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NATIONAL INCOME ACCOUNTS
Macroeconomics
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THE ECONOMY AS A SYSTEM
System
A group of interrelated parts that work to achieve aparticular objective
Economy as a System Tackles the activities of the members of the society
in the production and distribution of wealth
Systematic Action
Orderly flow of components of a system toward the
attainment of an objective
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THE ECONOMY AS A SYSTEM
Six Elements of Systematic Action
Needs
Objective
Limitations
Alternative Choices
Decision-making framework
Feedback mechanism
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ECONOMICS
NEEDOBJECTIVE
LIMITATIONS
ALTERNATIVECHOICES
DECISIONMAKINGFRAMEWORK
FEEDBACKMECHANISM
EXAMPLE
How to feed its members
to increase its domestic production of food grains
inadequacy of wealth, social status, and lack of skills
and education of its human resources
use rain-fed system, farmer-intensive technique and
traditional seeds, use of modern technoloy, and
hybrid seed alternative
Optimization: what alternative will be the best choice
to address the need
Has the choice answered the need?
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COMPONENTS OF AN ECONOMY
Actors, institutions, sectors who addresseconomic goals
Human Resources: Consumers, workers,
managers, capitalists, and leaders of thedifferent agencies in the government
Institutional: households, business and other
organizations, factories and industrial plants,government agencies, banks and financialinstitutions and union of workers
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PRIMARY ECONOMIC GOAL: MATERIAL SURVIVAL
2 Important Tasks
Production Activities: arrangements of humans and
other resources, institutions, and sectors in
creating goods, services and resources from theutilization of the wealth of the conomy
Distribution Activities: illustrate how the allocation
and division of the goods, services, and resources
to the members of society are carried our for these
members to live and prosper materially
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TASK OF PRODUCTION
What to produce?
Who will produce?
How will it be produced?
How much will be produced?
- Answering these production-related questions may
vary according to the limitations of the wealth of asociety, value system or the political system that asociety pursues
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TASK OF DISTRIBUTION
For whom are the finished products going to be
allocated?
How will the finished products be divided
among the members of a society?
- Answering these distribution-related questions
may vary according to the limitations of
economic systems
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SIMPLE CIRCULAR FLOW OF PRODUCTS, SERVICES AND MONEY
FIRMS
Market for FinancialGoods and Services
Households
Market for FactorInputs
rent, wages, interest, profit
land, labor, and capital Final goods and
services
Receipts on sale of final goods
and services
consumer goods
Payment for purchases of
final goods and services
Income from factor inputs
Factor inputs
SAVINGS
capital
goods
invest-
ment
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CIRCULAR FLOW ANALYSIS ASSUMPTIONS
The economy is stationary or is not growing
Constant flow of money
Constant flow of products and services
Aggregate Demand, Aggregate Supply and Income
are constant
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CIRCULAR FLOW ANALYSIS ASSUMPTIONS
Expenditures of one sector is the income of
another sector
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CIRCULAR FLOW ANALYSIS ASSUMPTIONS
Total Income = Total Expenditures to attain
stability
Rent, Wage, Interest and Profits = Value of Final
Goods and Services
Equilibrium Scenario:
Value of Final Goods and Services (Total Expenditures) = Php
2500 (i.e. 500 units @ Php 5 each)
Rent, Wages, Interest and Profits (Total Income) = Php 2500 (i.e.5 workers @ Php 250 each)
Php 2500 = Php 2500
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CIRCULAR FLOW ANALYSIS ASSUMPTIONS
Total Income = Total Expenditures to attain
stability
What happens if theres disequilibrium?
Total Expenditures > Total Income
Assumption: Economy is not growing (constant)
Expected Demand: 1000 units (from 500 units) @ Php 5 each =
Php 5000
Expected Additional Demand: 500 units @ Php 5 each (EXCESS
DEMAND) = Php 2500
To get rid of the excess demand because the economy is assumed
to be constant, prices of the goods/services should increase.
However, in normal conditions, to address the excess demand, the
production of goods and services can be increased but factor
inputs (i.e. labor) should also increase. (creates employment)
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CIRCULAR FLOW ANALYSIS ASSUMPTIONS
Total Income = Total Expenditures to attain
stability
What happens if theres disequilibrium?
Total Expenditures < Total Income
Assumption: Economy is not growing (constant)
Expected Demand: 250 units (from 500 units) @ Php 5 each = Php
1250
Expected Decrease in Demand: 250 units @ Php 5 each (LACK OF
DEMAND) = Php 1250
To boost demand because the economy is assumed to be
constant, prices of the goods/services should decrease.
