The Four Basic Economic Problems (2)

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Measuring the Economy

Measuring the Economy

1. Gross Domestic Product (GDP)

GDP is the market value of the overall production within a country, including the production made by foreigners in the country.

Formula:

GDP = C + I + G + NX

  • C = Consumption
  • I = Investment (Net Inflow = Inflow – Outflow)
  • G = Government Spending
  • NX = Net Exports (Exports – Imports)

2. Gross National Product (GNP)

GNP is the market value of the overall production of all citizens of a country, both inside and outside the country, including remittances from Overseas Filipino Workers (OFWs) and income from Filipino-owned corporations abroad.

Formula:

GNP = GDP + NYROW

  • GDP = Gross Domestic Product
  • NYROW = Net Income from the Rest of the World

Exercises:

  1. Differentiate between GNP and GDP in your own words.
  2. Based on World Bank data, the Philippines’ GNP for 2019 was US$416.2 billion, while GDP was US$376.8 billion. What was its NYROW for 2019?
  3. Thailand’s 2019 GDP was US$544 billion, while Malaysia’s was US$365 billion. How do these compare with the Philippines’ GDP? Which country has been more efficient in managing its economy?

3. Expenditure Approach

The Expenditure Approach measures the economy by adding all the expenditures of the end-users of the output produced in a given year.

Formula:

GDP = C + I + G + NX

  • C = Consumption of households (HH)
  • I = Investment of business firms (BF), e.g., fixed capital, inventories
  • G = Government spending
  • NX = Net Exports (Exports - Imports)
  • NYROW = Factor Payments, e.g., remittances from overseas contract workers

4. Income Approach

The Income Approach measures the economy by adding all the income received by owners of the resources in the production process.

Formula:

GDP = Y + I + GI

  • Y = Income of households (HH), e.g., rent, wages
  • I = Income of business firms (BF), e.g., interest, profit
  • GI = Government income
  • NYROW = Net Primary Income from the Rest of the World

5. Accuracy Check

To ensure the accuracy of the economy's measurement, the GDP and GNP calculated through both the Expenditure and Income approaches must be equal.

6. Exercise: Calculate GDP and GNP of the Philippines in 2001 (in million pesos)

Expenditure Approach:

  • Consumption: 779,011
  • Capital Formation: 206,300
  • Government Spending: 79,868
  • Exports: 424,966
  • Imports: 485,408
  • Net Factor Income from Abroad (NYROW): 61,879

GDP Calculation (Expenditure Approach):

GDP = C + I + G + NX = 779,011 + 206,300 + 79,868 + (-60,442) = 1,004,737

GNP Calculation (Expenditure Approach):

GNP = GDP + NYROW = 1,004,737 + 61,879 = 1,066,616

Income Approach:

  • Agriculture, Fishery, and Forestry Income: 197,737
  • Industry Sector Income: 336,697
  • Service Sector Income: 454,824
  • Net Factor Income from Abroad (NYROW): 61,879

GDP Calculation (Income Approach):

GDP = Y + I + GI = 197,737 + 336,697 + 454,824 = 989,258

GNP Calculation (Income Approach):

GNP = GDP + NYROW = 989,258 + 61,879 = 1,066,616

Differences between Expenditure and Income Approaches:

  • GDP Difference: 1,004,737 - 989,258 = 15,479
  • GNP Difference: 1,066,616 - 1,051,137 = 15,479

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