CHAPTER 6

THE NATIONAL INCOME ACCOUNTS

 LESSON 1
MEASUREMENT OF NATIONAL INCOME
OVERVIEW
THE INCOME OF THE NATION IS MEASURED BY THE TOTAL
EARNINGS OF THE FACTORS OF PRODUCTION OWNED BY
ITS CITIZENS OR BY THE TOTAL MARKET VALUE OF ALL
FINAL GOODS AND SERVICES PRODUCED BY THE
CITIZENS.

SUCH EARNINGS OR MARKET VALUE OF FINAL GOODS

AND SERVICES ARE ESTIMATED ON A YEARLY BASIS.
SUCH MEASUREMENTS REFLECT THE PERFORMANCE OF
THE ECONOMY.
THE GROSS NATIONAL PRODUCT
The Gross National Product or GNP refers to the market value
of all the final products produced by the resources of the
economy during na specified period of time.
GNP reflects the value of the products flowing in the circular
flow, the production of which entails the use of the economys
economic resources.
THREE MAJOR TYPES OF GOODS IN THE GNP
1. Goods and services which enter into the channel of trade and
commerce;
2. Products which are produced and consumed by the producers;
and
3. Imputed value in rentals.

Note:
1. GNP excludes second-hand items as they merely represent a change in
ownership of a good produced earlier, unless there is capital gain.
2. Final product is merely an attempt to avoid double counting a
problems that makes the determination of the gross national product
very difficult.
THREE MAJOR TYPES OF GOODS IN THE GNP
1. Goods and services which enter into the channel of trade and
commerce;
2. Products which are produced and consumed by the producers;
and
3. Imputed value in rentals.

Note:
1. GNP excludes second-hand items as they merely represent a change in
ownership of a good produced earlier, unless there is capital gain.
2. Final product is merely an attempt to avoid double counting a
problems that makes the determination of the gross national product
very difficult.
LIMITATION OF GNP
1. The national income in less developed countries is understated
insofar as many products which have been produced and
consumed are excluded (small-scale industries whose products
are only used for family consumption, various trade
transactions, some of which are not place in the market).
2. Inadequacy and inaccuracy of statistics.
3. GNP only measures the number of goods and services but not
the quality of goods and services.
4. GNP does not reflect the distribution of income among
members of society. Income of the rich and poor are combined
to come up with an average per capita income (PCI).
5. Per Capital Income (PCI) is income per head.
LIMITATION OF GNP
5. Per Capital Income (PCI) is income per head. The formula is:
PCI = National Income
Population

SO, IF THE NATIONAL INCOME IS PHP 950,000,000,000.00

AND THE POPULATION IS 100,000,000, PCI IS PHP
9,500.00.
THE GROSS DOMESTIC PRODUCT (GDP)
The Gross Domestic Product (GDP) is comprised of final goods
and services produced with national boundaries.
The GDP is a tool that measures the value of all locally-
produced goods and services at market price.
GDP does not include the earnings of Filipino factors of
production abroad as they are part of GNP.
THE DIFFERENCE BETWEEN GDP AND GNP
The difference between GDP and GNP is called net factor
income from abroad (NFIA).
It regards earnings of banking system as inflows and
repatriation to foreign factors of production as outflows.
NFIA is added to GDP to arrive at GNP.
A simple formula is:

GNP = GDP + NET FACTOR INCOME FROM ABROAD.

THE DIFFERENCE BETWEEN GDP AND GNP
MEASURING THE GNP
The GNP can be measured in two (2) ways:
1. CURRENT GNP
2. REAL GNP
CURRENT GNP = PcQc
Where:
Pc = Current Price
Qc = Current Volume of Goods and Services

At current price, GNP could not be exactly determined. An

increase in prices of goods and services will automatically
increase the GNP even if there is no actual increase in the
volume of production.
MEASURING THE GNP
If GNP is really made to measure the market value of total production, the
effect of price changes must be eliminated so as to show GNP values which
reflect only changes in quantity.