However, in normal conditions, to address the lack of demand, the
production of goods and services can be decreased but factor
inputs (i.e. labor) should also decrease. (creates unemployment)
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CIRCULAR FLOW ANALYSIS ASSUMPTIONS
Savings and Investments are equial in
equilibrium
Y = Z
C + S = C + IS = I
Y = Total Income
Z = Total Expenditures
C = Consumption ExpendituresS = Savings
I = Investment Expenditures
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EXPANDED CIRCULAR FLOW OF PRODUCTS, SERVICES AND MONEY
FIRMS
Market for FinancialGoods and Services
Households
Market for FactorInputs
rent, wages, interest, profit
land, labor, and
capital
Final goods and
services
Receipts on sale of final goods
and services
consumer goods
Payment for purchases of
final goods and services
Income from factor inputs
Factor inputs
SAVINGS
capital
goods
invest-
ment
Government
Business taxes
Transfer payments
land, labor, and
capital
rent, wages,
interest, profit
govt
expenditures
public goods
and services
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NATIONAL INCOME ACCOUNTING
primary means of measuring production and
distribution activities in an economy
Gross Domestic Product (GDP)
Gross National Product (GNP)
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NATIONAL INCOME ACCOUNTING
Circular Flow and Measuring National Income
Measure of national production: summation of
value of all final goods and services in the final
goods market
VALUE OF THE FINAL GOODS and SERVICES =
MONETARY VALUE OF COSTS OF PRODUCTON
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NATIONAL INCOME ACCOUNTING
Concept of Value Added
FINAL GOODS and SERVICES commodities have
undergone their final processing and
transformation within the economy and have endedup with buyers that use them for final demand or
disposition like consumption demand by
households and investment demand by firms
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NATIONAL INCOME ACCOUNTING
Concept of Value Added
VALUE ADDED increase in value in a finished
product after undergoing processing and
transformation using various factor inputs
Can be measured as the total value of the product
in the value of raw materials used
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NATIONAL INCOME ACCOUNTING
Concept of Value Added
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NATIONAL INCOME ACCOUNTING
Concept of Value Added
Value of Bibingka = Value added of palay
+ Value added of polished rice
+ Value added of galapong
+ Value added of bibingka
ABJI = ABCD + DCFE + EFHG + GHJI
* if value of final goods is combined with the value of intermediate inputs,
there will be an overestimation
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NATIONAL INCOME ACCOUNTING
Concept of Value Added
Total Value of a final product = Production Costs
Production Costs Value of raw materials and the
payments for factor inputs
Value of final goods = sum of the total salary paid
to the workers, rent paid to the owners of the land,
interest paid to the owners of capital and profits forentrepreneurs and owners in producing the
finished products.
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NATIONAL INCOME ACCOUNTING
Components of Final Demand and Total
Expenditures
Economic activities level of demand of different
sectors
Consumption expenditures
Investment expenditures
Government expenditures
Net Exports
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Industrial Origin Approach
Factor Income Approach
Final Expenditures Approach
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Industrial Origin Approach
Adding the value added of all industries and economic
sectors of the country in a particular period
Payments by all industries to the owners of factor inputs
that were used in the production process (wages, rent,
interest and profit)
Sum of all factor payments = NATIONAL INCOME OR NET
DOMESTIC PRODUCT AT FACTOR PRICES = Sum of all
income of owners of production in the entire economy
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Industrial Origin Approach
Industries Agricultural (agriculture, fishing and forestry)
Industrial (mining, manufacturing, construction, electricity, gas
and water)
Service (transportation, communication, finance, commerce and
other services
GDP at market prices sum of final goods and services producedwithin the economy in a particula year valued when they were
disposed at the market and does not account for the loss of other
wealth or capital in the process of production
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NATIONAL INCOME ACCOUNTING
Industry 2005a
I. AGRICULTURE, FISHERY AND FORESTRY 777,064
A. Agriculture and Fishery 774,514
B. Forestry 2,551
II. INDUSTRY SECTOR 1,747,495
A. Mining and Quarrying 63,639
B. Manufacturing 1,262,073
C. Construction 225,116
D. Electricity, Gas, and Water 196,668
III. SERVICE SECTOR 2,894,280
A. Transportation, Communication and Storage 413,317
B. Trade 776,949
C. Finance 263,724
D. Ownership of Dwellings and Real Estate 320,544
E. Private Services 721,468
F. Government Services 398,277
GROSS DOMESTIC PRODUCT 5,418,839
Net Factor Income From Abroad 457,459
GROSS NATIONAL PRODUCT 5,876,298
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Industrial Origin Approach
NFIA
Income earned by Filipino National who own factor inputs
abroad Income earned by Foreigners from their factor inputs
in the Philippines
GNP: value of total production contributed by the citizens
of the country produced both domestically and abroad
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Factor Income Approach
Estimation of national income based on the income
received by various owners of productive inputs
regardless of which productive sector they were earned.
