MACROECONOMICS GROSS DOMESTIC PRODUCT

CHAPTER 3  Non-market Production

NATIONAL INCOME ACCOUNTING  Increases in Product Quality
 Environmental Abuses
The Students should be able to:  Underground Economy
 Explain Gross Domestic Product (GDP).
Gross National Product (GNP), their
GROSS NATIONAL PRODUCT
purposes and limitations
 Gross national product (GNP) is an
 Account for GDP and GNP using
estimate of the total value of all the final
Expenditure Approach. Income
products and services turned out in a
Approach and Industrial Origin Approach
given period by the means of production
 Analyze the structural strengths and owned by a country's residents.
weaknesses of our economy:
 It is the value of all products and
 Distinguish current from real GNP services produced by all citizens of a
country both domestically, and
internationally by income earned by
WHAT IS NATIONAL INCOME ACCOUNTING foreign residents.

National income accounting is a government WHAT DOES GROSS NATIONAL PRODUCT

bookkeeping system that measures a country's MEASURE
economic activity-offering insight into how an  Gross national product is one metric for
economy is performing. measuring a nation's economic output,
Such a system will include total revenues by growth, and wealth as economists rely
domestic corporations, wages paid, and sales on the GNP data to solve national
and income tax data for companies. National problems such as inflation and poverty.
income accounting systems allow countries to GNP measures the total monetary value
assess the current standard of living or the of the output produced by a country's
distribution of income within a population, as residents. Therefore, any output
well as assess the effects of various economic produced by foreign residents within the
policies. country's borders must be excluded in
calculations of GNP, while any output
produced by the country's residents
GROSS DOMESTIC PRODUCT (GDP) outside of its borders must be counted.