REAL GNP
The measurement using a base or constant price.
This means expressing GNP for several years at prices of a single year.
In real GNP, the effect of price changes is eliminated so as to show GNP
values which reflect only changes in quantity.
Real GNP is computed from current GNP using a price coefficient known as
the PRICE INDEX or GNP deflator.
A price index is needed to divided the GNP current prizes in order to re-
express it at constant peso terms.
The price index must reflect well the average increase of prices of all goods
and services using the price of a given year as the point of comparison.
MEASURING THE GNP
REAL GNP

Formula:
REAL GNP = CURRENT GNP
PURE NO. INDEX

WHERE:

PURE NO. INDEX = PRICE OF CURRENT YEAR

BASE YEAR PRICE
MEASURING THE GNP
REAL GNP

PURE NO. INDEX = PRICE OF CURRENT YEAR

BASE YEAR PRICE

A B C
PRICE INDEX
YEAR CURRENT PRICE / BASE PRICE PURE NO. INDEX
(MULTIPLY C BY 100)
CAVAN OF RICE (1986 PRICE) (A B)
1986 350 350 1.0 100

1987 425 350 1.21 121.42

1988 475 350 1.36 135.71

 MEASURING THE GNP
REAL GNP

REAL GNP = CURRENT GNP

PURE NO. INDEX

A B
VALUE AT CONSTANT PRICES (A
YEAR VALUE OF CURRENT PURE NO.
B)
PRICES INDEX
1986 250,000 1.0 250,000.00

1987 458,000 1.21 378,512..40

1988 625,000 1.36 459,558.82

WITH THE REAL GNP, WE ARE NOW SURE THAT THE INCREASE IN GNP IS DUE TO THE
ACTUAL INCREASE IN THE VOLUME OF PRODUCTION, AND NOT DUE TO THE INCREASE
IN PRICES OF GOODS AND SERVICES.
 LESSON 2
OTHER APPROACHES OF MEASURING GNP
EXPENDITURE APPROACH
1. GNP IS MEASURED IN TERMS OF TOTAL SALES OF THE
ECONOMY, WHICH ARE BASICALLY , THE TOTAL
EXPENDITURES OF OUR ECONOMY.
2. GNP IS THE SUMMATION OF THE CONSUMPTION, INVESTMENT,
GOVERNMENT EXPENDITURES AND EXPORT MINUS IMPORTS
OR NET EXPORTS.

GNP = C + I + G + (X M)
Where:
C = Consumption spending by household /Private
Consumption Expenditures
I = Investment
G = Government Spending
XM = Exports minus Imports (Net Exports)
MEASURING THE GNP
REAL GNP

GNP AND GDP BY EXPENDITURES SHARES (@ CURRENT AND CONSTANT PRICES)

AT CURRENT PRICES
Expenditure Type
2009 2010 GROWTH RATE
1. PERSONAL CONSUMPTION EXPENDITURE
2. GOVERNMENT CONSUMPTION
CAPITAL FORMATION
EXPORTS
LESS: IMPORTS
GROSS DOMESTIC PRODUCT 7,678,917 8,513,037 10.9
NET FACTOR INCOME FROM REST OF THE WORLD 1,131,067 1,237,157
GROSS NATIONAL PRODUCT 8,809,984 9,750,193 10.7
GROSS NATIONAL INCOME
MEASURING THE GNP
REAL GNP

GNP AND GDP BY EXPENDITURE SHARES (@ CURRENT AND CONSTANT PRICES)

