Economics with Taxation and Agrarian Reform

Prefinals Handouts

Week 11: NATIONAL INCOME ACCOUNTS

Introduction to National Income Accounts

Definition of National Income Accounts:
 the bookkeeping system that a national government uses to measure the level of the country’s economic activity in a given
time period.
 a set of accounts that measures the spending, income and output of the entire nation for a year.
 National income accounting 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.

NIAs measure the following:

o The level of economic activity in a country for a given time
o The change in level of economic activity in a country over time or economic growth
o Where the economy is in the business cycle and the size of the output gap
o The distribution of national income between different social groupings and regions or income inequality
o Comparison of the standards of living between countries

Methods for measuring National Incomes:

o Product Method – national income is measured as a flow of goods and services where the money value of all finals goods
and services produced in an economy during a year is calculated.

o Income Method – national income is measured as a flow of factor incomes, the four factors of production which is labor,
capital, land and entrepreneurship is considered under the method.

o Expenditure Method – national income is measured as a flow of expenditure, this consists of adding up government
consumption expenditures, gross capital formation and net exports.

What is Gross National Product (GNP)?

 Measures the total market value of all final goods/ products and services produced by permanent residents of a nation
within a given period of time.
 GNP is a measure of a country's economic performance, or what its citizens produced (i.e. goods and services) and
whether they produced these items within its borders.

Components of GNP:
 Final Goods – goods that are produced for final use and not for resale for further manufacturing.
 Intermediate Goods – goods that have undergone some manufacturing or processing but have not yet reached the stage of
becoming final products.
 Net factor income from abroad – included in the computation of GNP is the dollar income of our OFWs and other Filipinos
who have businesses in other countries.

Approaches in computing for the GNP:

 Expenditure Approach
– measures GNP by adding personal consumption expenditures, gross private domestic investment plus stock building,
government purchases of goods and net exports and net factor income from abroad together.
- The following factors should be considered in computing for the GNP under the expenditure approach:
 Personal Consumption Expenditure (C ) – refers to the expenditure by households on goods and services
produced in the country

 Gross Private Domestic Investment Plus Stock Building (l) – refers to expenditure by firms on capital,
equipment and building and change in firms’ stocks, also includes households spending on new
residential houses.

 Government Purchases of Goods and Services (G) – refers to central and local government purchases of
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  Net Exports (NX) – this refers to exports (X) less imports (M)

 Net Factor Income from Abroad (nfia) – refers to the income of OFWs less income of transnational
corporations.

 GNP can be computed by using the formula: GNP = C + I + G + NX + Nfia

 Income Approach – measures GNP by adding together money earned by the factors of production in creating the year’s
output such as:

Operating Surplus – net business income before corporation tax is paid and after payment has been made for inputs and to
workers.

Mixed Income – the combining of wages, salaries and profits of the self-employed individuals

Compensation of Employees – wages and salaries including tax and pension contributions and any other fringe benefits

 Output or Value-Added Approach

- add up the final value of all the goods and services produced this year by firms
- the money spent on making the goods (inputs) is taken away from the money received from the sale of the
goods (outputs) to give each sector’s value added.
- taking final output or adding up each sector’s value gives national income

What is Gross Domestic Product (GDP)?

 Measures the market value of all final goods and services produced by permanent residents of a nation within a given
period of time.
 The monetary value of all the finished goods and services produced within a country's borders in a specific time period,
though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays,
investments and exports less imports that occur within a defined territory.
 GDP is perhaps the most widely used metric to measure the strength of economies, it is a flawed metric because it does not
measure the economic wellbeing of a society.

 clearer picture of GDP:

Gross - implies that no deduction for the reduction in the stock of plant and equipment due to wear and tear has been
applied to the measurements and survey-based estimates.

Domestic – includes only production by factors located in the country, whether home or foreign owned

Product – refers to the measurement of output at final prices as observed in market transactions or of the marker
value of factors used in their creation.

How to compute the Gross Domestic Product

 Personal Consumption Expenditure (C )
Gross Private Domestic Investment Plus Stock Building (l)
Government Purchases of Goods and Services (G)
Net Exports (NX), this refers to exports (X) less imports (M)

 Using the expenditure approach, GDP can be computed using the formula: GDP = C + I + G + NX

Week 12: BUSINESS CYCLE

 refers to the irregular fluctuations in the general level of economic activity around its long-run growth path.
 the periodic but irregular up and down movement in the economic activity that is measured by fluctuations in real GDP and
other macroeconomic variables.

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 Figure 1: Phases of a Business Cycle

 Contraction
– refers to a slowdown in the pace of economic activities
- different conditions:
 Sales are no longer expanding, the economy starts slowing down which is at first is mild. As sales stop increasing,
pile up.
 Companies can adjust to that by reducing orders for raw materials, avoiding overtime and resorting to sales
promotions.
 Suppliers start to feel the pinch and are forced to lay off a few workers, layoff is a signal of potential hard times
ahead.
 Employees prefer to set aside some wages and reduce their consumption.
 Companies are now burdened by the loans they took off to install new equipment. Their profits shrink with
decreasing revenues, still high employee salaries and a large overhead.
 The hardest hit are the manufacturers of equipment who see their orders dwindle. The effect is that fewer and
fewer businesses are started.

 Trough
– refers to the lower turning point of a business cycle, where a contraction turns into an expansion. It also marks the end of
a contraction as well as the beginning of possible recovery.
- different conditions:
 Recovery starts, having sold off their inventories, companies start to place orders for new supplies.
 Families have saved up in hard times. Banks are plentiful and bankers are eager to lend anew, even at very low
rates.
 New sales are observed in all sectors
 Companies start hiring at the low wage first
 New businesses are started, bankruptcies are less noticeable and economy is approaching expansion.

