Module 4 National Income Accounting

• National income accounting

  A set of rules and statements of meaning for measuring economic activity in the aggregate economy. Way of measuring total production broken down into sub-aggregates.
• Economic growth

  The increase in real gross domestic product (GDP) in the long-run. An outward shift in the production-possibility frontier.
• Gross domestic product (GDP)

  The market value of all final goods and services produced within the national borders of a country for a given period of time.
• Components of GDP

  • Consumption
  • Investment
  • Government Spending
  • Net Exports
• Consumption

  The largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Only expenditure-based consumption is counted.
• Investment

  Business investment in equipment, but does not include exchanges of existing assets. Spending by households (not government) on new houses is also included in Investment.
• Buying financial products

  Classified as 'saving', as opposed to investment.
• Government Spending

  The sum of government expenditures on final goods and services. Does not include any transfer payments, such as social security or unemployment benefits (since there is no economic benefit return).
• Net Exports

  Exports (X) represents gross exports. Imports (M) represents gross imports. Net exports is simply written as NX.
• C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count.
• Approaches in assessing GDP

  • Expenditure Approach
  • Income Approach
  • Output Approach
• Expenditure Approach

  Output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent.
• Income Approach

  States that all economic expenditures should equal the total income generated by the production of all economic goods and services.
• Total National Income


  The sum of all wages, rent, interest and profits.
• Sales Taxes


  Consumer taxes imposed by the government on sales of goods and services.
• Depreciation

  Cost allocated to a tangible asset over its useful life.
• Net Foreign Factor Income (NFFI)

  The difference between the total income that a country's citizens and companies generate in foreign countries, versus the total income foreign citizens and companies generate in the domestic countries.
• Main types of factor income

  • Employee compensation (cost of fringe benefits, including unemployment, health, and retirement benefits)
  • Interest received net of interest paid
  • Rental income (mainly for the use of real estate) net of expenses of landlords
  • Royalties paid for the use of intellectual property and extractable natural resources
• Output Approach

  Also called "net product" or "value added" method. It focuses on finding the total output of a nation. Only the final value of a good or service is included in the total output.
• Nominal GDP

  GDP calculated at existing prices. Calculates the current dollar value of the output of the economy.
• Real GDP


  Nominal GDP adjusted for inflation. Measures the output valued at constant prices.
• GDP Deflator


  The ratio of nominal GDP to real GDP. Reveals the status of overall level of prices in the economy. Measures the price of output relative to its price in the base year.
• Real gross domestic product (real GDP)

  Economists' initial measure of domestic output. Gross Domestic Product (GDP) is the aggregate market value of all final goods and services in an economy in a one-year period.
• Types of economic growth

  • Short-run Economic Growth
  • Long-run Economic Growth
• Short-run Economic Growth

  The business cycle refers to economy-wide fluctuations in production, trade, and economic activity over several months or years. The short-run variation in economic growth is called the business cycle.
• Long-run economic growth

  Measured as the percentage rate increase in the real gross domestic product. Includes the three approaches to determine the GDP.
• Factors that Impact Economic Growth

  • Growth of productivity
  • Demographics
  • Labor force participation
  • Human capital
  • Inequality
  • Trade
  • Quality of life
  • Employment rate
• Labor productivity


  The value that each employed person creates per unit of his or her input.
• Determinants of labor productivity

  • Human capital
  • Technological change
  • Economies of scale
• Sectors in the economy

  • Household, or consumer, sector
  • Business sector
  • Government sector
  • Foreign sector
• Final goods

  Goods or services at their furthest stage of production at the end of a year.
• Intermediate goods

  Goods that are used in the production of other goods, are excluded from GDP calculations.
• Items counted in GDP

  • Final goods and services
  • Intermediate goods that have not yet been used in final goods and services
  • Raw materials that have been produced, but not yet used in the production of intermediate or final goods
• Total National Income (TNI)


  The sum of all wages, rent, interest and profits.
• Sales Taxes (T)

  Consumer taxes imposed by the government on sales of goods and services.
• Depreciation (D)

  Cost allocated to a tangible asset over its useful life.
• Net Foreign Income Factor (NFFI)

  The difference between the total income that a country's citizens and companies generate in foreign countries, versus the total income foreign citizens and companies generate in the domestic countries.
• Gross Domestic Product (GDP)


  The aggregate market value of all final goods and services in an economy in a one-year period.
• Gross National Product (GNP)

  The total final output of citizens and businesses of an economy in a one-year period. The economic activity of Filipino citizens working abroad is counted in the Philippine GNP.
• To shift from GDP to GNP

  We must add net income factor to GDP. Net foreign factor income is the income from foreign domestic factor sources minus foreign factor income received domestically. We must add the foreign income of our citizens and subtract the income of residents who are not citizens.