AT CONSTANT PRICES
Expenditure Type
2009 2010 GROWTH RATE
1. PERSONAL CONSUMPTION EXPENDITURE
2. GOVERNMENT CONSUMPTION
3. CAPITAL FORMATION
4. EXPORTS
LESS: IMPORTS
GROSS DOMESTIC PRODUCT 1,432,115 1,537,152 7.3
NET FACTOR INCOME FROM REST OF THE WORLD 222,821 236,198
GROSS NATIONAL PRODUCT 1,654,936 1,773,350 7.2
GROSS NATIONAL INCOME 1,718,804 1,857,254
INCOME APPROACH
1. MAIN COMPONENT: NATIONAL INCOME
2. NATIONAL INCOME IS THE SUM TOTAL OF ALL FACTOR INCOME OF PERSONS
AND HOUSEHOLD (WAGES AND SALARIES, PROFITS AND DIVIDENDS, RENT AND
INTEEST) AND GOVERNMENT INCOME DERIVED FROM CAPITAL AND
UNDISTRIBUTED CORPORATE INCOME.
3. NATIONAL INCOME IS INCLUSIVE ALSO OF INDIRECT TAX, A TAX PAID ON THE
SALE OF PRODUCT USUALLY SHOULDERED BY THE CONSUMERS AND
DEPRECIATION ALLOWANCE WHICH IS A FEE FOR THE PRESENT USE OF
MACHINES AND BUILDINGS THAT HAS BEEN INSTALLED IN THE PAST.

GNP = NI + INDIRECT TAXES + DEPRECIATION

Where:
NI = NATIONAL INCOME
IT = INDIRECT TAXES
D = DEPRECIATION
MEASURING THE GNP
REAL GNP

GNP AND GDP BY INDUSTRIAL ORIGIN (@ CURRENT PRICES)

AT CONSTANT PRICES
INDUSTRY / INDUSTRY GROUP
4TH Q - 2009 4TH Q-2010 GROWTH RATE
1. AGRI./ FISHERY / FORESTRY
2. INDUSTRY SECTOR
3. SERVICE SECTOR

GROSS DOMESTIC PRODUCT 2,215,226 2,431,902 9.8

NET FACTOR INCOME FROM REST OF THE WORLD 309,698 328,192
GROSS NATIONAL PRODUCT 2,524,923 2,760,094 9.3
THE INDUSTRY-ORIGIN APPROACH
1. THE GNP IS DERIVED BY GETTING THE SUM OF THE GROSS
VALUE-ADDED BY ALL SECTORS OF THE ECONOMY. THESE
SECTORS ARE:
AGRICULTURE, FISHERY, FORESTRY
INDUSTRY
SERVICE
GNP = SUM OF THE GROSS VALUE-ADDED OF ALL SECTORS
+ INDIRECT TAX
+ DEPRECIATION
MEASURING THE GNP
REAL GNP

GNP AND GDP BY INDUSTRIAL ORIGIN (@ CONSTSNT PRICES)

AT CONSTANT PRICES
INDUSTRY / INDUSTRY GROUP
4TH Q - 2009 4TH Q-2010 GROWTH RATE
1. AGRI./ FISHERY / FORESTRY
2. INDUSTRY SECTOR
3. SERVICE SECTOR