 Expansion
– refers to a speed-up in the pace of economic activities
- different conditions:
 Business experience record sales and profits. Anticipates the continued sales growth, inventories are building up
and production facilities are expanded.
 Creates demand for suppliers of raw material and equipment. Banks are willing to lend given the bright predictions
of continued cash flows. A large number of loan applications push banks to raise interest rates which companies
can afford to pay.
 Companies find it difficult to hire all the employees they need and are forces to pay higher wages.

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  Peak
– refers to the upper turning of a business cycle. It also marks the end of an expansion and the beginning of recession
- different conditions:
 A strong consumer demand justifies, raising prices for many products.
 The overheating of the economy is evident in shortages of employees, materials, equipment, loanable funds and
products.
 These shortage imply inflation. Because of difficulties in obtaining resources, this is no longer a good time to start a
business even if sales appear encouraging. Prices, wages and interest rates continued rise puts eventually a stop to
further expanding product demand, new hiring and new lending. The economy has reached its peak.

Summary of the cycle: Business cycle comprises distinct phases, a general period of expansion followed by a general period of
contraction. The transition from contraction to expansion is a trough and the transition from expansion to contraction is a peak.

Relevant Terminologies:
Recovery - associated with rising levels of GDP, consumption and expenditure, investment expenditure and decreasing
levels of unemployment

Recession - a downturn in economic activity and is associated with falling levels of GDP, consumption and investment
expenditure

Depression – a recession that lasts longer and has a larger decline in business activity

Factors Affecting Business Cycles:

 International Factors – dependence on international trade determines the importance of this factor. Export industries are
dependent on foreign markets. When foreign demand is rising, domestic production rises. Secondary industries and
activities arising out of exports also improve their outputs which means, employment will also rise. The rise of exports
signals the rise of imports.

Contagion is the transmission of business cycle through trading partners that have an effect on domestic economic
conditions.

 Climatic Factors –favorable weather conditions could cause bumper crops and could result into prosperity in sectors
dependent on the weather such as agriculture.

 Internal Factors
Political Factors – political conditions and eventualities of the country can trigger the economic condition of a country

Institutional Factors – The cycle of presidential and local elections creates a high level of demand for spending during
election years and tends to cause an economic expansion in a temporary nature because of the political spending of the
candidates

Week 13: PRICE STABILITY

Inflation
 refers to the increase in the average price level in the economy. Inflation rate on the other hand is the percentage of
annual increase in the general price level.

 can be measured by:

o Consumer Price Index (CPI) – measures the average price of goods consumed by urban wage-earners, this is used in
computing inflation if we want to compute the purchasing power of the worker’s peso.
o GDP Deflator – measures the price of all the GNP, this reflect the share of each good in the GDP.

4 Types of Inflation:
o Hyperinflation – inflation at extremely high rates
o Galloping Inflation – inflation at a rate of 50 or 100 or 200 percent annually
o Moderate Inflation – inflation at a price level increases, it does not distort relative prices or incomes severely
o Deflation – a fall in the general level of prices, it refers to the opposite of inflation. When the overall price level decreases so
that inflation rate becomes negative, it is called deflation.
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Causes of Inflation:
o Oil Shocks – the increase in the price of oil in the international market increases the price of commodities in a specific
country
o Political Crisis – political tensions lessen the confidence of both local and foreign investors to put up their business in a
country
o Demand Pull Inflation – when the demand for a certain good increases, the price of that good would also increase
o Cost Push Inflation – when the cost of producing a certain good increases, the supply of that good will in turn decrease

Impacts of Inflation:
o Scrambled Income Distribution – debtors gain, lenders lose because the money borrowed in the past would have a
decreased value in the future
o Inefficiencies – distortion of resource allocation. Inflation creates uncertainty, this results to discouraged productivity
activity, saving and investing
o Reduced Competitiveness of the Country in International Trade – devaluates the national currency against other
currencies, it makes the country’s exports less attractive, and makes imports into the country more attractive which in turn
tends to create imbalance in trade
o Inflation is Hidden Tax on “Nominal Balances” – people who hold bonds and bank accounts in peso lose the value of those
accounts when the price level rises, just as if their money had been taxed away
o People resort to other means to carry out their business, means which use up resources and are inefficient.

Computing Inflation Rates:

CPI (this year) – CPI (last year) x 100
Inflation rate = CPI (last year)

Example:
Consumer Price Index (CPI) in 2011 = 324.22
Consumer Price Index in 2012 = 345.83

Inflation Rate = 345.83 – 324.22 x 100

324.22
= 6.67%

Price Stability
 This occurs when goods and services, in general, as not getting rapidly more expensive (inflation) or less expensive
(deflation)
 It exists when prices overall are stable; this does not mean that prices are frozen, but rather that taken on the whole they
are stable
 In an environment of price stability, you would expect some prices to be rising but others to be failing

Money
 it is anything that serves as a commonly accepted medium of exchange or means of payment
 it is the stock of assets that can be easily used to make transactions
 Liquidity is the convenience and ease of converting money to other things
Money Supply
 the equality of money available; in an economy that uses commodity money, the money supply is the quantity of that
commodity.
Monetary Policy
 pertains to the control over the money supply
 serves as a measure/action taken by the Central Bank to influence the supply of money in the economy
 aimed at influencing the timing of and availability of money and credit, as well as other financial factors, for the purpose of
stabilizing the price level
 2 Types of Monetary Policy:
o Expansionary Monetary Policy – a type of monetary policy setting that intends to increase the level of liquidity/
money supply in the economy
o Contractionary Monetary Policy – a type of monetary policy setting that intends to decrease the level of liquidity/
money supply in the economy

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