NATIONAL INCOME

ACCOUNTING
 “If we don’t make students accountable for their bad
behavior or poor academic performance, they will never
value their education.”
“Education as a right comes with the duty on the part of
the students to study well to meet academic standards
of the school.”
 NATIONAL INCOME ACCOUNTING

1. Explain “National Income

Accounting” in your own
words.
 NATIONAL INCOME ACCOUNTING
1. National Income Accounting is a system used
to track the flow of money and goods within the
economy.
2. Think of it as a comprehensive “balance sheet”
for a country.
3. It helps us understand the overall health of the
economy, identifying trends, and inform economic
policy decisions.
 NATIONAL INCOME ACCOUNTING

2. What is the most commonly

used measure in National
Income Accounting?
 NATIONAL INCOME ACCOUNTING
Gross Domestic Products (GDP):
This is the most widely used measure
of national income. It represents the
total market value of all final goods and
services produced within a country’s
borders in a specific period.
APPROACHES IN MEASURING GDP

3. What are the three approaches

in measuring Gross Domestic
Products (GDP)?
APPROACHES IN MEASURING GDP

1. Expenditure Approach
2. Income Approach
3. Output Approach
 GDP: EXPENDITURE APPROACH

4. What is the formula in computing

Gross Domestic Products (GDP)
using the Expenditure Approach?
 GDP: EXPENDITURE APPROACH
1. The GDP Expenditure Approach formula is : Y = C + G + I + (X-M).
where:
Y = Gross Domestic Product or National Income
C = Consumer Spending, it can also represent household spending
which include all durable and non-durable goods.
G = Government Expenditures
I = Private Sector or business investments
X = Exports
M = Imports
(X-M) = Exports - Imports which is sometimes shown as (Nx), meaning
net exports
 GDP CALCULATION
• Consumer Spending - 200 million
• Invesment Spending - 70 million (including purchase of
SMC stocks of P15 million)
• Local Government Spending - 120 million
• National Government Spending - 100 million (including
education subsidies of 20 million)
• Imports - 50 million
• Exports - 45 million
• Income Taxes - 100 million
 GDP CALCULATION
Answer: 450 million
Solution:
Y = C (200) + I (55) + G (120+80=200) + (X-M (45-50=-5)
= 450 million
Notes:
1. Purchase of stocks is considered as savings, not investment
2. Education subsidies is considered as transfer payments
3. Income taxes is not a component of GDP
HOUSEHOLD, OR CONSUMER, SECTOR
The household, or consumer, sector. In the Philippine,
this represents the single largest sector, with its spending
accounting for roughly 75.6% of the entire GDP in 2023.
(Consisting of private expenditures (hosuehold final
consumption expenditures. Personal expenditures fall
under one of the following categories: durable goods, non-
durable goods, and services).
 THE BUSINESS SECTOR
The Business Sector. Businesses purchase capital goods,
that is, machinery and equipment, constituting real
investment.
• Business investment in equipment, but does not include
exchanges of exiting assets.
• Spending by households (not government) on new
houses is also included in investment
• It is important to note that buying financial products is
classed as “saving,” as opposed to investment.
 THE GOVERNMENT SECTOR
The Government Sector. The government purchases goods
and services so that it can function, and provide its services.
• It includes salaries of of public servants, purchase of
weapons for the military, and any investment expenditure by a
government.
• Since GDP is a measure of productivity, “transfer payments”
made by the government are not counted because these
payments do not reflect a purchase by the government, rather
a movement of income. They are captured in “C” when the
payment is spent.
 TRANSFER PAYMENT
• Examples of Transfer Payments (A payment made for which no
current or future goods or services are required in return):
1. Social Security Benefits
2. Unemployment Insurance/Benefits
3.Welfare Payments
4. State Pensions
5. Civil Service Benefits
6.Public Health Services
7.Student Grants
8.Subsidies for Education and Trainings
 FOREIGN SECTOR
The Foreign Sector. Foreigners purchase a certain
amount of our products and services; we call these
exports. Of course, we also purchase from other
countries; what we buy from the rest of the world is
our imports.
 Final Goods and Services:
The Problem of Double Counting
• What are final goods? They are goods or services at their
furthest stage of production at the end of a year.
• Statisticians who calculate GDP must avoid the mistake of double
counting, in which output is counted more than once as it travels
through the stages of production.
• Intermediate goods, which are goods that are used in the
production of other goods, are excluded from GDP calculations.
Count just the value of final goods and services in the chain of
production.
 ITEMS COUNTED IN GDP

1. Intermediate goods that have not yet been

used in final goods and services.
2. Raw materials that have been produced, but
not yet used in the production of intermediate
or final goods.
 ITEMS NOT INCLUDED IN GDP
1. Intermediate goods that have been turned into
final goods and services (e.g. tires on a new truck)
2. Used goods
3. Transfer payments
4. Non-market activities
5. Illegal goods
 GDP: INCOME APPROACH

