Nation's Income PowerPoint presentation.

• What are the core agenda of Macroeconomics?
• How do we measure Economic Growth and Income and
Spending?
• How do we compute for GDP using Value-added
approach and Expenditure approach?
• What is the difference between nominal GDP versus
real GDP?
• What is GNP, per Capita GDP or GNP and the
Contribution of OFW in GNP?
1

Micro vs. Macro
• Microeconomics:
The study of how individual households and
firms make decisions, interact with one another
in markets.
• Macroeconomics:
The study of the economy as a whole and it
deals with the aggregate economy.
MEASURING A NATION S INCOME 2

Macroeconomics
Macroeconomics analyzes
the sum total of how
everyone in the economy…
bought and sold,
earned and spent,
produced and sold,
conceptualized and
implemented projects,
trained and worked,
And Saved and invested.

The Core Agenda of Macroeconomics
Macroeconomics monitors the
overall health of the economy.

Similar to personal health, the
economy also has vital signs to
check for it to be declared
HEALTHY AND FIT.

Similar to personal health, the
economy also has vital signs to
check for it to be declared
HEALTHY AND FIT.
GROWTH
PRICES
EMPLOYMENT

means that the economic standing of a
country is expanding from the previous
period.
GROWTH

Prices reflect the capacity of the population
to afford the various products and services in
the economy.
Prices

Employment matches the economic growth by
providing people with jobs that will allow them to
satisfy their needs and wants through the
income that they will receive.
Employment

Measuring Economic Growth
There is no better way to measure aggregate or total economic
expansion but through the Gross Domestic Product (GDP).

Gross Domestic Product (GDP) is...
the market value of all final goods &
services produced within or by a
country in a given period of time.
Goods are valued at their market prices, so:
• All goods measured in the same units
(e.g., dollars in the U.S.)
• Things that don't have a market va/ne are
excluded, e.g., housework you do for
yourself.

...the market value of all final goods &
services produced within a country in a
given period of time.
For example:
If a processed fish is
worth P100 and the raw
fish is worth P50, will it
be worth P150?
9

...the market value of all final goods &
services produced within a country
in a given period of time.
For example:
If a processed fish is
worth P100 and the
raw fish is worth P50,
will it be worth P150?
No, the worth is its
final value – P100
9

Gross Domestic Product (GDP) Is...
.the market value of all final goods &
GDP includes tangible goods
(like DVDs, mountain bikes, beer)
and intangible services
(dry cleaning, concerts, cell phone service).

the market value of all final goods &
GDP includes currently produced goods,
notgoods produced in the past.

GDP measures the value of production that occurs
within a country's borders, whether done by its own
citizens or by foreigners located there.
Gawa Dito Pinas

Usually a year or a quarter (3 months)

Gross Domestic Product (GDP)
Remember the Basic Circular Flow Model in
Module 2? That explains the GDP process.

The Circular-Flow Diagram
• a simple depiction of the macroeconomics
• illustrates GDP as spending, revenue,
factor payments, and income
• Preliminaries:
• Factors of production are inputs like labor,
land, capital, and entrepreneurship.
• Factor payments are payments to the factors
of production (e.g., wages, rent).
MEASURING A NATION S INCOME

Firms
Firms:
• buy/hire factors of production,
use them to produce goods
and services
• sell goods & services
Households:
•own the factors of production,
sell/rent them to firms for income
• buy and consume goods & services
Households
5

Markets for
Goods &
Services
Spending (=GDP)
Firms
Factors of
production Markets for
Factors of
Production
Wages, rent,
profit (=GDP)
bought
Households
Labor, land,
capital
Income (=GDP)

Measurement of Income and Spending
• Gross Domestic Product (GDP) measures
total income of everyone in the economy.
• GDP also measures total spending on the
economy's output of goods & services.
For the economy as a whole,
income equals spending because
every dollar a buyer spends is a
dollar of income for the seller.

Measurement of Income and Spending
For the economy as a whole,
income equals spending because
every dollar a buyer spends is a
dollar of income for the seller.
For instance, JP hires Nicolai to paint her
house for P5,000. JP spends P5,000 and
Nicolai earns P5,000. As a whole, GDP
increases by P5,000.

