Chapter 8

National Income
The income of EVERY NATION is measured by
the total earnings of the factors of
production owned by its citizens or the total
market value of all final goods and services
produced by its people.
National Income Accounting

- Refers to the system of statistics and

accounts that keeps track of production,
consumption, savings and investments to track
overall economic performance.
 Economic Indicators:

Gross National Product (GNP)

Gross Domestic Product (GDP)
Per Capita Income (PCI)
 Progressing & Regressing of National
Income

~ the products of interaction between and

among several factors like investment,
population, savings, consumptions, financial
crises and even political disturbances.
Definition of Terms
Gross National Product (GNP)

~ total market value of all final goods and

services produced by its citizens in one (1) year.
National Income

~ total income of the factors of production in

one (1) year or the total payments received by
citizens in one (1) year.
Per capita income (PCI) ~ income per head
Gross Domestic Product (GDP)

~ total market value of all final goods and

services produced within the territories of a
country in one (1) year.
** Income derived from investment or wealth
in foreign countries is excluded.
** In case of GNP, incomes of the citizens
earned from abroad are included.
Money GNP ~ the value of GNP at current price
or market price

Real GNP ~ the value of GNP in terms of the

number of goods and services
produced.
•
Final Goods and Services ~ are those which are
sold for the last time,
and these are not for
further processing or
manufacturing.
Disposable Income ~ personal income less
personal taxes
National income accounting follows the
Keynesian Model (John Meynard Keynes):
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 Ways of Calculating National Income

1. Product or Expenditure Approach (Demand Approach)

2. Income Approach
3. Industrial Origin Approach (Value added Approach)
 Product or Expenditure Approach
(Demand Approach)

•
 Income Approach

•
 Industrial Origin Approach
(Value added Approach)

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 Depreciation
and
Indirect Business Taxes
Depreciation

~ allowance for capital goods like machines,

buildings which have been consumed in the
process of production
Indirect Business Taxes

~ Include general sales tax, excise tax, business

property taxes, license fees, and custom
duties.
Indirect tax
~ tax imposed by the government on products
sold by businessmen and this is passed on to
the consumers by merely increasing the price
of the product.
Taxes are used to finance government
programs and project.
 Limitations of GNP
It only records what formal and not the informal
- does not declare or record activities in the
“underground economy”
It does not measure quality but more of quantity
or in numbers
 Real GNP
The real economic achievements of any country
are measured by the number of goods and services
its citizens have produced in a given year.
 Price Fluctuations
1. Deflation – market value of GNP is decreasing
2. Inflation – market of GNP naturally increases
Money GNP – GNP at current prices
Real GNP is obtained by multiplying the
number of final products and services by
•prevailing market price. It is expressed as:
 How to Compute Real GNP

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Base year – the point of reference or
benchmark.
This is usually a period of normal
economic conditions. Prices are stable and no
substantial unemployment problem.
 Relevance of National Income Accounting

1. Government policy makers – initiate and implement

policies to achieve and sustain economic growth.
2. Business firms – business planning, forecasting,
strategy formulation and direction setting
3. Households – better life decision, personal decision
in investment and finance.
An Overview of the Economy
 Within the economy, the basic activities of
production, consumption, employment, and income
generation take place through the interrelationship
existing between the basic consuming unit, which is
the household and the basic producing unit, which is
the firm.
 The Circular Flow of Economic Activity

Goods and Services

Economic Resources

Household Business Firm

Money payment for wages

Interest, Rent
Consumption Expenditure
The circular flow shows the flow of money and the flow of
goods and services in both directions.
The financial flow, which is the money flow, is depicted in the
money payment by the firm to the household of its money
income, and by the household to the firm for its purchase of
goods and services.
The physical flow, which is the goods flow, is depicted in the
flow of economic resources from the household to the firm and
in the flow of goods and services from the firm to the
household.