GROSS DOMESTIC PRODUCT 397,736 425,927 7.1

NET FACTOR INCOME FROM REST OF THE WORLD 60,684 62,986
GROSS NATIONAL PRODUCT 458,420 488,913 6.7
 LESSON 3
OTHER CONCEPTS OF NATIONAL INCOME
ACCOUNTING
OTHER CONCEPTS OF NATIONAL INCOME
ACCOUNTING
1. NET NATIONAL PRODUCT (NNP)
THE TOTAL SALES VALUE OF OUTPUT AFTER DEDUCTING CAPITAL
CONSUMPTION OR DEPRECIATION AND INDIRECT TAXES OF NET SUBSIDIES.
NNP = DEPRECIATION INDIRECT TAXES OF NET SUBSIDIES
2. PERSONAL INCOME (PI)
THE INCOME RECEIVED BY THE HOUSEHOLDS
PI = NI CI +D +TP
WHERE : PI = PERSONAL INCOME
NI = NATIONAL INCOME
CI = CORPORATE INCOME
D = DIVIDENDS
TP = TRANSFER PAYMENTS
OTHER CONCEPTS OF NATIONAL INCOME
ACCOUNTING
2. PERSONAL INCOME (PI)
OTHER ALTERNATIVE OF EXPRESSING PI IS:
PI = W + D + E + TP
WHERE : W = WAGES AND SALARIES
D = DIVIDENDS
E = ENTREPRENEURIAL /PROPERTY
INCOME OF PERSONS
TP = TRANSFER PAYMENTS
OTHER CONCEPTS OF NATIONAL INCOME
ACCOUNTING
2. PERSONAL DISPOSABLE INCOME (PDI)
AN INCOME USED FOR CONSUMPTION
PERSONAL TAXES ARE EXCLUDED IN THE COMPUTATION OF
DISPOSABLE INCOME.
FORMULA:
DI = PI - PT
WHERE : DI = DISPOSABLE INCOME
PI = PERSONAL INCOME
PT = PERSONAL TAXES
TP =
CONSUMPTION IS:
C = PI PT PS WHERE: PS IS PERSONAL SAVINGS
 LESSON 4
THE DISTRIBUTION OF NATIONAL INCOME
MEANING OF INCOME DISTRIBUTION
INCOME DISTRIBUTION
THE ALLOCATION OF INCOME AMONG THE OWNERS OF THE FACTORS
OF PRODUCTION
IT IS THROUGH THIS THAT INCOMES ARE APPORTIONED/ALLOCATED TO
THE DIFFERENT MEMBERS OF SOCIETY.
ONE MAY RECEIVE MORE WHILE OTHERS RECEIVE LESS.
MOST OF THE PRODUCTIVE RESOURCES BELONG TO THE VERY FEW
INDIVIDUALS, WHILE WORKERS AND EMPLOYEES ARE GIVEN LOW
WAGES.
THE OTHER SOURCES OF INCOME LIKE RENTS, INTERESTS, AND
PROFITS ARE MUCH HIGHER.
SUCH A DISMAL ECONOMIC CONDITION OF THE POOR HAS BEEN A
PRODUCT OF OUR EXISTING SOCIO-ECONOMIC STRUCTURE.
MEANING OF INCOME DISTRIBUTION
TYPES OF INCOME DISTRIBUTION
1. PERSONAL DISTRIBUTION DEALS WITH THE
ALLOCATION OF INCOME AMONG PERSONS
OR HOUSEHOLDS AND THE TOTAL INCOME
THEY RECEIVE
THE DEGREE OF INCOME INEQUALITY
AMONG HOUSEHOLDS OR FAMILIES IS % OF INCOME
SHOWN BY THE LORENZ CURVE.
THE VERTICAL AXIX REPRESENTS
PERCENT OF INCOME WHILE THE
HORIZONTAL AXIS IS THE PERCENT OF
FAMILIES.
THE DIAGONAL LINE SHOWS PERFECT LORENZ CURVE
INCOME EQUALITY AMONG FAMILIES.
THE FURTHER THE LORENZ CURVE FROM
THE LINE OF EQUALITY, THE GREATER IS % OF FAMILIES
INCOME INEQUALITY AMONG FAMILIES
MEANING OF INCOME DISTRIBUTION
TYPES OF INCOME DISTRIBUTION
2. FUNCTIONAL DISTRIBUTION THE
ALLOCATION OF INCOME AMONG THE
FACTORS OF PRODUCTION, NAMELY, LAND,
LABOR, CAPITAL AND ENTREPRENEUR.

CAUSE OF INCOME INEQUALITY

1. INTELLIGENCE AND TALENTS
2. EDUCATION AND TRAINING
3. UNPLEASANT ASND RISKY JOBS
4. OWNERSHIP OF PRODUCTIVE FACTORS