However, the Circular Flow Model Omits
• The government
• collects taxes, buys goods and service
• The financial system
• matches savers' supply of funds with
borrowers' demand for loans
• The foreign sector
• trades goods and services, financial
assets, and currencies with the country's
residents

o Produced means goods that are currently made and sold at that certain
time period, say in a specific year. GDP does not include anything
previously sold.
 For example: If a person sells a second-hand car a year after it was
bought, the value of the car sold will not be reflected in the GDP of
the succeeding year.
 Thus, an imported vehicle bought from a Philippine distributor
does not help increase the country’s GDP; rather, it becomes a
competitor of the local manufacturers and is therefore detrimental
to growth. GDP measures the worth of production within the confines
of a specific country.

GDP can be computed in three ways:
• By adding all expenditures by the household
(Expenditure Approach)
• By adding the total income (Income Approach)
• Value Added-Approach
Although these might look too simple and impractical, in reality, some
parts of the households’ income are used for paying taxes and some
are saved. In summary, whether there are more than two
participants (e.g. including the government) in the circular flow, it is
mostly true that total income is equal to total spending.

GROSS DOMESTIC PRODUCT
USING THE EXPENDITURE
APPROACH
Y = C + I + G + NX
Where:
Y – GDP
C – Consumption
I – Government Spending
X – Exports
M – Imports
(X-M) – Net
Exports (NX)

Consumption (C)
• is total spending by households on goods &
sold.
• Note on housing costs:
• For renters,
consumption includes rent payments.
• For homeowners,
consumption includes the imputed rental value
of the house, but not the purchase price or
mortgage payments.

Consumption (C)
• Goods – classified into durables and non-
durables
Durables – goods that do
not deplete with use.
Goods that can be used
repeatedly.
Non-durables – products
that decrease when used.
These are commonly
those goods with single
use.
Durables – non-perishable
Non-Durables – perishable
• Services – are the ones
one gets or consumes
without physically holding
on to them, like getting a
massage.

Investment
• is total spending on goods that will be used in the
future to produce more goods.
• includes spending on
• capital equipment (e.g., machines, tools)
• structures (factories, oñice buildings, houses)
• inventories (goods produced but not yet sold)
Note: “Investment” does not
mean the purchase of financial
assets like stocks and bonds.

Government Expenditures Spending
• is all spending on the goods and services
purchased by government at the federal, state,
and local levels after collecting taxes from
Households and Firms.
• Government spending excludes transfer
payments, such as Social Security or
unemployment insurance benefits since they
are not purchases of goods and services.

Government Expenditures Spending
• is all spending on the goods and services purchased by government at
the federal, state, and local levels after collecting taxes from
Households and Firms.
In the case of the Philippines,
the national government uses
these taxes to pay for the
president’s salary or to construct
a bridge, among others. Local
governments use their own tax
collection to pay for the mayor’s
salary or constructing their own
municipal road.

Net Exports (NX)
• NX = exports —imports
• Exports represent foreign spending on the
economy's goods & services.
• Imports are the portions of C, I, and G that are
spent on goods & services produced
abroad.This have a negative value because
these are considered foreign spending.
• Adding up all the components of GDP gives:
Y = C + I +G + NX

GDP using Income Approach
• This GDP formula takes the total income generated by
the goods and services produced.
GDP = Total National Income + Sales
Taxes + Depreciation + Net Foreign Factor
Income
Total National Income – the sum of all wages, rent, interest,
and profits.
Sales Taxes – consumer taxes imposed by the government on
the sales of goods and services.
Depreciation – cost allocated to a tangible asset over its useful
life.
Net Foreign Factor Income – the difference between the total
income that a country’s citizens and companies generate in
foreign countries, versus the total income foreign citizens and
companies generate in the domestic country.

GDP using Value-Added
Approach
Computing GDP using the Value-Added approach is a
more intuitive way to avoid double counting the value
of intermediate goods in gross domestic product is to,
rather than try to isolate only final goods and services, look
at the value added for each good and service (intermediate
or not) produced in an economy.
Value added is simply the difference between the cost
of inputs to production and the price of output at any
particular stage in the overall production process.

