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E. CURRENT GNP VS. REAL GNP

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Van Maythel Celocia

on 14 August 2014

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Transcript of E. CURRENT GNP VS. REAL GNP

E. CURRENT GNP VS. REAL GNP
FRAMEWORK & RATIONALE
CURRENT GNP

a value using current prices


REAL GNP


a value using a base or constant price; the growth rate in Real GNP is theoretically the growth rate in volume, thus reflecting the movement of economic activities through time.

Current GNP


=
Pc
Qc

Real GNP

=
Pb
Qc

where:

Pc
=
Current Price

Pb
=
Base Price

Qc
=
Current Volume of Goods and Services

Economists typically use nominal GDP (the value of GDP at current price levels) to compare multiple economies at current levels. Real GDP (the value of GDP at a base year price level) is most often used to compare a single economy’s output at various points in time.
Real GNP is computed from Current GNP using a price coefficient. The coefficient is in the form of a weighted price index for all the products as based on their relative importance in the expenditure basket.
INTRODUCTION
The purpose of this topic is to study how the gross national product is measuring the economic activity of a nation. The concept is defined and explained. The components are analyzed in the expenditure and the income approach, and the two are reconciled. Adjustments for inflation are presented. The concept is compared to other measures of economic welfare.
NATIONAL INCOME ACCOUNTING
This is used to determine the level of economic activity of a country. Two methods are used and the results reconciled: the expenditure approach sums what has been purchased during the year and the income approach sums what has been earned during the year. Just as firms need to know how well they are doing, so does a country. National income accounting provides the statistics to determine if the economy is encountering difficulties.
GNP ACCOUNTING: MEANING, PURPOSE, and LIMITATIONS DEFINITION
Gross National Product (GNP)
the market value of all final products produced by the resources of the economy during a specific period of time.
a measure of a country's economic performance, or what its citizens produced (i.e. goods and services) and whether they produced these items within its borders.
the market value of all the products and services produced in one year by labor and property supplied by the citizens of a country.
PURPOSE

• GNP is a measure of aggregate economic activities as required by Economic Planning and Policy Making.
• GNP reflects the value of the economy’s production since it also includes the value of products from the lower stages of production.
• GNP figures show the structure of production according to end use and factor contribution.

LIMITATION

• GNP camera is a formal tool which cannot picture the informal and hence, undeclared activities in the economy. GNP vs. GDP


GROSS NATIONAL INCOME AND GROSS DOMESTIC PRODUCT
BY INDUSTRY:
1st Quarter 2012 and 1st Quarter 2013

AT CURRENT AND CONSTANT 2000 PRICES, IN MILLION PESOS

At Current Prices

INDUSTRY/INDUSTRY GROUP Q1 2012 Q1 2013 Growth Rate(%)
Agriculture, Hunting. Forestry, and Fishing
301,616 310,076 2.8
Industry
779,722 865,333 11.0
Services
1,336,453 1,481,168 10.8

GROSS DOMESTIC PRODUCT 2,417,791 2,656,578 9.9
Net Primary Income
484,779 514,204
GROSS NATIONAL INCOME 2,902,570 3,170,782 9.2

At Constant 2000 Prices

INDUSTRY/INDUSTRY GROUP Q1 2012 Q1 2013 Growth Rate(%)
Agriculture, Hunting. Forestry, and Fishing
172,560 178,340 3.3
Industry
478,924 530,994 10.9
Services
833,337 891,676 7.0

GROSS DOMESTIC PRODUCT 1,484,821 1,601,010 7.8
Net Primary Income
289,052 298,355
GROSS NATIONAL INCOME 1,773,874 1,899,364 7.1



Source: National Statistical Coordination Board (NSCB)
Posted: 29 August 2013

Price Index
=
Pc

------

Pb


Pb
=
Pc
-
-----------------

Price Index

Then:
Real GNP
=
Pb
Qc

=
Pc
Qc
-----------------

Price Index

=
CURRENT GNP
---------------------

PRICE INDEX

GNP vs. GDP
• Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership.
• While GNP measures the output generated by a country's enterprises (whether physically located domestically or abroad) GDP measures the total output produced within a country's borders - whether produced by that country's own local firms or by foreign firms.

