National Income Analysis

National Income- Meaning It is a sum total of factor incomes accruing to normal residents of a country within an accounting year. It is a sum total of factor incomes accruing to normal residents of a country within an accounting year. The concept of National Income can be explained from three sides – The concept of National Income can be explained from three sides – I) Production I) Production II) Income and II) Income and III) Expenditure III) Expenditure

DEFINITIONS Central Statistical Organization: - “National Income is the sum total of factor incomes earned by the normal residents of a country in the form of wages, rent, interest and profit in an accounting year”. Central Statistical Organization: - “National Income is the sum total of factor incomes earned by the normal residents of a country in the form of wages, rent, interest and profit in an accounting year”. Prof. Kuznets: - “The sum total of the market value of final goods and services, produced by normal residents of a country in one year is known as national product.” Prof. Kuznets: - “The sum total of the market value of final goods and services, produced by normal residents of a country in one year is known as national product.”

Circular flow diagram summarizes the transactions between the different economic agents summarizes the transactions between the different economic agents agents: households, firms (business), government, and foreigners (rest of the world) agents: households, firms (business), government, and foreigners (rest of the world)

Circular flow diagram Assumption: The economy composed of households and firms only Assumption: The economy composed of households and firms only Households: own factors of production, consume goods and service Households: own factors of production, consume goods and service Firms: hire factors of production to produce goods and services Firms: hire factors of production to produce goods and services

FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between firms and households in a simple economy. In the upper loop, the arrow emanating from firms to households represents the sale by firms of goods and services to households. On the other hand, the arrow from households to firms represents the payments. n the lower loop, the arrow originating from the households to the firms shows that firms hire labor and capital from households in order to produce goods and services. The arrow emanating from the firms indicates their payments for the use of the factors of production. factor payments (wages, interest, rent, profit) factor services goods and services payments for goods and services HOUSEHOLDSFIRMS

MARKETS FOR FACTORS OF PRODUCTION MARKETS FOR GOODS AND SERVICES FIRMS HOUSEHOLDS Good and services bought Good and services sold Revenue (=GDP) Spending (=GDP) Inputs for Production Land, labor and capital Wages, rent, interest and profit (=GDP) Flow of goods & services Flow of money: pesos Income (=GDP) THE CIRCULAR FLOW DIAGRAM

Transfer payments Transfer payments – are transactions wherein one party is not obliged to deliver a good or service in return for the payment. Transfer payments – are transactions wherein one party is not obliged to deliver a good or service in return for the payment. Examples: retirement benefits, unemployment benefits, scholarships, and donations. Examples: retirement benefits, unemployment benefits, scholarships, and donations.

Concepts/Aggregates of National Income Gross Domestic Product at Market Price (GDP MP ) Gross Domestic Product at Market Price (GDP MP ) Gross National Product at Market Price (GDP MP ) Gross National Product at Market Price (GDP MP ) Net National Product at Market Price (NNP MP ) Net National Product at Market Price (NNP MP ) Net Domestic Product at Market Price (NDP MP ) Net Domestic Product at Market Price (NDP MP ) Gross Domestic Product at Factor Cost (GDP FC ) Gross Domestic Product at Factor Cost (GDP FC ) Gross National Product at Factor Cost (GNP FC ) Gross National Product at Factor Cost (GNP FC ) Net National Product at Factor Cost (NNP FC ) Net National Product at Factor Cost (NNP FC ) Net Domestic Product at Factor Cost (NDP FC ) Net Domestic Product at Factor Cost (NDP FC ) Factor Income From Net Domestic Product Accruing to Private Sector Factor Income From Net Domestic Product Accruing to Private Sector Private Income Private Income Personal Income Personal Income

Basic Concepts - Domestic and National Concepts Domestic and National Concepts 1.Domestic Income = National Income – NFYA 1.Domestic Income = National Income – NFYA 2. National Income = Domestic Income + NFYA Market Price and Factor Cost Concepts Market Price and Factor Cost Concepts 1. Market Price = Factor Cost + NIT 2. Factor Cost = Market Price – NIT Gross and Net Concepts Gross and Net Concepts 1. Gross Product = Net Product + Depreciation 2. Net product = Gross Product – Depreciation

Definition of GDP The market value of good i (V i ) is equal to P i  Q i The market value of good i (V i ) is equal to P i  Q i GDP = sum of the market values of all final goods and services produced within the year. GDP = sum of the market values of all final goods and services produced within the year.

GDP includes final goods and services only Final goods - goods and services that are not purchased for the purpose of producing other goods and services or for resale Final goods - goods and services that are not purchased for the purpose of producing other goods and services or for resale –Eg. Rice (final) and palay or unhusked rice (intermediate product) Including intermediate goods and final goods will result in “double counting”. Including intermediate goods and final goods will result in “double counting”.