GDP using Value-Added
Approach
Solution: The value added for each sector is calculated as follows:
SECTOR OUTPUT INTERMEDIATE
CONSUMPTION
VALUE-ADDED
AGRICULTURE $100 $50 $50
MANUFACTURING $200 $100 $100
SERVICES $300 $150 $150
This approach to calculating GDP is based on the idea that the value of a final
good or service is equal to the sum of the values added at each stage of
production. The value-added approach is a more accurate way to measure GDP
than the output approach because it takes into account the value of intermediate
consumption.
Intermediate consumption is the value of goods and services that are used up in the
production of other goods and services. If intermediate consumption were not taken
into account, the value of GDP would be overstated.

Real versus Nominal GDP
Inflation can distort economic
variables like GDP, so we have two
versions of GDP: One is corrected for
inflation, the other is not.
• Nominal GDP values output using current
prices. It is not corrected for inflation.
• Real GDP values output using the prices of
a base year. Real GDP is corrected for
inflation.

Real versus Nominal GDP
To get a true glimpse of what is happening with a
country’s GDP, the real GDP should be measured. This is
the actual increase in the output of an economy and not a
superficial raise like in inflation.
GDP
May mean that the economy has
increased its output from the
previous year to the current year
The prices of goods and services
in the previous year are cheaper
compared with current prices
OR

Example
Nominal or current GDP is solved by simply multiplying the price (P) by
the quantity (Q) for the given year.
Year Price of Rice per kg
(P)
Quantity of Rice
(kg)
Price of LPG per kg
(P)
Quantity of LPG
(kg)
2012 30 100 50 12
2013 35 120 55 14
2014 40 140 60 16
Table 1. Price and Quantity of Rice and
LPG
Thus, from the data, the values or figures of the nominal GDP are as
follows:
2012: (P30 x 100) + (P50 x 12) = P3,600
2013: (P35 x 120) + (P55 x 14) = P4,970
2014: (P40 x 140) + (P60 x 16) = P6,560

Nominal GDP
Year Price of
Rice per
kg (P)
Quantit
y of Rice
(kg)
Price of
LPG per
kg (P)
Quantit
y of
LPG
(kg)
2012 30 100 50 12
2013 35 120 55 14
2014 40 140 60 16
Table 1. Price and Quantity of Rice and LPG
Thus, from the data, the values or figures of
the nominal GDP are as follows:
2012: (P30 x 100) + (P50 x 12) = P3,600
2013: (P35 x 120) + (P55 x 14) = P4,970
2014: (P40 x 140) + (P60 x 16) = P6,560
The simple growth formula is:
Present Year – Past Year
-------------------------------- x 100%
Past Year
From the data, the growth rates of the
nominal of current GDP are as follows:
2012 - 2013: 38.05%
2013 - 2014: 32.00%
Initially, it seems that the growth rates are
high. But it should be noted that the growth
as computed included the price changes.
To remove the price changes from the
solution, the estimates must be adjusted
by considering the base year.

Real GDP
Year Price of
Rice per
kg (P)
Quantit
y of Rice
(kg)
Price of
LPG per
kg (P)
Quantit
y of
LPG
(kg)
2012 30 100 50 12
2013 35 120 55 14
2014 40 140 60 16
Base year – a period of relative normality
in an economy. Generally, it means that the
economy did not encounter any serious
social, political, economic, and
environmental problem. In the example, it
can be assumed that 2012 is a normal year.
It can then be used as the base year.
-------------------------------- x 100%
Past Year
When the price of 2012 is used for all years,
price increases that happened within the next
two years should be taken out. Solving with
this step gives the real or constant GDP. To
implement it, the initial table is recomputed
using the 2012 prices. The results are as
follows:

Real GDP
Year Price of
Rice per
kg (P)
Quantit
y of Rice
(kg)
Price of
LPG per
kg (P)
Quantit
y of
LPG
(kg)
2012 30 100 50 12
2013 35 120 55 14
2014 40 140 60 16
-------------------------------- x 100%
Past Year
Computing the real GDP (base year 2012)
2012: (P30 x 100) + (P50 x 12) = P3,600
2013: (P30 x 120) + (P50 x 14) = P4,300
2014: (P30 x 140) + (P50 x 16) = P5,000
With the same simple growth formula,
GDP growth can then be recomputed as:
2012 - 2013: 19.44%
2013 - 2014: 16.28%
It can be seen that the growth rates are
lower than the results of the first
computation. It is always the real and
constant rate that is considered official
and not the nominal or current rate.