 Gross domestic product is the  Gross national product is the value of

monetary value of all finished goods and all products and services produced by
services made within a country during a the citizens of a country both
specific period. domestically, and internationally minus
income earned by foreign residents.
 GDP provides an economic snapshot of
a country, used to estimate the size of
an economy and its growth rate. LIMITATIONS OF GNP
 GDP can be calculated in three ways, While GNP does count as one way to
using expenditures. production, or measure the economic health of a country, it
incomes and it can be adjusted for does have its limitations. While not precise, it is
inflation and population to provide still a useful tool in measuring a nation's
deeper insights. economic output and overall demand.
 Real GDP takes into account the effects 1. Exchange Rate
of inflation while nominal GDP does not.
GNP calculates the value of goods sold
 Though it has limitations, GDP is a key abroad by domestic firms and uses the
tool to guide policymakers. investors, exchange rate to convert that value into local
and businesses in strategic decision- currency. So when Apple sells 100 iPhones in
making. Europe, this may be the equivalent of €70.000.
However, that needs to be converted back into
US dollars so that it is comparable to other
sales.
 1. Account for GDP and GNP using
Expenditure Approach
2. Cannot tell if Economy is Growing
GNP works out the total value of goods
produced and sold by domestic companies and  The expenditure approach to calculating
individuals, including those abroad. This is not gross domestic product (GDP) takes
an accurate measurement because global into account the sum of all final goods
markets are so integrated that each nation will and services purchased in an economy
derive a significant part of its income from over a set period of time.
abroad. If GNP is growing, it may be showing
 That includes all consumer spending,
an increasing income from abroad, but doesn't
government spending, business
show how well the domestic economy is. For
investment spending, and net exports.
example, GNP could be growing rapidly, but
unemployment could be increasing.  Quantitatively, the resulting GDP is the
same as aggregate demand because
they use the same formula.
3. GNP Inflated due to Expats
Some nations, particularly poorer
The formula for Expenditure GDP is:
nations, have a high outflow of skilled workers
from their countries. Often, residents from GDP = C + I + G + (X-M)
Eastern European countries such as Albania.
Hungary, and Poland. will emigrate to Western Where:
European countries such as France and the UK. C = Consumer spending on goods and services
The income they earn from those countries is
then sent home, thereby inflating GNP figures. | = Investor spending on business capital
goods
G = Government spending on public goods and
4. GNP Deflated due to Foreign Direct services
Investment
X = Exports
When foreign firms invest in another
nation, it can lead to a net outflow of GNP. For M = Imports
example, a big firm such as Walmart may
invest in the Indian market. It sells goods and
services there but sends the profits back to the 2. Account for GDP using Income Approach
US. This boosts the US figure, whilst draining
The factors of production include land,
than of India.
labor, capital and entrepreneurship. Each of
these factors of production are exchanged for
a corresponding source of income: which we
IN A NUTSHELL call rent, wages, interest, and profit. When you
 A country's GNP reflects the market add up all this income, you arrive at the gross
value of all goods and services put out domestic product using the income approach.
by its citizens no matter where they're
produced.
This can be represented by the formula:
 Using GNP alone makes it difficult to
compare the economies of different GDP = TNI +T+D+NFFI
countries.
Gross Domestic Product = Total National
 GDP is generally considered the go-to Income + Sales Taxes + Depreciation + Net
metric to use when comparing global Foreign Factor Income
economies.
 GNP measures the output of a country's 3. Account for GNP using Income Approach
residents regardless of the location of
the actual underlying economic activity. Since every transaction involves a buyer
and a seller, the GNP can also be calculated
 Income from overseas investments by a from the seller's point of view, which focuses
country's residents counts in GNP, and on where money payments go. The method,
foreign investment within a country's also known as the income approach, measures
borders does not. GNP as the sum of all the incomes received by
all owners of resources used in production.
Such income payments are known as factor
payments, because they are paid to various be subtracted from its income before it can be
factors involved in the production of goods and added to avoid duplication issues. The
services. industrial origin approach will yield the same
results as any expenditure or income based
The official formula for calculating GNP is as
model of GNP calculation.
follows:
The value added by a firm is its revenue
Y=C+I+G+X+Z from selling a product minus the amount paid
for goods and services purchased from other
firms. The intuitive sense of this concept is
Where: clear: If a firm buys some inputs from other
C = Consumption Expenditure firms, does something to them, and sells the
resulting product for a price higher than it paid
I = Investment for the Inputs, we say that the firm has "added
G = Government Expenditure value to the product, if we sum up the values
added by all firms in the economy, we must get
X = Net Exports (Value of Imports minus value the total value of all final products.
of exports)
Z = Net Income (Net income inflow from
abroad minus net income outflow to foreign Thus: GDP can be measured as the sum of the
countries) values added by all firms.

Account for GDP and GNP using Industrial  FORMULA IN COMPUTING FOR THE
Origin Approach GDP

GDP = Industry + Agriculture + Services

What is Industrial Origin Approach?
The Industrial Origin Approach also  FORMULA IN COMPUTING FOR THE
called as "Value Added Approach" is an GNP
approach to computing a nation's GNP based
GNP = GDP + Net Factor income from
on adding up the gross value of primary, mo
and tertiary industries. Abroad (NFIFA)

These industries are: To calculate NFIFA;

 Agricultural NFIFA = Factor income earned from abroad by

residents – Factor income of non- residents in
 Manufacturing domestic territory
 Services
This approach is one of many that can Structural Strength and Weaknesses of our
be used to try and create an estimate of the Economy
true GNP of a nation. However, if done properly,
all methods should generate the same GNP Economic Strength
figure. In this angle, economic strength can be
A nation's gross national product is a said to be the capability to meet the need of
measure of the market value of the goods and people for material and cultural wealth by itself,
services produced within a country along with regardless of external uncertain environment,
the income of citizens from overseas and this capability is expressed by economic
investments, according to Investopedia. There foundation.
are different ways to measure a nation's GNP. Economic Weakness
Some focus on expenditures or things
consumed within the country. Other methods A sluggish economy is an economy that
focus on incomes and the fact that they is experiencing little or no macroeconomic
correspond to an output. As a contrast to these growth. Sluggish economic may be
two methods, the industrial origin approach characterized by falling GDP growth or high
focuses on three subgroups of a nation's unemployment.
industry. Instead of tracing expenses and
purchases, this method sums up the total
values of industries and adds them together.
This means that an industry's expenses must
Strength Real GNP
The Philippines is one of the most  It is calculated relative to a set base
dynamic economic in the East Asia Pacific year.
region. With increasing urbanization, a growing
 It can be used to evaluate a single
middle class, and a large and young population,
economy's history.
the Philippines' economic dynamism is rooted
in strong consumer demand supported by  Can be used for measuring economic
vibrant labor market and robust remittances. output in terms of goods and services.
 Large population that is young [50% is  Real GNP adjusts for inflation and
under 25), qualified and with good reflects on economy's production in
fluency in English constant prices.
 Diverse geographic and sectoral origins  Actual growth of National Income due to
of expatriate workers' remittances (10% increase in output is indica.
of GDP)
 Thriving Business Process Outsourcing
(BPO) sector CHAPTER 4

