Economic Growth PDF

“GROSS DOMESTIC PRODUCT” Macroeconomics MELCAH PASCUA MONSURA D E PA RT M E N T O F E C O N O M I C S P O LY T E C H N I C U N I V E R S I T Y O F T H E P H I L I P P I N E S - Macroeconomics is the study of whole economies--the part of economics concerned with large-scale or general...

“GROSS DOMESTIC PRODUCT” Macroeconomics MELCAH PASCUA MONSURA D E PA RT M E N T O F E C O N O M I C S P O LY T E C H N I C U N I V E R S I T Y O F T H E P H I L I P P I N E S - Macroeconomics is the study of whole economies--the part of economics concerned with large-scale or general economic factors and how they interact in economies. - Macroeconomics focuses on the performance of economies – changes in economic output, inflation, interest and foreign exchange rates, and the balance of payments. - Poverty reduction, social equity, and sustainable growth are only possible with sound monetary and fiscal policies. - Macroeconomics connects together the countless policies, resources, and technologies that make economic development happen. - Without proper macro management, poverty reduction and social equity aren't possible. MACROECONOMICS  Gross Domestic Product - Gross Domestic Product (GDP) measures the value of goods and services produced within an economy’s borders during a given period. Source: Economic and Financial Indicators Technical Notes- - Tracking gross domestic product is important because it provides a general assessment of the state of a country’s economy. Generally, if the GDP is growing, companies are expanding and there are more jobs available. Nominal vs. Real GDP  National Income Accounting This focuses on the measurement of indicators of aggregate output or income. - Measures the economy’s overall performance. Total/Gross - Enables economists and policymakers to: 1. Assess the health of the economy by comparing levels of production at regular intervals. 2. Track the long-run course of the economy to see whether it has grown, been constant, or declined. 3. Formulate policies that will safeguard and improve the economy’s health. Gross Domestic Product The primary measure of the economy’s performance is its annual total output of goods and services or, as it is called, its aggregate output. the total market value of all final goods and services produced in a includes all goods and Gross services produced by given year. Domestic either citizen-supplied or Product (GDP) foreign-supplied resources employed within the country. Avoiding Multiple Counting INCLUDED EXCLUDED Final Goods Intermediate Goods - goods and services that are purchased for final - goods and services that are purchased for use by the consumer, not for resale or for further resale or for further processing or processing or manufacturing. manufacturing. - all goods and services produced in a particular Nonproduction Transactions year must be counted once and only once. - Public Transfer Payments - Private Transfer Payments Value Added - Stock Market Transactions - market value of a firm’s output less the value of the inputs the firm has bought from others. Secondhand Sales Value Added VALUE ADDED IN A FIVE-STAGE PRODUCTION PROCESS At each stage, the difference between what a firm pays for a product and what it receives from selling the product is paid out as wages, rent, interest, and profit. How much should include in GDP? - $350 - The value of the final product. - This amount includes all the intermediate transactions leading up to the product’s final sale. Double What if we include all intermediate sales, Counting! $1,140? Three Approaches of GDP Expenditure Approach Income Approach Industry-Origin Approach - Also called as OUTPUT - Also called as Earnings or - Also called as Value Added Approach Allocation Approach Approach - Add up all the spending on Compensation of Employees - Summing value added per final goods and services that Rents unit over all units sold is total has taken place throughout Interests value added. the year. Proprietors Income (1) Agriculture, Fishery, (1) Consumption Corporate Profits and Forestry Sector (2) Investment Taxes on Production and (2) Industry Sector (3) Government Imports (3) Service Sector Spending Net Foreign Factor Income (4) Net Exports Consumption of Fixed Capital  Expenditure Approach Net Private Domestic Investment Gross Investment - depreciation C + I + G + NX = GDP Consumption Gross Private Spending by Government