Gross Domestic Product (GDP)

• Gross Domestic Product (GDP) is the total market value of final goods and services produced within a country during a specific period.
• There are three approaches to measuring GDP: Total Market Value, Expenditure Method, and Total Income of Capital and Labor.

Total Market Value Approach

• Total Market Value refers to the total worth of all goods and services produced or exchanged in a market at current prices.
• To determine GDP using this approach, calculate the aggregate worth of all goods and services produced or exchanged in a market at current prices.
• Example: In a hypothetical economy called Medi, okra (10 pieces/bunch) sells for P2.00/bunch; toothbrush sells as 5 units for P10.00/unit; mouthwash sells as 3 units for P15.00/unit; hence, the GDP is calculated as (10 bunches of okra x P2.00) + (5 toothbrush x P10.00) + (3 mouthwash x P15.00) = P115.00

Final Goods and Services

• An end product of a process
• The product or service is purchased directly by the consumer
• Intermediate goods are goods used in the production process
• An example of intermediate goods is wood, nails and varnish; they are used to create the final product of a chair
• The chair is the final good in this instance

GDP Example

• If a carpenter purchases wood (₱180), nails (₱20), and varnish (₱50) to build a chair and sells the chair for ₱220, the ₱220 is the GDP reflecting the value of its components.

Capital Goods

• A tangible asset usually invested in for the purpose of producing goods and services.
• Capital goods are used to produce a final good, but not considered final goods themselves.
• Examples in manufacturing include machinery, tools, factories, and plants.
• If a dentist charges 500 pesos for teeth cleaning and pays an assistant 75 pesos, the total contribution to the GDP is 500 pesos, since the assistant's wage is included in the final service price.
• The contribution of selling a 20-year-old house that was previously counted in the GDP is based only on any commission from the sale.
• If a real estate agent sells an old house for 5 million pesos and earns a commission of 500,000 pesos, the GDP contribution is 500,000 pesos (the value of the commission).
• If someone enhances a car and is promised 10% of the selling price, the GDP contribution is the 10% commisison.

Expenditure Approach

• GDP is measured by adding the market value of all final goods and services produced in the country.
• GDP is also measured by totaling the money spent by households, firms, government, and the foreign sector, while subtracting spending on imported goods and services.
• Consumption Expenditure is spending by households on goods and services like food, clothing, and entertainment.
• Investment is spending by firms on final goods/services, primarily capital goods, and includes equipment, structures, and inventories.
• Government Purchases are final goods and services bought by national and local government units.
• This includes government spending for different services.
• Net Exports is the difference between exports and imports.
  • NX = Exports - Imports
  • Exports are domestically produced goods and services sold abroad.
  • Imports are goods and services purchased by domestic buyers that were produced abroad.
• GDP can be calculated as the sum of consumption (C), investment (I), government purchases (G), and net exports (NX): GDP = C + I + G + NX

Philippine GDP Example in 2012 (in million pesos)

• Consumption Service totalled 7,836,227 (durable goods: 3,267,168; non-durable goods: 1,171,231; services: 1,845,379; miscellaneous goods and services: 893,269).
• Investment totalled 2,053,161 (business fixed investment: 985,653; residential investment: 1,091,042; inventory investment: -23,534).
• Government Purchases: 1,096,831
• Net Exports: -391,114 (exports: 3,196,232; imports: 3,587,346).
• Total Gross Domestic Product: 10,595,105
• If the Philippines produces 10,000,000 tons of rice valued at ₱50,000 per ton, in which 7,000,000 tons are sold to customers, 2,000,000 tons are sold to businesses, 500,000 tons are sold to the government, and 250,000 tons are sold abroad, there are 250,000 tons left.

Total Market Value

• The market value of final goods and services produced is 10,000,000 tons * ₱50,000 = ₱500 billion

Expenditure Method Example

• Consumption: 7,000,000 tons x ₱50,000 = ₱350 billion
• Investments: ₱100 billion + ₱12.5 billion = ₱112.5 billion
• Government purchases: 500,000 tons x ₱50,000 = ₱25 billion
• Net Exports: 250,000 tons x ₱50,000 = ₱12.5 billion
• GDP =Consumption + Investment + Government Purchases + Net Exports
• GDP = ₱350 billion + ₱112.5 billion + ₱25 billion + ₱12.5 billion = ₱500 billion.

Income of Capital and Labor Approach

• Measures GDP by totaling labor and capital income.
• Labor Income includes wages, salaries, and incomes of the employed and self-employed, comprising two-thirds of the GDP.
• Capital Labor involves payments to owners of physical assets like rent paid for office buildings along with earnings from selling factories/machines. It includes royalty fees and accounts for one-third of the GDP.

"The Economy of Barangay Masagana" Example GDP Calculation Using:

1. Total Market Value Approach:

• Agriculture is ₱5,000 billion.
• Fisheries are ₱2,500 billion.
• Manufacturing is ₱3,500 billion.
• Services are ₱3,000 billion.
• Total intermediate goods total ₱3,000 billion.
• (5,000+2,500+3,500+3,000)−3,000=₱11,000 billion*

2. Expenditure Approach:

• Household consumption is ₱6,000 billion.
• Investments are ₱2,500 billion.
• Government is ₱2,000 billion.
• Exports are ₱1,200 billion.
• Imports are ₱700 billion.
• GDP=6,000+2,500+2,000+(1,200−700)=₱11,000 billion*

3. Income Approach:

• Wages is ₱5,500 billion.
• Rent is ₱700 billion.
• Banks interest from loans is ₱600 billion.
• Business profits is ₱2,800 billion.
• Depreciation is ₱900 billion.
• Taxes total ₱500 billion.
• GDP=5,500+700+600+2,800+900+500=₱11,000 billion

Nominal GDP

• Computed using current prices.

Real GDP

• Computed using the prices of a base year.
• Gross National Product (GNP) is the total market value of all goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced.

GNP is measured:

• By the number of OFWs
• The value of their remittances
• Local companies that become globally competitive by establishing satellite factories, and branches in foreign countries
• Jollibee Data to Calculate GDP
  • Total sales revenue from final goods: ₱240 billion
  • Cost of intermediate goods (raw ingredients, packaging, etc.): ₱50 billion
  • Household spending on Jollibee meals: ₱150 billion
  • Jollibee's investments in new stores: ₱25 billion
  • Government purchases: ₱10 billion
  • Exports: ₱30 billion
  • Imports: ₱25 billion
  • Wages paid to employees: ₱80 billion
  • Rent for store spaces: ₱15 billion
  • Interest paid to banks: ₱10 billion
  • Profits: ₱50 billion
  • Depreciation of equipment: ₱20 billion
  • Taxes paid: ₱15 billion