• When a country's capital or labour resources are employed outside its borders, or when a foreign firm is operating in its territory, GDP and GNP can produce different measures of total output.
• The difference between GDP and GNP is net unilateral transfers and
factor income of foreigners.
• GDP is calculated either by measuring all income earned within a country, or by measuring all expenditures within the country, which should approximately be the same.

2010 7.63 9003.5 199.6 2155 45.11
2011 3.64 9706.3 224.1 2379 43.31
2012 6.82 10564.9 250.2 2611 42.23
2013 7.16 11546.1 272.2 2792 42.45

Year GDP growth GDP in GDP in GDP per capita Peso vs Dollar
in percent Php billion USD billion in USD Exchange Rate

GDP of the Philippines using data taken from the International Monetary Fund
TWO WAYS OF CALCULATING THE NATIONAL INCOME
EXPENDITURE APPROACH

It sums up personal consumption expenditures of households, government consumption, investment or capital formation, and exports less imports. This approach yields GDP by type of expenditure. Common sources of these data are household expenditures surveys, retail and wholesale trade surveys, producer surveys, customs records, government accounts, and special surveys done by the statistical centers.

Equation:

GNP
=
C
+
I
+
G
+ (
X
-
M
)
Where

GNP
= Gross National Product

C
= Consumption

I
= Investment

G
= Government Spending

X
= Exports

M
= Imports
(
X
-
M
) = Net Exports

1. Personal Expenditure (C)
2. Gross Domestic Capital Formation or Investment (I)
3. Government Expenditures (G)
4. Net Exports (X - M)
5. Statistical Discrepancy (SD)
Gross Domestic Product (GDP)
6. Net Factor Income (NFY)
Gross National Product (GNP)


P xxxxx
xxxxx
xxxxx
xxxxx
P xxxxx
xxxxx
xxxxx
P xxxxx

Personal Consumption Expenditures

Durable goods
are the tangible goods purchased by consumers that tend to last for more than a year. Common examples are cars, furniture, and appliances. The two most important subcategories of durable goods in the National Income and Product Accounts are "motor vehicles and parts" and "furniture and other household equipment."
 Nondurable goods
are the tangible goods purchased by consumers that tend to last for less than a year. Common examples are food, clothing, and gasoline. In fact, the three most important subcategories of nondurable goods in the National Income and Product Accounts are listed as "food," "clothing and shoes," and "gasoline and oil."
 Services
are activities that provide direct satisfaction of wants and needs without the production of tangible goods. Common examples are information, entertainment, and education. The four primary subcategories of services in the National Income and Product Accounts are "housing," "household operation," "transportation," and "medical care."

Investments

Ownership Investments
are what comes to mind for most people when the word "investment" is batted around. Ownership investments are the most volatile and profitable class of investment. The following are examples of ownership investments:

Stocks
are literally certificates that say you own a portion of a company. More broadly speaking, all traded securities, from futures to currency swaps, are ownership investments, even though all you may own is a contract.

Business
. The money put into starting and running a business is an investment. Entrepreneurship is one of the hardest investments to make because it requires more than just money.

Real Estate
. Houses, apartments or other dwellings that you buy to rent out or repair and resell are investments.
 Precious Objects
. Gold, Da Vinci paintings and a signed LeBron James jersey can all be considered an ownership investment - provided that these are objects that are bought with the intention of reselling them for a profit.

Government Expenditures

Government expenditure
is a term used to describe money that a government spends. Expenditure occurs on every level of government, from local city councils to federal organizations. There are several different types of government expenditure, including the purchase and provision of goods and services, investments, and money transfers.


TYPE OF EXPENDITURE


Personal Consumption Expenditure
Government Consumption
Capital Formation
Exports
Imports
Statistical Discrepancy

GDP
Net factor Income from the rest of the world
GNP



947,799
76,465
225,601
541,982
630,181

42,866

1,204,533
101,002
1,305,535

INCOME APPROACH

This method of determining GDP is to add up all the income earned by households and firms in the year. The total expenditures on all of the final goods and services are also income received as wages, profits, rents, and interest income.
Note that both the income and expenditure approaches must yield the same results of GDP. This is because output from the production of goods and services is, by economic definition, equal to the total expenditures on goods and services.
In other words, output (production approach) is either consumed and/or saved (expenditure approach). Estimation adjustments due to different data sources are reflected under the item statistical discrepancy. Net factor income from the rest of the world (NFI) is added to the GDP to determine the GNP. Technically, the NFI is defined as compensation and property income of Philippine residents earned abroad less compensation and property income earned in our country by nonresidents of the Philippines. This is popularly referred to, however (in a narrow sense), as the OFW remittances.