Net Exports Expenditures by Domestic Private Expenditures Households Investment Business not by government International (public) Expenditures for trade Personal - all final agencies goods and services transactions Consumption purchases of for providing public Expenditure services machinery, equipment, and Investment is exports (X) tools taking place minus imports - All construction inside the Expenditures (M) Durable goods for social capital and Nondurable - changes in country such as schools goods inventories (Philippines) and highways  Income Approach Allocation/Earnings Approach Compensation of Employees - was paid as wages and salaries by business and government to their employees Rents - income received by the households and businesses that supply property resources. Interests - consists of the money paid by private businesses to the suppliers of money capital Proprietors Income - consists of the net income of sole proprietorships, partnerships, and other unincorporated businesses Corporate Profits - Composed of Corporate Income Taxes, Dividends, and Undistributed Corporate Profits Taxes on Production and Imports - Includes general sales taxes, excise taxes, business property taxes, National Income license fees, and customs duties. Net Foreign Factor Income (-) - income Filipinos gain from supplying resources abroad and the income Consumption of Fixed Capital (+) that foreigners gain by supplying resources (should be deducted) Gross Domestic Product - cost of such capital must be allocated over its lifetime (depreciation)  Industry-Origin Approach A + I + S = GDP Agriculture, Fishery, and Forestry Industry Sector Service Sector Agriculture captures value added This sector represents value This sector consists of the following subsectors: from the production of agricultural added of firms engaged in: crops such as rice, corn, etc., Transportation ornamental plants and livestocks. Mining communication and Quarrying storage Fishery includes commercial and Manufacturing Trade municipal fishing, aquaculture and the Construction and utilities Finance harvesting of marine products. Ownership of dwellings and real estate Forestry represents activities such Private services and as logging and gathering of forestry products. government services.  Other Accounts in National Income Accounting These accounts provide useful information about economy’s performance. Net Domestic Product (NDP) Personal Income (PI) Disposable Income (DI) GDP – Consumption of Fixed National Income – Taxes on Personal Income – Personal Capital (depreciation) production and imports – Taxes SSS contributions – National Income (NI) 2 ways DI = Consumption + Savings Corporate Income Taxes – Net Domestic Product – Undistributed Corporate DI = C + S Statistical Discrepancy + Net Profits + Transfer Payments Foreign Factor Income - the amount of income that - all income received households have left over - earned for their contributions whether earned or after paying their personal of land, labor, capital, and unearned. taxes. entrepreneurial talent  Philippines Gross National Income and Gross Domestic Product: 2020 to 2021 (in million pesos: at current price EXPENDITURE APPROACH INDUSTRY-ORIGIN APPROACH Type of Expenditure 2020 2021 Industry 2020 2021 Household final consumption expenditure 13,476,075 14,610,149 1. Agriculture, forestry, and fishing 1,828,424 1,954,345 Government consumption 2,739,671 3,021,100 2. Industry Sector 5,098,232 5,607,011 a. Mining & Quarrying 137,060 185,284 Capital formation 3,129,566 4,111,887 b. Manufacturing 3,169,921 3,423,404 A. Fixed capital 3,824,091 4,327,283 1. Construction 2,331,973 2,682,153 c. Electricity, steam, water and waste management 611,051 650,876 2. Durable equipment 943,928 1,072,947 d. Construction 1,180,199 1,347,446 3. Breeding stock & 3. Service Sector 11,024,918 11,849,213 a. Wholesale and retail trade; repair of motor vehicles and orchard development 421,946 427,892 motorcylces 3,317,371 3,503,236 4. Intellectual property products 126,244 144,292 b. Transportation and storage 551,045 604,919 B. Changes in inventories (695,464) (216,438) c. Accommodation and food service activities 253,013 285,244 C. Valuables 939 1,042 d. Information and communication 593,039 640,192 Exports 4,524,306 4,996,724 e. Financial and insurance activities 1,823,979 1,961,922 A. Exports of goods 2,551,888 2,916,134 f. Real estate and ownership of dwellings 