Chapter 7 Measuring National Income (PDF)

CHAPTER 7: MEASURING NATIONAL INCOME GROUP MEMBERS: 1. Ecle, Crysnel 2. Palmones, Mishayne F. 3. Santos, Ruel 4. Señoson, Eira Ariane DEFINITION OF TERMS Government purchases Capital Good...

CHAPTER 7: MEASURING NATIONAL INCOME GROUP MEMBERS: 1. Ecle, Crysnel 2. Palmones, Mishayne F. 3. Santos, Ruel 4. Señoson, Eira Ariane DEFINITION OF TERMS Government purchases Capital Good the sum of expenditures incurred by the any tangible asset usually bought or government in providing different social invested on by an organization for the services to the people. purpose of producing goods and services. Imports Capital Labor purchases by domestic buyers of goods total payments made to owners of and services that were produced abroad. physical capital, such as the rent paid for office buildings, profits of business owners Investments who sell factories and machines, as well as the spending by firms on final goods and royalty fees paid for copy rights and services, primarily capital goods. patents, and is equal one-thirds of the GDP Labor Income Consumption Expenditure total wages, salaries, and incomes of the spending by households on goods and employed and self-employed of most services such as food, clothing, and economies, and this comprises two-thirds entertainment. of total GDP. During Given Period Net Exports only concerned with new or current simply the difference between exports and production. imports. Exports Total Market Value domestically produced final goods and does not only pertains to the tangible services that are sold abroad. goods that an economy manufactures or produces but also compromised of all Final Goods and Services tangible products whether private or public the end product of a process. services. Gross Domestic Product the measure of an economy's productivity.  INTRODUCTION GDP-“Gross Domestic Product” is considered the measure of an economy’s productivity and it is one of the vital components of an economy. GDP is the total market value of the final goods and services produced within a country during a given period. Total Market Value – It is the economic value or the total amount of tangible goods/products produced by an economy and the services provided by national and local governments. FINAL GOODS AND SERVICES – The end or final product of a process or service that is actually being purchased by a particular consumer. Intermediate Goods – are goods that are used in the production process to make the final goods, which are ultimately sold to consumers. CAPITAL GOODS – is any tangible asset usually bought or invested on by an organization for the purpose of producing goods and services. In the business perspective, this includes the machineries, office buildings, and factories, among others. For the government, meanwhile, these are the public roads, airports, seaports, which offer transportation services PRODUCED WITHIN THE COUNTRY - GDP only measures the final goods and services produced by the economic activities within the country. DURING A GIVEN PERIOD-GDP is only concerned with new or current production. Old output is not counted in the GDP of the current calendar year because it was already counted back at the same time It was produced and it would result in double counting if we are to include the sales of used goods in the computation of the current GDP. THE EXPENDITURE METHOD IN MEASURING GDP Economic Players – those who purchase and consume the services that make up the GDP in a year. Four Categories of Economic Players, According to Economists (Who buys) 1. Households 2. Firms 3. Governments 4. Foreign Sector (the users of domestic goods who are based abroad) Consumption Expenditure – or consumption, is the spending by households on goods and services like food, clothing, and entertainment. This constitutes the largest share of a nation’s output (see Table 7.1) and is the reason why local consumption is one of the key factors of economic growth in terms of GDP measure. Investment-the spending by firms on final goods and services, primarily capital goods, and is also the sum of expenditures on equipment, structure, and inventories. Government Purchases – are the final goods and services purchased by the national and local government units for providing social services to the people However, there are also transfer payments, which are payments made by the government for which no current goods or services are produced or received. Examples include social security benefits, unemployment benefits, and pensions paid to retired government workers. Net Exports are the difference between exports and imports, calculated as exports minus imports. Exports – are domestically produced final goods and services sold abroad, while imports are purchases of domestic buyers of goods and services produced abroad. NOMINAL GDP VS. REAL GDP REAL GDP – measures the real physical production of the year by using the prices of a base year, not the current year, in computation. By using Real GDP, we get a sensible measure of the actual growth in production over the years excluding the effect of inflation. NOMINAL GDP - GDP that is computed using the current prices. Nominal GDP does not factor the changes in inflation. The methods in measuring GDP: 1. Adding the total Market value of al the final goods and services produces in a country 2. Adding up the total value of money by the households, firms, government and foreign sectors on final goods and services and subtracting the money spent to purchase imported goods and services Computation using methods: To further understand how this methods are used to compute GDP let us give an example. Example: 1 Table 7.1 provides the peso values for each of the components for the Philippine economy in 2012, showing that the GDP was over PHP 10 trillion at current prices, with an average of PHP 114,740.15 per person or GDP per capita (income per person in a certain city/country), calculated by dividing the total GDP by the total population.  TABLE 7.2 Quantity of Price of Quantity of Price of Apples Apples Oranges Oranges 2010 100 Php 10 150 Php 15 2013 200 Php 12 300 Php 16 Formula/Equation The relationship between GDP and expenditures on goods and services can be expressed in the following equation: Y=C+I+G+NX Where: Y = gross domestic product C = consumption expenditure I = investments. G = government purchases NX = net exports Example: 2 The Philippines produces 10,000,000 tons of rice valued at PHP 50,000 per ton, with 7,000,000 tons sold to consumers, 2,000,000 to businesses, 500,000 to the government, and 250,000 sold abroad. There is no importation of rice, and unsold rice at the end of the year are held in inventory by rice producers (250,000 tons). The market value of the production of final goods and services in this economy is PHP 500 billion, calculated by multiplying 10,000,000 tons by PHP 50,000 per ton using the first method). To measure GDP in terms of expenditure (the second method), we add spending on consumption, investment, government purchases, and net exports. Consumption is PHP 350 billion (7,000,000 tons x PHP 50,000), Government purchases are PHP 25 billion (500,00 tons x PHP 50,000), Net exports are equal to exports of PHP 12.5 billion (250,000 tons x PHP 50,00) minus imports (zero), so net exports are PHP 12.5 billion. Meanwhile, in investments, caution is required. The 2,000,000 tons sold to businesses, worth PHP 100 billion, are considered investment. However, rice producers have 10,000,000 tons but only sold 9,750,000 (7,000,000 2,000,000-500,000-250,000), leaving 250,000 tons unsold and were added to rice producer’s inventories. This amount, or PHP 12.5 billion (250,000 tons x PHP 50,000), counts as inventory investment, making it part of the total investment. Thus, the total investment spending is equal to the PHP 100 billion worth of rice sold to businesses plus PHP 12.5 billion in inventory investment, PHP 112.5 billion.  