Topic 14.

NATIONAL INCOME ACCOUNT

Prepared by: Leovenza P. Villacorte

National Income means the value of goods and services produced by a country
during a financial year. It refers to the measurements of indicators of national output or
income.

Indicators of aggregate output are the following:

a. Gross National Product (GNP) is the sum of the final market values of all final
goods and services produced by citizens in given period of time. It is the sum of money
value of consumption, investment, government purchase of goods and services, and net
exports. It is the sum of money value of consumption, investment, government purchase
of goods and services, and net exports.
Final market value is the monetary amount by which a product would have been
sold in the market.
Final goods and services refers to goods and services produced within a year for
final use of consumers. Also called sold or remain unsold.

Activities that are excluded in the computation of GNP

a. Non- productive transaction
b. Second hand sales
c. Underground economy

Public transfer of payments are those given by the government to individuals or

household but does not contribute production in return for them.
Examples: age-old pensions
Private transfer of payments involves transfer of funds from a private individual to
another and which does not entail production.
Examples: gift checks from relatives

Gross national product (GNP) is measured by using these approaches

1. Expenditure approach
2. Income approach
3. Industrial origin approach

Expenditure approach consist of major components

1. Personal consumption expenditure of goods and services (c)
2. Gross private domestic investment (ig)
3. Government purchases of goods and services (g)
4. Net exports (xn)
5. Statistical discrepancy (sd)
6. Net factor income from abroad (nfia)
1. Expenditures Approach

Formula: GNP = c + g ± xn + sd = gdp + nfia

It consist of major components:

1. Personal Consumption Expenditure of Goods and Services (c) - it includes durable
consumer goods, non-durable and services.
2. Gross Private Domestic Investment (ig) - it includes inventories, final purchases of
machinery, tools and equipment, and all construction including residential.
3. Government Purchases Of Goods and Services (g) - it is the sum of expenditures
incurred by the government. It includes national government spending, local spending,
government payroll (salaries and wages of public servants), and payment of debts.
4. Net Exports (xn) is the export (x) minus import (m). it can be either favorable (x>m),
unfavourable (x <m) or balanced (x=m).
5. Statistical discrepancy is the accounting and reporting errors inserted to ensure that
the three approaches generate the same GDP.
6. net factor income from abroad (nfia) is refers to the differential between the earned by
the citizens who earned resources used in the production process abroad and the income
of foreigners who own resources used in the production process here in the Philippines.
Note:
A negative net export is derived when import is greater than export.
A positive net export is derived when export is greater than import.

Exports refers to PRODUCTS produced domestically but sold abroad.

Imports refers to products produced abroad but are bought and consumed domestically.

2. Income Approach

It includes all income received as the owners of economic resources known as

factor payments. Factor of payments includes wages and salaries to labor, rent paid for
the use of one’s property, profit, and dividends paid to capital.

Formula:
Compensation of employees + interest income + profits = national income + depreciation
+ ibt – subsidies = GNP

It consist of major components

1. Rent income representing the money income payments by the supplies of various
resources.
2. Interest income or the money income payment that flows from the business enterprises
to owners of the monetary capital.
3. Compensation of employees referring to the money income payments for the services
rendered by labor including those required by law.
4. Profits or proprietor’s income and corporate profit. it should include profits earned by
business organization.
5. Indirect business taxes (ibt) are levied on business in the government. it includes
general taxes, excise tax, custom duties, license fees, and business property taxes.
6. Capital consumption allowance (depreciation) is the allowance for wear and tear of
machinery tools and equipment.

Subsidies refers to the payment of funds, goods, or services by a government, business,

or household for which it receives no good or services in return.

Kinds of Economy are the following:

1. Expanding/growing economy - if investment is greater than depreciation.
2. Static economy - if investment is equal to depreciation.
3. Declining economy - if investment is less than depreciation.

3. Industrial Origin Approach.

It includes the incomes of primary sector, secondary sector, tertiary, and net factor
income
Formula:
Primary sector + industry sector + service sector = gdp – nfirw = gnp – net indirect
business taxes and depreciation allowances = national income.

Depreciation and indirect business taxes

Depreciation is an allowance for capital goods likes machines which have been
“consumed” in the process of production.
Example:
The useful life of a machine – 5 years
Cost of the machine - P20, 000.00
Junk value - 400.00

Solution for yearly depreciated value

𝟐𝟎, 𝟎𝟎𝟎 − 𝟒𝟎𝟎 𝟏𝟗,𝟔𝟎𝟎
= = P 3, 920
𝟓 𝟓

Indirect business taxes is tax imposed by the government on products sold by

businessmen. Sales tax is a tax paid to a governing body for the sales of certain goods
and services. Excise tax are internal taxes that are levied on the sale of specific goods
and services, such as alcohol, fuel and tobacco. It is an indirect tax that is not paid by the
customers directly — instead, the excise tax is imposed on the supplier or the producer,
who then includes it in the product price.
Custom duties is a tariff or tax imposed on goods when transported across international
borders. The purpose of customs duty is to protect each country's economy, residents,
jobs, and environment by controlling the flow of goods, especially restrictive and
prohibited goods, into and out of the country
License fees is a money paid for a right or ability to use a property or asset.
Business property taxes is the tax a business owner is responsible for paying on
company-owned property.
b. Gross domestic product (GDP) is the sum of the market value of all final goods
and services produced within a country. it is measured by using value added approach.

4. Value Added Approach

Value added is simply the difference between the cost of inputs to production and
the price of output at any particular stage in the overall production process.
Real GNP is the sum value of all goods and services in constant price.
Base year is the point of references or benchmark from which constant price of
quantity of goods and services are taken.