The GDP Deflator
• The GDP deflator is a measure of the overall
level of prices.
• Definition:
GDP deflator = 100 X
nominal GDP
---------------
real GDP
• One way to measure the economy's inflation
rate is to compute the percentage increase in
the GDP deflator from one year to the next.

Deflator
Year Price of
Rice per
kg (P)
Quantit
y of Rice
(kg)
Price of
LPG per
kg (P)
Quantit
y of
LPG
(kg)
2012 30 100 50 12
2013 35 120 55 14
2014 40 140 60 16
Deflator formula is:
Nominal GDP
----------------------------- x 100%
Real GDP
Deflator mimics the growth of GDP
without the prices. The values are,
however, not exact with the estimated simple
growth rate as they more or less reflect the
increase in prices rather than the growth rate
itself.
The deflator is solved by dividing the
nominal GDP by the real GDP. The
quotient is then multiplied by 100%.
2012: (P3,600 / P3,600) x 100% = 100%
2013: (P4,970 / P4,300) x 100% = 116%
2014: (P6,560 / P5,000) x 100% = 131%
The deflator eliminates inflation from 2013
and 2014, and retains the increase in
quantity outputs of rice and LPG.

A C T I V E L E A R N I N G 7
GDP and its components
In each of the following cases, determine how much GDP
and each of its components is añected (if at all).
A. Debbie spends $200 to buy her husband dinner at the
finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends $1200 on a computer to use in her editing
business. She got last year's model on sale for a great
price from a local manufacturer.
D. General Motors builds $500 million worth of cars, but
consumers only buy $470 million worth of them.

Answers
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in
her publishing business. The laptop was built in
China.
21
Consumption and GDP rise by $200.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.

Answers
C. Jane spends $1200 on a computer to use in her
editing business. She got last year's model on
sale for a great price from a local manufacturer.
Current GDP and investment do not change,
because the computer was built last year.
D. General Motors builds $500 million worth of cars,
but consumers only buy $470 million of them.
Consumptionrises by$470 million,
inventory investment rises by $30 million.
22

Pizza Latte
year P O P O
2005 $10 400 $2.00 1000
2006 $11 500 $2.50 1100
2007 $12 600 $3.00 1200
PROBLEM:
1. Compute nominal GDP in each year.
2. Compute the real GDP in each year.
3. Compute the value of the deflator.
:

Pizza Latte
year P O P O
2005 $10 400 $2.00 1000
2006 $11 500 $2.50 1100
2007 $12 600 $3.00 1200
SOLUTION:
Compute nominal GDP in each
year:
Increase:
2005:
2006:
2007:
$10 x 400 + $2 x 1000 =
$11 x 500 + $2.50 x 1100 =
$6,000
$8,250
37.5%
$12 x 600 + $3 x 1200 = $10,800
30.91%
24

Pizza Latte
year P O P O
2005 $10 400 $2.00 1000
2006 $11 500 $2.50 1100
2007 $12 600 $3.00 1200
Compute real GDP in each year:
Increase:
2005:
2006:
2007:
$10 x 400 + $2 x 1000 =
$10 x 500 + $2 x 1100 =
$6,000
$7,200
20%
$10 x 600 + $2 x 1200 = $8,400
16.67%
24
(using2005 as the base year)
SOLUTION:

Pizza Latte
year P O P O
2005 $10 400 $2.00 1000
2006 $11 500 $2.50 1100
2007 $12 600 $3.00 1200
Compute deflator in each year:
2005:
2006:
2007:
( $ 6,000 / $ 6,000 ) x 100%=
( $ 8,250 / $ 7,200 ) x 100%=
100%
114.58%
( $ 10,800 / $8,400) x 100% = 128.57%
SOLUTION:

EXAMPLE:
Nominal
year GDP
Real
GDP
GDP
Deflator
2005
2006
2007
$6000
$8250
$10,800
$6000
$7200
$8400
100.0
114.6
128.6
14.6%
12.2%
Compute the GDP deflator in each year:
2005: 100 x (6000/6000) 100.0
2006: 100 x (8250/7200) = 114.6
2007: 100 x (10,800/8400) = 128.6

Nominal Real
year GDP GDP
2005 $6000 $6000
2006 $8250 $7200
2007 $10,800 $8400
EXAMPLE:
In each year,
• nominal GDP is measured using the (then)
current prices.
• real GDP is measured using constant prices from
the base year (2005 in this example).

EXAMPLE:
Nominal
year GDP
37.5%
Real
GDP
20.0O
›9
2005 $6000 $6000
2006 $8250 $7200
2007 $10,800 30.9% $8400 16.7%
• The change in nominal GDP reflects both prices
and quantities.
• The change in real GDP is the amount that
GDP would change if prices were constant (i.e.,
if zero inflation).
Hence, real GDP is corrected for inflation.
%

2007 (base yr) 2008 2009
P Q P Q P O
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205
PROBLEM 2: Computing GDP
Use the above data to solve these problems:
A. Compute nominal GDP in 2007.
B. Compute real GDP in 2008.
C. Compute the GDP deflator in 2009.
31

2007 (base yr) 2008 2009
P Q P Q P O
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205
Answers
A. Compute nominal GDP in 2007.
$30 x 900 + $100 x 192 = 46.200
B. Compute real GDP in 2008.
$30 x 1000 + $100 x 200 = 50.000

2007 (base yr) 2008 2009
P Q P Q P O
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205
Answers
C. Compute the GDP deflator in 2009.
Nom GDP $36 x 1050 + $100 x 205 $58,300
Real GDP $30 x 1050 + $100 x 205 $52,000
GDP deflator 100 x (Nom GDP)/(Real GDP)
100 x ($58,300)/($52,000) 112.1

GDP and Economic Well-Being
• Real GDP per capita is the main indicator of
the average person's standard of living.
• But GDP is not a perfect measure
of well-being.
• Robert Kennedy issued a very eloquent
yet harsh criticism of GDP:

Gross Domestic Product...
“. does not allow for the health of our
children, the quality of their education,
or the joy of their play. It does not
include the beauty of our poetry or
the strength of our marriages, the
intelligence of our public debate or
the integrity of our public officials.
It measures neither our courage, nor our wisdom,
nor our devotion to our country. It measures everything,
in short, except that which makes life worthwhile, and it
can tell us everything about America except why we are
proud that we are Americans.”
- Senator Robert Kennedy, 1968 35

GDPDoes Not Value:
• the quality of the environment
• leisure time
• non-marketactivity, such as the child care a
parent provides his or her child at home
• an equitable distribution of income
iVlEASURlNG A NATION S INCOME 36

But why do we care about GDP?
• Having a large GDP enables a country to
afford better schools, a cleaner environment,
health care, etc.
• Many indicators of the quality of life are
positively correlated with GDP.

Nominal and Real GDP in the U.S.,
1965-2007
Billions
$12,000 -
$10,000 -
$8,000
Real GDP
(base year
2000)
$6,000
$4,000
$2,000-
Nominal
GDP
28

The Gross National Product
The national income accounts include other measures of income
that differ slightly in definition from GDP. It is important to be aware of
the various measures because economists and the media often refer
to them.

The Gross National Product
 Is the measure of all the final goods
produced by the labor of a country in
a specific time period, including
earnings from abroad.
Gawa Ng Pinoy
To see how the alternative measures of
income relate to one another, we start
with GDP.
GNP = GDP + FACTOR PAYMENTS FROM ABROAD – FACTOR
PAYMENTS TO ABROAD
Whereas GDP measures the total income produced domestically, GNP
measures the total income earned by nationals (residents of a nation).

GNP Using Value-Added Approach
GDP = GDO

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