EDEV 311: ECONOMIC

DEVELOPMENT
SESSION 2: MEASURING THE NATIONAL INCOME ACCOUNTS
AND COST OF LIVING
 THE GROSS NATIONAL PRODUCT
Gross National Product (GNP) is the market value of all the goods and services
produced in one year by labor and property supplied by the citizens of a given
country. Unlike the Gross Domestic Product (GDP), which defines production
based on the geographical location of production, GNP indicates allocated
production based on location of ownership. In fact it calculates income by the
location of ownership and residence, and so its name is also the less
ambiguous gross national income.
GNP is an economic statistic that is equal to GDP plus any income earned by
residents from overseas investments minus income earned within the domestic
economy by overseas residents.
GNP does not distinguish between qualitative improvements in the state of the
technical arts (e.g., increasing computer processing speeds), and quantitative
increases in goods (e.g., number of computers produced), and considers both to
be forms of “economic growth".
The term Gross National Income (GNI) has gradually replaced the Gross National
Product (GNP) in international statistics. While being conceptually identical, the
precise calculation method has evolved at the same time as the name change.
 THE GROSS DOMESTIC PRODUCT

Gross Domestic Product (GDP) is a monetary measure of the market value of all

the final goods and services produced in a specific period. GDP (nominal) per
capita does not, however, reflect differences in the cost of living and the
inflation rates of the countries; therefore using a basis of GDP per capita at the
purchasing power parity (PPP) is arguably more useful when comparing living
standards between nations, while nominal GDP is more useful comparing national
economies on the international market.
Total GDP can also be broken down into the contribution of each industry or
sector of the economy. The ratio of GDP to the total population of the region is
the per capita GDP and the same is called Mean Standard of Living. GDP is
considered the "world's most powerful statistical indicator of national
development and progress".
 THE AGGREGATE NATIONAL OUTPUT
The National Income and Product Accounts are the accounting system used to
measure of aggregate economic activity of a particular country. Thus, the
measure of Aggregate Output in the National Income Accounts is the Gross
Domestic Product (GDP).
NATIONAL INCOME: INCOME = EXPENDITURE
 NATIONAL INCOME: INCOME = EXPENDITURE
The circular flow diagram illustrates the
equivalence of the income approach and
expenditures approach to calculating
national income. In this diagram, goods,
services, and resources move clockwise,
and money (income from the sale of the
goods, services, and resources) moves
counterclockwise.
Individuals purchase goods and services
from businesses, and their expenditures
(the money they spend) go to businesses.
Firms purchases resources, such as labor
from households, and the money they
pay for these resources go to households.
GDP: CAN BE MEASURED AS FOLLOWS -
 VALUE ADDED APPROACH
GDP is the sum of value added in the economy during a given period. VALUE
ADDED pertains to the value of a firm’s production minus the value of the
intermediate goods it uses in production.
 INCOME APPROACH
GPD is the sum of the incomes – labor income, capital income, indirect taxes
- in the economy during a given period.
 EXPENDITURE APPROACH
GDP is the sum of all final goods and services purchased in an economy over
a certain period of time and it includes consumer spending, government
spending, business investment spending and net exports.
PH GDP FOR 2019
PH GDP FOR 2019

“Gross Domestic Product (GDP) posted a year-on-year growth of 6.4 percent in

the fourth quarter of 2019, resulting in the 5.9 percent full-year growth for
2019.
Trade and Repair of Motor Vehicles, Motorcycles, Personal and Household
Goods; Manufacturing; and Construction were the main drivers of growth for
the fourth quarter of 2019.
Among the major economic sectors, Services posted the fastest growth in the
fourth quarter of 2019 with 7.9 percent. Industry grew by 5.4
percent. Agriculture, Hunting, Forestry and Fishing registered a growth of 1.5
percent.”

-Philippine Statistics Authority

23 January 2020
PH GDP FOR 2019
 NOMINAL GROSS DOMESTIC PRODUCT

The Nominal GDP is the value of all the final goods and services that an economy
produced during a given year. It is calculated by using the prices that are current
in the year in which the output is produced. In economics, a nominal value is
expressed in monetary terms. For example, a nominal value can change due to
shifts in quantity and price. The nominal GDP takes into account all of the
changes that occurred for all goods and services produced during a given year. If
prices change from one period to the next and the output does not change, the
nominal GDP would change even though the output remained constant.
 REAL GROSS DOMESTIC PRODUCT
The Real GDP is the total value of all of the final goods and services that an
economy produces during a given year, accounting for inflation. It is calculated
using the prices of a selected base year. To calculate Real GDP, you must
determine how much GDP has been changed by inflation since the base year, and
divide out the inflation each year. Real GDP, therefore, accounts for the fact
that if prices change but output doesn’t, nominal GDP would change.
 REAL GROSS DOMESTIC PRODUCT
In economics, real value is not influenced by changes in price, it is only impacted
by changes in quantity. Real values measure the purchasing power net of any
price changes over time. The real GDP determines the purchasing power net of
price changes for a given year. Real GDP accounts for inflation and deflation. It
transforms the money-value measure, nominal GDP, into an index for quantity of
total output
NOMINAL GDP VS. REAL GDP
NOMINAL GDP VS. REAL GDP
MEASURING THE COST OF LIVING
 THE CONSUMER PRICE INDEX