Equation:

NI = PY + CY + GY
(wages + rent + interest income + business profit)
GNP = [NI + (IT - S)] + DA


Where

PY
= Income of Person

CY
= Corporate Income

GY
= Government Income from Capital

NI
= National Income

IT
= Indirect Tax

S
= Subsidies

DA
= Depreciation Allowance

GNP
= Gross National Product

An alternative method of calculating GNP using the Income Approach is “
RIPSAW
.”

R
= rents
I
= interests
P
= profits
SA
= statistical adjustments (corporate income taxes, dividends, undistributed corporate profits
W
= wages

Labor Income (W):
Salaries, wages, and fringe benefits such as health or retirement. This also includes unemployment insurance and government taxes for Social Security.

Rental Income (R):
This is income received from property received by households. Royalties from patents, copyrights and assets as well as imputed rent are included.

Interest Income (i):

Income received by households through the lending of their money to corporations and business firms. Government and household interest payments are not included in the national income.

Profits (PR):
The amount firms have left after paying their rent, interest on debt, and employee compensation. GDP calculation involves accounting profit and not economic profit.

1.
Income of Person (PY)
2.
Corporate Income (CY)
3.
Government Income from Capital (GY)
National Income (NI)
4.
Indirect Tax (IT)
Less:
Subsidies
5.
Capital Consumption Allowance or Depreciation Allowance (DA)
Gross National Product

Examples:
Table 1: Expenditures
Transfer Payments
Interest Income
Depreciation
Wages
Gross Private Investment (I)
Business Profits
Indirect Business Taxes
Rental Income
Net Exports (X-M)
Net Foreign Factor Income
Government Purchases (G)
Household Consumption (C)

P 54
150
36
67
124
200
74
75
18
12
156
304

GDP = C + G + I + (X - M)
In this case the

C
is represented by Household Consumption which is P 304.
G
refers to Government Spending which is P156.

I
is gross private investment and is P124.
(X - M)
is the net exports and in the table is shown to be P18.

Therefore:
GDP
= P304 + P156 + P124 + P18

GDP
=
P602


Table 2: Income
Transfer Payments
Interest Income (i)
Depreciation
Wages (W)
Gross Private Investment
Business Profits (PR)
Indirect Business Taxes
Rental Income (R)
Net Exports
Net Foreign Factor Income
Government Purchases
Household Consumption

P 54
150
36
67
124
200
74
75
18
12
156
304

NI = W + R + i + PR
W
is the wages that are represented by P67 in the table.
Rental income is the
R
and is P75.
Interest income is
I
and is P150.
PR
are business profits and are P200.
Therefore:
NI
= P67 + 75 +150 + 200

NI
= P492

GNP
=
NI + Indirect Business Taxes + Depreciation

GNP
=P492 + 74 +36

GNP = P602

OBJECTIVES
To know the meaning and significance of Gross National Product Accounting
To identify the limitations of GNP Accounting
To identify the different approaches in computing the GNP
To differentiate Expenditure approach from Income approach in computing the GNP
To understand and know the difference between National Product and Net National Income
To define, understand the significance of Current GNP and Real GNP and differentiate one from another


PRICE INDEX
– also known as GNP deflator, an economic metric that accounts for the effects of inflation in the current year's gross national product by converting its output to a level relative to a base period. The GNP deflator is calculated with the following formula:

GNP Deflator = Nominal GNP
-------------- x 100

Real GNP
The GNP deflator provides an alternative to the Consumer Price Index (CPI). The CPI is based upon a basket of goods and services while the GNP deflator incorporates all of the final goods produced by an economy. This allows the GNP to more accurately capture the effects of inflation since it's not limited to a smaller subset of goods.
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