1,081,612 1,138,901 B. Exports of services 1,972,418 2,080,590 g. Professional and business services 1,137,558 1,220,837 Less : Imports 5,918,045 7,329,292 h. Public administration and defense; compulsory social activities 950,590 1,030,438 A. Imports of goods 4,790,020 6,306,996 i. Education 719,494 796,827 B. Imports of services 1,128,025 1,022,297 j. Human health and social work activities 325,260 385,686 Statistical discrepancy - - k. Other services 271,957 281,010 Gross Domestic Product 17,951,574 19,410,568 Gross Domestic Product 17,951,574 19,410,568 Net primary income 1,360,427 693,869 Net primary income from the rest of the world 1,360,427 693,869 Gross National Income 19,312,001 20,104,437 Gross National Income 19,312,001 20,104,437 Philippines Gross National Income and Gross Domestic Product: 2020 to 2021 (in million pesos: at constant 2018 price EXPENDITURE APPROACH INDUSTRY-ORIGIN APPROACH Type of Expenditure 2020 2021 Industry 2020 2021 1. Agriculture, forestry, and fishing 1,780,391 1,775,358 Household final consumption expenditures 12,911,357 13,456,532 2. Industry Sector 5,115,316 5,549,484 Government consumption 2,651,875 2,839,962 a. Mining & Quarrying 137,493 144,431 Gross capital formation 3,375,833 4,060,997 b. Manufacturing 3,266,302 3,554,737 A. Gross fixed capital 3,761,791 4,136,015 c. Electricity, steam, water and waste management 589,213 615,505 1. Construction 2,242,534 2,491,428 d. Construction 1,122,308 1,234,811 2. Durable equipment 1,001,578 1,123,296 3. Service Sector 10,642,137 11,213,211 3. Breeding stock & a. Wholesale and retail trade; repair of motor vehicles orchard development 389,875 376,943 and motorcylces 3,275,537 3,414,326 b. Transportation and storage 515,149 547,542 4. Intellectual property products 127,805 144,348 c. Accommodation and food service activities 231,811 248,457 B. Changes in inventories (386,663) (75,780) d. Information and communication 585,185 639,123 C. Valuables 705 762 e. Financial and insurance activities 1,769,952 1,853,154 Exports 4,749,668 5,128,006 f. Real estate and ownership of dwellings 1,031,275 1,053,944 A. Exports of goods 2,849,277 3,180,714 g. Professional and business services 1,068,769 1,135,218 B. Exports of services 1,900,391 1,947,292 h. Public administration and defense; compulsory Less : Imports 6,150,890 6,947,443 social activities 911,188 962,824 A. Imports of goods 5,030,860 5,936,272 i. Education 687,610 744,503 B. Imports of services 1,120,030 1,011,171 j. Human health and social work activities 306,903 350,268 Statistical discrepancy - - k. Other services 258,758 263,851 Gross Domestic Product 17,537,843 18,538,054 Gross Domestic Product 17,537,843 18,538,054 Net primary income 1,320,173 642,515 Net primary income from the rest of the world 1,320,173 642,515 Gross National Income 18,858,016 19,180,569 Gross National Income 18,858,016 19,180,569  Nominal GDP Calculating Real GDP (Base Year = Year 1) vs. Real GDP A GDP based on the prices P > that prevailed when the 300 300 100 output was produced is P 280 308 < 110 called unadjusted GDP. Price Index a measure of the price of a specified collection of goods A GDP that has been and services in a given year as compared to the price of deflated or inflated to same collection of goods and services in a reference year. reflect changes in the price (1) (2) Price of the current year nominal GDP level is called adjusted GDP. X 100 Price of the base year real GDP Real GDP = Nominal GDP / Price index (in hundredths)  Shortcomings of GDP Nonmarket Activities Improved Product Quality GDP and the Environment Certain productive activities GDP is a quantitative measure The growth of GDP is inevitably do not take place in any rather than a qualitative accompanied by “gross market— the services of measure; it fails to capture the domestic by products,” homemakers and the labor of full value of improvements in including dirty air and polluted carpenters who repair their product quality. water, toxic waste, congestion, own homes. and noise. Composition and The Underground Economy Distribution of Output Leisure Firms (engaged in legal or illegal GDP does not tell us whether National income accounting activities) choose illegally not to report their full incomes. the mix of goods and service understates well-being by is enriching or potentially ignoring leisure’s value. detrimental to society. Let’s Try! SEE YOU NEXT WEEK! ❤