Bus Econ 2 (Income Approach)

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is a method of computing GDP that measures the income received by all factors of production in producing final goods, which include wages, rents, interest, and profits.

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Income approach

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The income approach to GDP breaks down GDP into four components, these are:

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national income

depreciation

indirect taxes minus subsidies

and net factor income from the rest of the world.

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represents the salaries and wages of workers in the economy paid by firms and by the government, as well as various supplements to wages and salaries such as contributions that employers make to social insurance and private pension funds.

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Employees’ compensation

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is the income of unincorporated businesses.

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Proprietors’ income

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are the income of corporate businesses.

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Corporate profits

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is the interest paid by business. Interest paid by households and by the government is not counted in GDP because it is not assumed to flow from the production of goods and services.

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Net interest

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is the income received by property owners in the form of rent

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Rental income

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represents the consumption of existing capital stock.

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Depreciation

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account for things like taxes on the use or purchase of goods and services and grants from government to firms.

Firms do not include indirect business taxes in computing their profits.

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Indirect Taxes less Subsidies

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are payments made by the government for which it receives no goods or services in return.

are subtracted from national income to get GDP.

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Subsidies

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measures the difference between the earnings of Philippine residents in other countries and foreign residents in the Philippines.

It represents the earnings from labor services and ownership of assets.

For example, this item includes the earnings of Overseas Filipino Workers (OFWs).

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Net factor income from the rest of the world

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includes business transfer payments and the statistical discrepancy.

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Other

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are deducted from corporate profits and are not included as income elsewhere. Therefore, they need to be included to get total income.

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Business transfer payments

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adjusts for errors In the data collection.

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Statistical discrepancy

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is a method of computing GDP that involves taking the sum of the value added of all firms in the economy.

It is calculated by taking the difference between a firm’s sales and its purchases from other firms.

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Value added approach or Industry origin approach

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Value Added formula

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= Sales – Purchases from other firms

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represents the value added of three sub-sectors

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Agriculture, Fishery and Forestry sector

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– captures the value added from the production of agricultural crops (e.g., rice, corn, banana, etc.), ornamental plants and livestock.

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Agriculture sector

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includes commercial and municipal fishing, aquaculture, and the harvesting of marine products.

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Fishery sector

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represents activities such as logging and gathering of other forestry products

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Forestry sector

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represents the value added of firms engaged in mining and quarrying, manufacturing, construction, and utilities. The bulk of the value added for this sector comes from manufacturing

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Industry sector

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is made of the following sub-sectors, as follows: (a) transportation, communication, and storage (b) trade (c) finance (d) ownership of dwellings and real estate (e) private services, and (f) government services

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Services sector

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is the most important item in National Income Accounting, it is also useful to know other concepts such as gross national product (GNP),

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GDP

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is total production by factors of production located within the country

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GDP

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is total production by factors of production owned by that country.

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GNP

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is the difference between the receipts of factor income earned by Filipino citizens from the rest of the world minus payments of factor income earned by foreigners in the Philippine.

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Net factor income

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is the total income of households. It refers to the income received by households after paying social insurance taxes but before paying personal income taxes.

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Personal income

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The amount of income that households have to spend or save is called

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disposable personal income, or after-tax income

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There are three categories of spending.

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a. personal consumption expenditures b. interest paid by consumers to business, and c. personal transfer payments to foreigners

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is the amount of disposable personal income left after total personal spending in a given period.

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Personal saving

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is the percentage of disposable personal income saved, an important indicator of household behavior.

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personal saving rate

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T/F

A low saving rate means households are spending a large amount of their income.

A high saving rate means households are cautious in their spending

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True

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is the production of goods and services valued at current prices.

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Nominal GDP

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is the production of goods and services valued at constant prices. We calculate real GDP by first choosing one year as a base year.

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Real GDP

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Nominal GDP uses current prices to place a value on the economy’s production of goods and services.

Real GDP uses constant base-year prices to place a value on the economy’s production of goods and services

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true

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By contrast, by holding prices constant at base-year levels, real GDP reflects only the quantities produced. From these, we can compute a third, called

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the GDP deflator