Composed of the total income earned by the owners of
land, capital, labor and other resources
This method is not anymore used in the Philippines
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Adds up all the expenditures on the final goods and
services made by various major categories of demand
Sectors that dispose the final goods and services
Households, businesses, government, external
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
CONSUMPTION (C)
an activity pursued by individuals in disposing the final goods
and services produced by the economy to provide enjoyment
the sum of all consumers spending
Durable: vehicles, appliances Non-Durable: food
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
CONSUMPTION (C)
Factors Affecting Consumption
TASTE preference of individuals for present goods against
future goods
SOCIOECONOMIC STATUS number of household members, agegroup, educational attainment and the employment status of
the head of the family
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
CONSUMPTION (C)
Factors Affecting Consumption
INTEREST RATE can be viewed as the price of present goods
relative to future goods
WEALTH income TAXES decisions are based on disposable income
Disposable Income = Personal Income Less Income Taxes
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
CONSUMPTION (C)
Factors Affecting Consumption
POPULATION the number of people in the economy
INCOME DISTRIBUTION
INFLATION RATE rapid increase in the prices of goods andservices
EXPECTATIONS
INCOME current income, future income, permanent income
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
INVESTMENT (I)
capital accumulation
expenditures that increase the capital stock of an individual,
firm and economy
dependent on interest rates (r) If r is high, I is low
If r is low, I is high
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G)
Two (2) Categories
Expenditures on Current Consumption
Expenditures on Investments
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G)
Two (2) Categories
Expenditures on Current Consumption
Expenditures for the Operations of Various Government Agencies
Transfer Payments (i.e. Pension, Subsidies) Debt Payments
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G)
Two (2) Categories
Expenditures on Investments
Increase the capital stock of the society
Constructions of school buildings, hospitals, public markets, roadsand bridges, airports and other physical infrastructures
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G)
are financed by Taxes (T)
Tax a mandatory contribution enforced on citizens by the
government
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G)
are financed by Taxes (T)
Classification:
According to the subjects to be taxed:
a. Personal Tax imposed on people living in a specific territory(i.e. residence tax)
b. Property Tax based on the physical wealth owned by persons
that may be personal of real
c. Excise Tax receipt of inheritance (i.e. estate tax, donors tax)
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G)
are financed by Taxes (T)
Classification:
According to the objective:
a. General Tax revenues to finance its operations b. Specific Tax - to control or discourage an activity
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G)
are financed by Taxes (T)
Classification:
According to the scope:
a. National Tax national level (i.e. Income tax) b. Local Tax - city, municipality and barangay level (i.e. Community
tax)
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G) are financed by Taxes (T)
Classification:
According to the value:
a. Specific Tax based on the number or weight of a commodity b. Ad Valorem Tax - percentage of the value of goods and services
that is taxable
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G) are financed by Taxes (T)
Classification:
According to the tax burden:
a. Direct Tax the person who is supposed to pay the tax will bearthe tax burden
b. Indirect Tax - the person who is supposed to pay the tax can
transfer the tax burden to others (i.e. VAT)
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G) are financed by Taxes (T)
Classification:
According to the rate of increase of taxation:
a. Progressive Tax tax rate increases with an increase in thetaxable amount
b. Regressive Tax- taxes whose tax rate decreases as the income
of the taxpayer increases
c. Proportional Tax has a fixed rate based on the value of the
taxable commodity
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
Government Expenditures (G) are financed by Taxes (T)
Goal: G = T Balanced BudgetG > T Budget DeficitG < T Budget Surplus
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
NET EXPORTS (X-M) External sector
The amount by which foreign spending on a home country's
goods and services exceeds the home country's spending on
foreign goods and services.
International Trade
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NATIONAL INCOME ACCOUNTING
Alternative Methods of National Income
Accounting
Final Expenditures Approach
NET EXPORTS (X-M) Goal: X = M Balanced Trade
X < M Trade Deficit
X > M Trade Surplus
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