditure ApproachExpenditure Approach – measures GDP– measures GDP
as the sum of expenditures on final goodsas the sum of expenditures on final goods
and services.and services.

14. Value Added MethodValue Added Method
STEPS –STEPS –
 Classification of ProductiveClassification of Productive
EnterprisesEnterprises
 Calculation of Value AddedCalculation of Value Added
1.1. Value of OutputValue of Output
2.2. Value of Intermediate ConsumptionValue of Intermediate Consumption
 Calculation of Domestic IncomeCalculation of Domestic Income
 Calculation of National IncomeCalculation of National Income

15. Value Added ApproachValue Added Approach
 Suppose that rice is the only final product of anSuppose that rice is the only final product of an
economy: It goes through several (3) stages ofeconomy: It goes through several (3) stages of
production.production.
Stage of Prod’nStage of Prod’n
Value ofValue of
intermediateintermediate
goodgood
Value ofValue of
SalesSales
Value-addedValue-added
Farmer - PalayFarmer - Palay 12,00012,000 12,00012,000
Rice Miller -MilledRice Miller -Milled
RiceRice
12,00012,000 15,00015,000 3,0003,000
Retailers - RiceRetailers - Rice 15,00015,000 20,00020,000 5,0005,000
GDP= Total ValueGDP= Total Value
AddedAdded
20,00020,000

16. Cautions Regarding Value AddedCautions Regarding Value Added
1) Value of intermediate goods is not1) Value of intermediate goods is not
included in Product Method.included in Product Method.
2) Value of second hand goods is not2) Value of second hand goods is not
included in product method.included in product method.
3) Imputed rent is included in this3) Imputed rent is included in this
method.method.

17. Income MethodIncome Method
STEPSSTEPS
 Classification of ProductiveClassification of Productive
EnterprisesEnterprises
 Classification of Factor IncomeClassification of Factor Income
1.1. Compensation of Employees (COE)Compensation of Employees (COE)
2.2. Operating Surplus (O.S.)Operating Surplus (O.S.)
3.3. Mixed IncomeMixed Income
 Calculation of Domestic IncomeCalculation of Domestic Income
 Calculation of National IncomeCalculation of National Income

18. Income ApproachIncome Approach
ITEMS SYMBOLS VALUE
Compensation of
Employees
COE 1,093,800
Operating Surplus OS 2,215,100
Depreciation D 357,200
Net Indirect Taxes NIT 356,600
Gross Domestic Product GDP 4,022,700

19. Cautions Regarding IncomeCautions Regarding Income
MethodsMethods
 Windfall gainsWindfall gains
 Income from illegal activitiesIncome from illegal activities
 Transfer earningsTransfer earnings
 The sale and purchase of secondThe sale and purchase of second
hand goodshand goods
 Imputed value of servicesImputed value of services

20. Expenditure MethodExpenditure Method
STEPSSTEPS
 Identification and classification ofIdentification and classification of
Economic Units incurring FinalEconomic Units incurring Final
ExpenditureExpenditure
 Classification of Final ExpenditureClassification of Final Expenditure
1.1. Final Consumption ExpenditureFinal Consumption Expenditure
2.2. Final Investment ExpenditureFinal Investment Expenditure
 Calculation of Domestic IncomeCalculation of Domestic Income

21.  NDPNDPFCFC = Private Final Consumption= Private Final Consumption
Expenditure + Government FinalExpenditure + Government Final
Consumption Expenditure + GrossConsumption Expenditure + Gross
Domestic Capital Expenditure (GrossDomestic Capital Expenditure (Gross
Fixed Capital Formation + Change inFixed Capital Formation + Change in
Stock) + Net Exports (Exports –Stock) + Net Exports (Exports –
Imports)- Dep.-NITImports)- Dep.-NIT
 Calculation of National IncomeCalculation of National Income

22. Cautions Regarding ExpenditureCautions Regarding Expenditure
MethodMethod
 Only final expenditure is included inOnly final expenditure is included in
national income.national income.
 Expenditure on shares and bonds areExpenditure on shares and bonds are
not included.not included.
 Expenditure on second hand goods isExpenditure on second hand goods is
not included in national income.not included in national income.
 Expenditure on transfer payments isExpenditure on transfer payments is
not included in national income.not included in national income.

23. Nominal and Real GDPNominal and Real GDP
 GDP at current prices or nominal GDP -GDP at current prices or nominal GDP - GDPGDP
measured using the prices of the year for which it ismeasured using the prices of the year for which it is
calculatedcalculated
 Nominal GDP can be a misleading indicator ofNominal GDP can be a misleading indicator of
changes in output or income because it alsochanges in output or income because it also
embodies changes in the prices of goods andembodies changes in the prices of goods and
services.services.
 Real GDP or GDP at constant pricesReal GDP or GDP at constant prices ≡≡ measuresmeasures
the total value of output using the prices of athe total value of output using the prices of a
selected year (the base year).selected year (the base year).
 Real GDP better for analysis overtime because itReal GDP better for analysis overtime because it
eliminates the effects of price changeseliminates the effects of price changes

24. Real GDPReal GDP
Nominal GDP
Real GDP 100.
GDP deflator
= ⋅

25. Inflation RateInflation Rate
1
1
Inflation Rate t t
t
CPI CPI
CPI
−
−
−
=

26. GDP per capitaGDP per capita
 Measures how much output or income wasMeasures how much output or income was
produced or received, on the average, by anproduced or received, on the average, by an
individual in an economyindividual in an economy
 Useful for comparing the performance of a countryUseful for comparing the performance of a country
overtime and a country’s performance relative to itsovertime and a country’s performance relative to its
neighborsneighbors
GDP
GDP per capita
population
=

27. Per Capita GNI Per Capita GNI Poverty rate
Myanmar b
217 26.6
Nepal 250 30.9
Cambodia 350 34.7
Lao PDR 390 33.5
Bangladesh 440 49.8
Viet Nam 540 19.5
Pakistan 600 32.6
India 620 26.1
Sri Lanka 1010 22.7
Indonesia 1140 18.2
Philippines 1170 30.0
China 1500 3.1
Thailand 2490 9.8
Malaysia 4520 7.5
Korea, Rep. of 14000 3.6
Taiwan 14770 0.8
Singapore 24760 0.0
PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)

28. Some Limitations of GDP orSome Limitations of GDP or
GNP as measures of growthGNP as measures of growth
 Ignores income distributionIgnores income distribution
 Ignores environmental degradationIgnores environmental degradation
 Does not include activities that do notDoes not include activities that do not
go through the formal markets sectorsgo through the formal markets sectors
 Does not include “illegal” activities likeDoes not include “illegal” activities like
drug trafficking, prostitution,drug trafficking, prostitution,
moonlightingmoonlighting