 Poverty reduction (Pantawid Pamilyang CONSUMPTION AND SAVINGS

Pilipino Program) OVERVIEW
 define consumption and savings;
Weaknesses  describe the consumption function;
 Inadequate infrastructure levels, low  enumerate and explain the factors that
fiscal revenues (14% of GDP) affects consumption;
Governance shortcomings and high
coruption perception
 High levels of income inequality, and What is consumption?
underemployment
Consumption is the act of using goods
 Terrorism in the South of the Country and services to satisfy human wants. In a
broad sense, consumption is not the monopoly
 Strict bank secrecy and casinos that of households since businesses and the
facilitate money laundering government also use goods and services to
 Exposed to natural disasters (typhoons) attain some ends.

Distinguish Current from Real GNP What is Savings?

Current/Nominal GNP According to personal finance concept,

saving means keeping or conserving money to
 It is calculated at the current price be used in the future. Saving is done with some
levels of the economy. pre-determined objectives.
 It is typically used to compare current Examples of saving:
economies at current price levels.
 Mr. Falamig has been saving 20% of his
 Can be used to measure output in terms earnings just because he is aiming to
of money value. increase his savings so that it would be
 Reflects an economy's production in enough to purchase a car.
current prices, unadjusted for inflation.  Miss Suerte has been saving 30% of her
 It does not indicate real growth of earnings just because she wants to get
National Income (N.I.) her fiancée a nice wallet for his birthday.

Concept of Consumption and Saving

Consumption and savings are opposite
by nature. The term consumption denotes
expenditure and by savings we understand the
act of preserving money for future needs.
Consumption Function The multiplier coefficient measures the
average number of times every peso of inflow
The consumption function, or
circulates hands in the system as income.
Keynesian consumption function, is an
economic formula that represents the FORMULA:
functional relationship between total
consumption and gross national income. It
was introduced by British economist John
Maynard Keynes.

John Maynard Keynes – British economist,

John Maynard Keynes is the founder of
Keynesian economics. He argued that the Where additionally:
function could be used to track and predict
total aggregate consumption expenditures. M = Multiplier coefficient (MPC) Marginal
propensity to consume
MPS = 1 - (MPC) = Marginal propensity to save
Consumption and Income
Personal or household consumption is
one of the determinants of national or factor Consumption Function
income. If income is assumed as only equal to The consumption factor of the
consumption, the inflow that generates the multiplier is expressed as a coefficient called
former constitutes borrowings from the the marginal propensity to consume (MPC)
economy's stock of savings. while the savings factor is the marginal
The following equations sum up the income propensity to save (MPS). They respectively
components without the inflows of represent consumption and savings from every
investment, government spending, and net additional peso of disposal income that the
exports: system generates.
The denominator of the multiplier
equation (1 - MPC) is actually the MPS since
FORMULA: MPS + MPC = 1
In addition, income is fully generated
when the inflow has been fully siphoned from
the system in the form of savings. Savings
gradually diminishes this inflow that the
system circulates and generates into income.
Where:
Once the income is fully generated, there is
Y = Factor Income nothing left for re-circulation and, thus, the
multiplier process is completed. The following
C_{b} = Borrowings from the economy's stock equation illustrates:
of savings
FORMULA:
Delta*C = Change in consumption