The Consumer Price Index (CPI) is a measure that examines the weighted
average of prices of a basket of consumer goods and services, such as
transportation, food, and medical care. It is calculated by taking price changes
for each item in the predetermined basket of goods and averaging them. Changes
in the CPI are used to assess price changes associated with the cost of living. The
CPI is one of the most frequently used statistics for identifying periods of
inflation or deflation.
THE BASKET OF GOODS
UNDERSTANDING CPI
The CPI measures the average change in prices over time that consumers pay for a
basket of goods and services, commonly known as inflation. Essentially it attempts to
quantify the aggregate price level in an economy and thus measure the purchasing
power of a country's unit of currency. The weighted average of the prices of goods
and services that approximates an individual's consumption patterns is used to
calculate CPI. A trimmed mean may be used as part of this.
The U.S. Bureau of Labor Statistics (BLS) reports the CPI on a monthly basis and has
calculated it as far back as 1913. It is based upon the index average for the period
from 1982 through 1984 (inclusive) which was set to 100. So a CPI reading of 100
means that inflation is back to the level that it was in 1984 while readings of 175 and
225 would indicate a rise in the inflation level of 75% and 125% respectively. The
quoted inflation rate is actually the change in the index from the prior period,
whether it is monthly, quarterly or yearly.
While it does measure the variation in price for retail goods and other items paid by
consumers, it does not include things like savings and investments, and can often
exclude spending by foreign visitors. 
WHAT IS CPI FOR?
 
CPI is an economic indicator. It is the most widely used measure of inflation and, by
proxy, of the effectiveness of the government’s economic policy. The CPI gives the
government, businesses, and citizens an idea about prices changes in the economy,
and can act as a guide in order to make informed decisions about the economy. 

The CPI and the components that make it up can also be used as a deflator for other
economic indicators, including retail sales, hourly/weekly earnings. Additionally, it
can be used to value a consumer’s dollar to find its purchasing power. Generally, the
currency’s purchasing power declines when the aggregate price level increases and
vice versa. 
WHO & WHAT IS COVERED BY THE CPI?
The CPI statistics cover professionals, self-employed, poor, unemployed and retired
people in the country. People not included in the report are non-metro or rural
populations, farm families, armed forces, people serving in prison and those in
mental hospitals.
The CPI represents the cost of a basket of goods and services across the country on a
monthly basis. Those goods and services are broken into eight major groups:
CALCULATING CPI
CALCULATING CPI
PRODUCER PRICE INDEX
WHAT IS PPI & UNDERSTANDING IT
 The Producer Price Index (PPI), is a group of indices that calculates and
represents the average movement in selling prices from domestic production
over time.
 The PPI measures price movements from the seller's point of view.
Conversely, the Consumer Price Index (CPI), measures cost changes from the
viewpoint of the consumer. In other words, this index tracks change to the
cost of production.
AN EXAMPLE OF PPI
Businesses often enter into long-term contracts with suppliers. Because prices
fluctuate over time, such long-term deals would be difficult with only a single,
fixed price for the goods or supplies. Instead, the purchasing business and the
supplier typically include a clause in the contract that adjusts the cost by
external indicators, such as the PPI.

For example, Company A might get a key component for its widgets from
Industry Z. At the outset of the deal, the cost of that component is $1, but they
include a provision in the contract that the price will be adjusted quarterly,
according to the PPI. So, three months after the contract is signed, the cost of
the component could be $1.02 each or $0.99 each, depending on whether or not
the PPI went up or down and how much it changed.
 CPI VS. PPI VS. GDP DEFLATOR
 The Consumer Price Index (CPI) measures food, beverages, housing, apparel,
transportation, medical care, recreation, education and communication, and
other goods and services. It is one of the most-used economic indicators to
measure inflation in the United States, as it calculates the change in cost on a
bundle of consumer goods and services over time. Inflation shows the change
in the purchasing power of the dollar. Higher sale prices indicate a decrease
in consumer purchases and a rise in inflation, eventually leading to
adjustments in income and the cost of living – a process referred to as
indexation.
 The CPI is broken down into two subcategories to measure price changes in
domestic and imported consumer-related services. Residents of urban or
metropolitan areas, including professionals, the self-employed, the poor, the
unemployed and the retired, are measured using the Consumer Price Index
for All Urban Consumers (CPI-U). Urban wage earners and clerical workers are
measured using the Consumer Price Index for Urban Wage Earners and
Clerical Workers (CPI-W), a more specific category that skews more towards
active workers and those in the lower social classes.
 CPI VS. PPI VS. GDP DEFLATOR
 As the CPI does not include rural or non-metropolitan areas, farm families,
members of the armed forces and those in institutions such as prisons and
mental hospitals, U.S. uses additional indexes to measure inflation. The
Producer Price Index (PPI), which measures the domestic output of raw goods
and services, serves as a leading indicator for the CPI; when producers face
input inflation, the increase in their production costs are passed on to the
retailers and consumers.
 Hence, the PPI serves as a true measure of output; it is not affected by
consumer demand. The GDP Deflator measures the aggregate prices of all
goods and services produced by the entire nation encompassing the CPI and
the PPI statistics. The CPI is a sound index to measure inflation, but for a
more accurate and comprehensive measure, the PPI and the GDP deflator are
also required.
INTEREST RATES
INTEREST RATES
INTEREST RATES
INTEREST RATES
THANK YOU !
-OLFU SUMMER 2020