The economy’s expenditure components include consumption (PHP 350 billion), investment including inventory investment (PHP 112.5 billion), government purchases (PHP 25 billion), and net exports (PHP 12.5 billion). Summing these components yields PHP 500 billion, which is the same value for GDP that we got by calculating the market value of production (first method). Calculating the GDP Formula: (Quantity of Product A x Price per bunch) + (Quantity of Product B x Price per unit) = GDP Example: (10 bunches of okra x P2.00/bunch) + (5 toothbrush x P10.00/unit) + (3 mouthwash x P15.00/unit) = P115.00 Calculating the Nominal GDP Formula: (Quantity of Product A for the current year x Current price per unit) + (Quantity of Product B for the current year x Current price per unit) Nominal GDP Example: Compute Nominal GDP for the year 2013 (current year) using current price (See Table 7.2) 2013 Nominal GDP = (2013 quantity of apples x 2013 price of apples) + (2013 quantity of oranges x 2013 price of oranges) = (200 x Php 12) + (300 x Php 16) = Php 6,900 Calculating the Real GDP Formula: (Quantity of Product A for the current year x Base-year price per unit) + (Quantity of Product B for the current year x Base-year price per unit) = Real GDP Example: Compute the Real GDP for the year 2013 (current year) using 2010 (base-year price) (See Table 7.2) 2013 Real GDP = (2013 quantity of apples x 2010 price of apples) + (2013 quantity of oranges x 2010 price of oranges) (200x Php 10) + (300x Php 15) = Php 6,500 GDP AS A MEASURE OF ECONOMIC WELL-BEING Economists, policy makers, and investors (both local and foreign) use GDP as a measure of economic well-being of a country that affects and influences points for decision-making as regards formulation of socio-economic policies, business investments, and the level of consumption. Illustration The diagram shows that the GDP can only increase if there is an Increase in the production of goods and services produced by factors of production, specifically from the labor component or Increase in employment that will be caused by the desire of the firms to invest and put-up businesses in the country. Businesses need sufficient infrastructures Infrastructure Projects are inputs of an economy being considered by investors to evaluate the profitability of putting businesses in a country. Additional employment is guaranteed during the construction, operation, and maintenance of such projects. GDP DOES NOT CAPTURE IT ALL -GDP does not really capture the entire story of the economic situation of a country for there are socio-economic factors that sometimes do not complement or support GDP as the measure of its economic well-being. Example: The Philippines has been reported to be one of the fastest-growing economies in Southeast Asia. This was attributed to the increase and growth in investments, infrastructure projects, employment rate, and production of the major industries. However, we cannot ignore some socio-economic facts that somewhat do not translate and support the reported economic growth of the country. According to 2018 Philippine Records: 1. Filipinos living in poverty-16.7% or 17.7 million (Philippine Statistics Authority, 2020) 2. International poverty line-$1.90/day or 100/day (Ladrido, 2018) 3. Filipinos living below poverty line over 22 million Filipinos (Ladrido, 2018) 4. NCR population as of 2015-20,785 persons living in every kilometer of the land (Philippine Statistics Authority, 2016) This means that the region is increasingly becoming more congested, as a result of the increasing number of illegal settlers who usually hail from the provinces with the hopes of a better life and employment in the city. 5. Philippine debt as of August 2019-7.939.08 billion (Bureau of the Treasury, 2019) Which means that each Filipino has a debt of around P73,442. GNP “Gross National Product” is the total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens anywhere in the world, regardless of where the output is produced. Key points: In producing one particular good, there is a need to use a number of other goods. Not all products and services with market values should be counter in GDP, but only those considered as final goods and services or end products. There are four categories of economic players that use the goods and services that make up the GDP in a year. These are the households, firms, governments, and the foreign sectors. If a country’s net export is positive, it shows that its domestically produced goods and services are demanded by other countries GDP as a measure of economic well-being of a country that affects and influences points for decision-making as regards formulation of socio-economic policies, business investments, and the level of consumption. GDP can only increase if there is an increase in the production of goods and services produced by factors or production. Business sector will not invest in the country when people do not have the economic capacity to consume its products and services, The more businesses and employment established and created In an economy, the more sources of funds in the form of taxes the government could use for Infrastructure projects. Infrastructure projects are both inputs and outputs in the economy. Comparison of the fiscal year in GDP will help to find out if an economy has Indeed develop or not. Summary: Gross domestic product (GDP) is the measure of a country’s output produced within its borders. In computing for GDP, know first the market value of the goods and services produced. Raw materials are not included in the GDP computation, only the final goods. GDP is only concerned with the goods and services produced in the current year. Expenditure model is another way to compute for GDP. Adding the Total Income of Capital and Labor is the third approach in GDP computation. Nominal GDP is calculated using the prices of the current year. Real GDP is calculated using the prices of a base year. GNP is the measure of a country’s output produced by all its citizens anywhere in the world.