Approaches for measuring National Income 1.Value-added Approach – measures GDP as the sum of value added at each stage of production (from initial to final stage) 2.Income Approach (lower loop) – measures GDP as the sum of incomes of factors of production (wages, rent, interest and profit. 3.Expenditure Approach – measures GDP as the sum of expenditures on final goods and services.

Value Added Method STEPS – Classification of Productive Enterprises Classification of Productive Enterprises Calculation of Value Added Calculation of Value Added 1. Value of Output 2. Value of Intermediate Consumption Calculation of Domestic Income Calculation of Domestic Income Calculation of National Income Calculation of National Income

Value Added Approach Suppose that rice is the only final product of an economy: It goes through several (3) stages of production. Suppose that rice is the only final product of an economy: It goes through several (3) stages of production. Stage of Prod’n Value of intermediate good Value of Sales Value-added Farmer - Palay 12,00012,000 Rice Miller -Milled Rice 12,00015,0003,000 Retailers - Rice 15,00020,0005,000 GDP= Total Value Added 20,000

Cautions Regarding Value Added 1) Value of intermediate goods is not included in Product Method. 2) Value of second hand goods is not included in product method. 3) Imputed rent is included in this method.

Income Method STEPS Classification of Productive Enterprises Classification of Productive Enterprises Classification of Factor Income Classification of Factor Income 1. Compensation of Employees (COE) 2. Operating Surplus (O.S.) 3. Mixed Income Calculation of Domestic Income Calculation of Domestic Income Calculation of National Income Calculation of National Income

Income Approach ITEMSSYMBOLSVALUE Compensation of Employees COE1,093,800 Operating SurplusOS2,215,100 DepreciationD357,200 Net Indirect Taxes NIT 356,600 Gross Domestic ProductGDP4,022,700

Cautions Regarding Income Methods Windfall gains Windfall gains Income from illegal activities Income from illegal activities Transfer earnings Transfer earnings The sale and purchase of second hand goods The sale and purchase of second hand goods Imputed value of services Imputed value of services

Expenditure Method STEPS Identification and classification of Economic Units incurring Final Expenditure Identification and classification of Economic Units incurring Final Expenditure Classification of Final Expenditure Classification of Final Expenditure 1. Final Consumption Expenditure 2. Final Investment Expenditure Calculation of Domestic Income Calculation of Domestic Income

NDP FC = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Expenditure (Gross Fixed Capital Formation + Change in Stock) + Net Exports (Exports – Imports)- Dep.-NIT NDP FC = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Expenditure (Gross Fixed Capital Formation + Change in Stock) + Net Exports (Exports – Imports)- Dep.-NIT Calculation of National Income Calculation of National Income

Cautions Regarding Expenditure Method Only final expenditure is included in national income. Only final expenditure is included in national income. Expenditure on shares and bonds are not included. Expenditure on shares and bonds are not included. Expenditure on second hand goods is not included in national income. Expenditure on second hand goods is not included in national income. Expenditure on transfer payments is not included in national income. Expenditure on transfer payments is not included in national income.

Nominal and Real GDP GDP at current prices or nominal GDP - GDP measured using the prices of the year for which it is calculated GDP at current prices or nominal GDP - GDP measured using the prices of the year for which it is calculated Nominal GDP can be a misleading indicator of changes in output or income because it also embodies changes in the prices of goods and services. Nominal GDP can be a misleading indicator of changes in output or income because it also embodies changes in the prices of goods and services. Real GDP or GDP at constant prices  measures the total value of output using the prices of a selected year (the base year). Real GDP or GDP at constant prices  measures the total value of output using the prices of a selected year (the base year). Real GDP better for analysis overtime because it eliminates the effects of price changes Real GDP better for analysis overtime because it eliminates the effects of price changes

Real GDP

Inflation Rate

GDP per capita Measures how much output or income was produced or received, on the average, by an individual in an economy Measures how much output or income was produced or received, on the average, by an individual in an economy Useful for comparing the performance of a country overtime and a country’s performance relative to its neighbors Useful for comparing the performance of a country overtime and a country’s performance relative to its neighbors

Per Capita GNI Poverty rate Myanmar b Nepal Cambodia Lao PDR Bangladesh Viet Nam Pakistan India Sri Lanka Indonesia Philippines China Thailand Malaysia Korea, Rep. of Taiwan Singapore PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)

Some Limitations of GDP or GNP as measures of growth Ignores income distribution Ignores income distribution Ignores environmental degradation Ignores environmental degradation Does not include activities that do not go through the formal markets sectors Does not include activities that do not go through the formal markets sectors Does not include “illegal” activities like drug trafficking, prostitution, moonlighting Does not include “illegal” activities like drug trafficking, prostitution, moonlighting