The National Income Accounts

Chapter 6:
The National
Income
Accounts
Lesson 1: Measurement of National Income
What is National income accounting?

 Used in economics to refer to the bookkeeping system that a national government uses to
measure the level of the country's economic activity in a given time period.
 Records the level of activity in accounts such as total revenues earned by domestic
corporations, wages paid to foreign and domestic workers, and the amount spent on sales
and income taxes by corporations and individuals residing in the country.
What is Gross National Product?

 Indicator of overall economic welfare and performance.
 Market value of all the final products produced by the resources of the economy during a
specified period of time.
 It reflects the value of products flowing in the circular flow, the production of which
entails the use of the economy’s economic resources.
Three major types of goods and services which enter the final composition of
GNP:
 Goods and services which enter into the channel of trade and commerce
 Products which are produced and consumed by the producers
 Imputed value on rentals
LIMITATIONS OF GNP:
 National income in less developed countries
 Inadequacy and inaccuracy of statistics
 It does not measure the quality of goods and services
 It does not reflect the distribution of income among the members of society.
What is Gross National Product?

 Comprised of final goods and services produced within national boundaries.
 Measures the value of all locally- produced goods and services at market price.
 It does not include the earnings of Filipino factors of production abroad.
What is Net factor product from abroad (NFIA)?

 The difference of GNP and GDP
 It regards the earnings of banking system as inflows and repatriation to foreign factors of
production as outflows.
GNP = GDP + Net Factor Income from Abroad
Measuring the GNP:

GNP can be measured into two ways:
1. Current GNP – it is the total value of final goods and services produced during the year at
prices prevailing during that year.
Current GNP = PcQc
Where:
Pc = Current Price
Qc = Current volume of goods and services
2. Real GNP – measurement using a base or constant price. It is computed from current
GNP using a price coefficient known as the Price Index or GNP deflator.
What is Price index?
 Percentage number that shows the extent to which a price (or a 'basket' of prices) has
changed over a period (month, quarter, year) as compared with the price(s) in a certain
year (base year) taken as a standard.
Pure No. Index = Price of Current Year
Base Year Price
Formula for real GNP:
Real GNP = Current Year
Pure No. Index
Or Real GNP = Current GNP
Price Deflator
Lesson 2: Other Approaches in Measuring GNP
There are three approaches in measuring GNP:
1. Expenditure Approach – GNP is measured in terms of the total sales of the economy (the
total expenditures of our economy). It is the summation of the consumption, investment,
government expenditures and exports minus imports or net export.
GNP = C + G + I + NX
Where:
C = all private consumption, or consumer spending, in a nation's economy
G = sum of government spending
I = sum of all the country's investment, including businesses capital expenditures
NX = nation's total net exports
(i) Personal Consumption (C) - it is also known as household expenditure
It comprise the biggest portion of GNP, especially in
developing countries. Growth in these countries’ GNP is said to be consumption-led.
Such economies are attractive to many business people because of their big market
potential.
(ii) Gross investment (I) – also known as Capital Formation
Refers to private investment expenditures, which are prior to
depreciation expense or the wear or tear of capital goods.
(net investment + depreciation)
Inventories are also included under gross investments.
(iii) Government (G) – expenses incurred for national defense and for the
payment of salaries of government workers also fall under this account, as well as the
expenses incurred in social infrastructures.
(iv) Net Exports (NX) - the difference between the value of exports and imports.
2. Income Approach – The main component of this approach is the National Income which
is the sum total of all factor income of persons and household and government income
derived from capital and undistributed corporate income.
- Indirect taxes and depreciation allowance are also included in this
approach.
GNP = NI + INDIRECT TAXES + DEPRECIATION
Factor income of persons 202,326
Government income from capital 2,131
Corporate income 10,781
National income 215,238
Indirect taxes 27,752

Depreciation allowance 26,791
By using the formula, GNP = 269,781

3. The Industry-Origin Approach – derived by getting the sum of the gross value-added of
all sectors of the economy. These sectors are:
a. Agriculture, Fishery, Forestry
b. Industry Sector
c. Service Sector
GNP = sum of all gross value-added of all sectors + Indirect

Taxes + Depreciation
1. AGRI, FISHERY, & FORESTRY
A. Agriculture 154,481
B. Forestry 7,780
2. INDUSTRIAL SECTOR
a. Mining and Quarrying 11,091
b. Manufacturing 181,983
c. Construction 40,780
d. Electric, Gas and Water 20,504
3. SERVICE SECTOR
a. Transpo, Commu., & Storage 41,217
b. Trade 101,354
c. Finance 30,018
d. Ownership of dwelling 40,146
e. Private services 49,165
f. Government services 33,996
NFIA 1,644
By using the formula, GNP = 714,379.

And for GDP, we will use the formula: GDP = GNP – NFIA
GDP = 712,735
Lesson 3: Basic Concepts of National Income Accounting
Let us first define some basic concepts that will help us in understanding GNP and GDP:
 Final Value – determined by multiplying the price of goods and services with the physical
quantity produced in a year.
Product Quantity Price Per Unit Final Value
Rice 10,000 kilos P 22.00 P 220, 000.00
Eggs 10, 000 dozens P 30.00 P 300,000.00
Doctor's Services 5, 000 hours P 200.00 P 1,000,000.00
Total P 1,520,000.00
 Final Goods – are those ready for use and do not require further processing before
consumption. Raw materials are non-final goods and are therefore excluded from the
estimation of GNP and GDP to avoid double-counting.
 Annual Production – GNP and GDP account for annual (current) production, or for goods
produced within a year. Old houses, antique items, and old cars are some of commodities that
do not fall under current production. The revenues from resale of these commodities are not
considered part of GNP and GDP.
Other transactions that do not entail current production are purely
financial deals. Buying and selling of shares of stocks and insurance policies, gifts, donations
and pensions are some example
Lesson 4: The Distribution of National Income

 Income Distribution – allocation of income among the owners of the factors of production. It
is through this that incomes are apportioned or allocated to the different members of society.
Types of Income Distribution:

1. Personal Distribution – it deals with the allocation of income among persons or
households and the total income we receive.
LORENZ CURVE:
 Is graphical representation of the distribution of income or of wealth.
 It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth
distribution.
2. Functionalist Distribution – it is the allocation of income among the factors of
production: land, labor, capital and entrepreneur.
Causes of Income Inequality:

1. Intelligence and Talents
2. Education and training
3. Unpleasant and Risky Jobs
4. Ownership and productive factors

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Chapter 6:

What is National income accounting?

What is Gross National Product?

What is Gross National Product?

What is Net factor product from abroad (NFIA)?

GNP = GDP + Net Factor Income from Abroad

Measuring the GNP:

Lesson 2: Other Approaches in Measuring GNP

There are three approaches in measuring GNP:

Indirect taxes 27,752

By using the formula, GNP = 269,781

GNP = sum of all gross value-added of all sectors + Indirect

By using the formula, GNP = 714,379.

Lesson 4: The Distribution of National Income

Types of Income Distribution:

Causes of Income Inequality:

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