4. What is the formula in computing

Gross Domestic Products (GDP)
using the Income Approach?
 GDP: INCOME APPROACH
• The Income Approach to calculating gross domestic
product (GDP) states that all economic expenditures
should equal the total income generated by the production
of all economic goods and services.
• The GDP formula takes the total income generated by the
goods and services produced.
• Formula: Total National Income + Sales Taxes +
Depreciation + Net Foreign Factors Income
 GDP: INCOME APPROACH
Total National Income
• The sum of all wages, rent, interest and profits.
Sales Taxes
• Consumer taxes imposed by the government on 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 generated in foreign countries, versus the total income foreign
citizens and companies generate in the domestic countries.
 GDP CALCULATION
•Wages - 200 billion
•Rent - 50 billion
•Interest - 30 billion
•Investment - 50 billion
•Profits - 80 billion
•Depreciation - 20 billion
•Indirect Business Taxes - 10 billion
•Remittances from other countries - 190
•Remittances to other countries - 200
Calculate GDP using the income approach
 GDP CALCULATION
Solution:

GDP = TNI = 360 billion (200 billion + 50 billion + 30 billion

+ 80 billion) + Depreciation = 20 billion + Taxes = 10
billion + NFFI = -10 (190 - 200) = 380 billion
 GDP: OUTPUT APPROACH

5. What is the formula in computing

Gross Domestic Products (GDP)
using the Output Approach?
 OUTPUT APPROACH
• The output approach is also called “net product” or
“value added” method. It focuses on finding the total
output of a nation by directly finding the total value of all
goods and services a nation produces.
• Formula: GDP (Output Approach) = Σ (Value Added in
Each Industry)
• Σ: This symbol means “sum of.” We’re adding up the value added for each
industry in the economy.
• Value Added in Each Industry: This is the core calculation. It represents
the contribution of each industry to the over-all production process.
 OUTPUT APPROACH
Illustration:
Imagine an economy with two industries:
• Agriculture: Produces P100 million worth of wheat, using P20 million worth
of fertilizer and other inputs
• Bakery: Used the wheat to produce P200 million worth of bread.
Calculation of GDP using the output approach:
• Agriculture
• Value added = P100 million (output) - P20 million (inputs) = P80 million
• Bakery
• Value added = P200 million (output) - P100 million (cost of wheat) = P100 million
GDP = P80 million (Agriculture) + P100 million (Bakery) = P180 million
 OUTPUT APPROACH
Problem:

Imagine a company that owns multiple stages of production. They

grow wheat (P10 million), mill it into flour (P20 million), and then
bake bread (P30 million), which they sell to consumers.

1. Calculate the GDP using the output approach for this

company.
 OUTPUT APPROACH
Solution:
Total GDP for this company: P10 million + P10 million + P10
million = P30 million
Focus on value added at each stage:
• Wheat Production: P10 million (this is the value added, as there
are no prior inputs)
• Flour Production: P10 million (value added of flour P20 million -
cost of wheat P10 million)
• Bread Production: P10 million ( value added of bread P30 million
- cost of flour P20 million)
 REAL GDP VS NOMINAL GDP
• NOMINAL GDP: Measures the value of goods and
services produced in an economy at current market
prices. It is influenced by both changes in the quantity of
goods and services produced and changes in price.
• REAL GDP: Measures the value of goods and services
produced in an economy using constant (based year)
prices. This means that real GDP adjusts for inflation,
giving u a clearer picture of how much the economy is
actually producing.
 GDP DEFLATOR
GDP Deflator: A price index that measures the overall
price level of goods and services produced in an economy.
It is calculated as follows:
GDP Deflator = (Nominal GDP / Real GDP) * 100

• Base Year: The base year for the GDP deflator is set to 100. This means
that in the base year, nominal GDP and real GDP are equal.
• Inflation: A GDP deflator greater than 100 indicates that prices have risen
since base year (inflation). A GDP deflator less thab 100 indicates that prices
have fallen since the base year (deflation).
 GDP DEFLATOR
Illustration:

Suppose a country’s nominal rate GDP is P10 million and its real GDP in 2023
ia P9 million. The GDP deflator for 2023 would be:

GDP Deflator: (P10 million / P9 million) * 100 = 111.11

Interpretation: This means that prices in 2023 were 111.11% of the price level
in the base year. In other words, there was a 11.11% inflation rate since base
year.
 USING GDP DEFLATOR TO
CALCULATE INFLATION
The GDP deflator can also be used to calculate the inflation rate between two
years. The formula is:
Inflation Rate: [(GDP Deflator in Year 2 - GDP Deflator in Year 1) / GDP
Deflator in Year 1] * 100
Example:
In the previous example, the GDP deflator in 2023 is 111.11. If the GDP deflator
in 2024 is 115, then the inflation rate between 2023 and 2024 would be:

Inflation Rate: [(115-111.11) / 111.11] * 100 = 3.48%

 GDP DEFLATOR
PRICES AND QUANTITIES

PRICE OF QUANTITY OF PRICE OF QUANTITY OF

YEAR HOTDOG HOTDOG HAMBURGER HAMBURGER

2001 P1.00 100 P2.00 50

2002 P2.00 150 P3.00 100

2003 P3.00 200 P4.00 150

Assuming that base year is 2001, calculate the GDP Deflator for Years
2001, 2002 and 2003 and inflation rate for Years 2002 and 2003.
 GDP DEFLATOR
Computation of Inflation Rate:

• Year 2001: There is no inflation rate for the base year (2001)

• Year 2002: [GDP Deflator in 2002 - GDP Deflator in 2001) /GDP Deflator in
2001] * 100 = [(171.43 - 100) / 100] * 100 = 71.43%

• Year 2003: [GDP Deflator in 2003 - GDP Deflator in 2002) /GDP Deflator in
2002] * 100 = [(240 - 171.43) / 171.43] * 100 = 39.88%