Consumption Function
Initially the economy dissaves by
borrowing from its stock of savings to meet
current consumption needs in the absence if
Where additionally:
income.
S = aggregate savings from currently
generated income
The Multiplier Concept
i = Inflow
The process of generating income
through the circular flow exchange between
households and the firm is called the multiplier.
Consumption and Savings (1)Taste or Preference
The additional income that the  Taste or preference depends on how
generates by the multiplier process yields the product satisfies one's desires.
savings outflow. If income is initially generated There are several underlying reasons
through borrowings, the corresponding savings why consuming units have different
outflow can be used for debt payments. attitudes toward consumption and,
therefore, have different tastes or
It is only when income is fully generated
differences.
that the debt balance is reduced to zero. Once
the point where (S= i) is reached, accumulated  Taste and preferences may also vary
savings outflow is just enough to pay for the across different racial, ethnic, age, and
said borrowings which financed the inflow of occupational groups.
initial consumption.
Values also have something to do with
attitudes and therefore affect taste or
preference. A common mentality is the gaya-
Graphical and Tabular Illustrations
gaya system which influences consumption
not because of product utility but simply
because others also possess the goods.
Another common attitude is a colonial
mentality which regards locally made goods as
inferior to their foreign counterparts. There is a
standing bias for goods marked "imported"
which is also associated with economic status.
This mentality is one reason for the slow
development of local substitutes towards
international standards.

(2)Population

The x-axis represents income; whereas the y- Population size also determines
axis represents consumption in reference to consumption needs and, therefore, affects
Line c and income in reference to the 45- consumption expenditures with a given income.
degree line An increase in household size with income and
other factors as constant may decrease the
Thus, the multiplier coefficient is alternatively propensity to consume and increase savings at
expressed as follows: the expense of nonessential items in the
consumption basket. However, the reverse can
M = [1 + (mpc) + (mpc)² + (mpc)³...n] be true if the household size increases to a
point where income hardly meets the basic
consumption requirements.
Where: mpc <1
The symbol n represents an infinitely small
value implying that nothing is left at this point (3)Income
to further generate income. The level of income can increase with
more infusions in the circular flow.
Households belonging to the lower income
FACTORS OF CONSUMPTION brackets may even dissave as they hardly meet
ONE(1): Taste or Preferences even their basic consumption needs. In
contrast, those belonging to the higher income
TWO(2): Population bracket save and consume a smaller
THREE(3): Income percentage of their income which is more than
enough to satisfy their wants.
FOUR(4): Price Level
FIVE(5): Innovation and Promotion
SIX(6): Engel's Law
(4)Price Level
Individual product demand is inversely This relationship is illustrated by the following
proportional to price due to the change in equations:
purchasing power and substitution with other
products. On the aggregate, consumers seek
the best mix in the consumption of available
products through substitution given a certain
level of aggregate income, price, and
purchasing power.
Therefore, aggregate volume of
consumption is also inversely proportional to
price but only due to a change in purchasing
power since substitution changes not its level
but its consumption instead. Where:
Cn =consumption of non-essential items
(5)Innovation and Promotion Ce = consumption of essential items
Innovations and promotion can expand C = consumption of all items
the line of consumer's choice and extend the
Y = income
influence of demand factors on consumption
and propensity to consume income. The D = change
introduction of new products can create
demand and increase aggregate consumption
with the same taste or preference and level of
income.
Promotions and advertising serve as a
medium of introducing new products in the
market which create demand and consumption.
In addition, they also give more
information about existing products to guide
consumers in attaining better mix of items in
the consumption basket.

(6)Engel's Law and the Compositional Change

in Consumption Expenditure
Ernest Engel – A German economist who
found a relation between the level of family
income and the composition of its consumer
spending.
His research shows that as the family
income level rose, the proportion to the total
income of essential items like food increased
while non-essential items like education and
recreation followed the opposite trend.

Engel's Law
It implies that changing the relative
importance of items in the consumption
basket depends on how consumers spend
additional income.