Applied Economics: Measuring the Economy - GDP and GNP

 # Introduction to Applied Economics

• Conceptual Focus: This material serves as an introduction to the application of economic theories and principles to real-world situations, specifically focusing on the measurement of a national economy.

• Institutional Origin: The lesson is part of the curriculum at Tarlac Christian College, Incorporated (Approved unto God), emphasizing their "Better Choice" educational approach.

Measuring the Economy: Gross Domestic Product (GDP)

• Definition: Gross Domestic Product (GDP) is defined as the market value of all final products produced by domestic resources within a specific territory.

• Local Mnemonic: In the Philippine context, it is colloquially referred to as "Gawa Dito sa Pinas" (Made here in the Philippines).

• Historical Trends in Philippine GDP:

  • 2023: Estimated at $\$437.15\,B$, reflecting an $8.11\%$ increase compared to the previous year (2022).

  • 2022: Recorded at $\$404.35\,B$, representing a $2.61\%$ increase from 2021.

  • 2021: Stood at $\$394.09\,B$, an $8.94\%$ increase from the economic levels of 2020.

  • 2020: The GDP reached $\$361.75\,B$, which constituted a $4\%$ decline from the 2019 levels, likely influenced by global economic shifts.

Measuring the Economy: Gross National Product (GNP)

• Definition: Gross National Product (GNP) is the market value of all final products produced by the resources of the economy (owned by its citizens) in a given period of time, regardless of where those resources are located geographically.

• Local Mnemonic: In the Philippine context, it is known as "Gawa Ng Pilipino" (Made by Filipinos).

• Resource Ownership vs. Location:

  • While the resources utilized in GNP belong to the citizens (Filipinos), not all of these resources are located within the domestic borders of the economy.

  • Conversely, not all resources physically present in the economy belong to the national economy (as foreign resources may be operating domestically).

The Expenditure Approach to GNP/GDP

• Core Components: The expenditure approach calculates economic output by summing the total spending on final goods and services. The primary components include:

  • Household and government consumption.

  • Government expenditure/purchases.

  • Investments.

  • Exports.

  • Imports.

• Standard Formula:     $GNP = C + I + G + (X - M)$

  • $C$: Consumption Expenditure

  • $I$: Investment

  • $G$: Government Expenditure

  • $X$: Exports

  • $M$: Imports

  • $(X - M)$: Net Exports

Detailed Breakdown of Expenditure Categories

• C - Consumption Expenditure:

  • Durable Goods: Goods that do not wear out quickly (e.g., appliances, vehicles).

  • Services: Intangible products provided by people (e.g., healthcare, education).

  • Non-durable Goods: Goods that are consumed quickly or have a short lifespan (e.g., food).

  • Example Calculation Total: If Durable Goods = $422.00$, Services = $1,592.00$, and Non-durable = $998.00$, the Total Consumption ($C$) = $3,012.00$.

• I - Investment:

  • Residential Fixed: Housing and residential construction.

  • Business Fixed: Capital investment in machinery, equipment, and buildings.

  • Change in Inventories: The value of goods produced but not yet sold.

  • Example Calculation Total: If Residential = $227.00$, Business = $447.00$, and Inventory Change = $39.00$, the Total Investment ($I$) = $713.00$.

• G - Government Expenditure:

  • Includes all government purchases of goods and services.

  • Example Calculation Total: If Government purchases = $925.00$, the Total ($G$) = $925.00$.

• X & M - Exports and Imports:

  • Exports: Goods and services produced and sold to other countries ($X$).

  • Imports: Goods and services bought from other countries ($M$).

  • Example Calculation: If Exports = $428.00$ and Imports = $551.00$, then Net Exports $(X - M)$ = $-123.00$.

• Z - Net Factor Income:

  • Refers to the Net Factor Income From Abroad (NFIA).

  • Example Value: $650.00$.

Solving GNP: Step-by-Step Examples

Transcript Example 1 (Based on Slide 15 Data)

• Given:

  • $C = 3,012$

  • $I = 713$

  • $G = 925$

  • $X = 428$

  • $M = 551$

• Calculation as shown in transcript:     $GNP = 3,012 + 713 + 925 + (551 - 428)$     $GNP = 3,012 + 713 + 925 + 123$     $GNP = 4,773$

Transcript Example 2 (Finding 2021 GNP)

• Problem Statement: The government reported that in the year 2021, it spends $500\text{ billion}$ with a consumption expenditure of $300\text{ billion}$. The report shows an investment of $155\text{ billion}$ and imports of $200\text{ billion}$ compared to exports of $100\text{ billion}$.

• Data Extraction:

  • $G = 500\,000,000,000$

  • $C = 300\,000,000,000$

  • $I = 155\,000,000,000$

  • $M = 200\,000,000,000$

  • $X = 100\,000,000,000$

Transcript Example 3 (Large Scale Figures)

• Given Variables:

  • $I = 562,548,000$

  • $G = 208,171,000$

  • $X = 1,193,462,000$

  • $M = 1,006,845,000$

  • $C = 1,319,719,000$

• Objective: Calculate the GNP.

Student Activity Problems

Problem 1: Year 2025 Forecast

• Context: Based on a government report for the year 2025.

• Values Provided:

  • Government spending ($G$): $4,062,000,000$

  • Consumption expenditure ($C$): $5,803,934,000,000$

  • Investment ($I$): $4,100,083,000,000$

  • Imports ($M$): $159,762,000,000$

  • Exports ($X$): $138,745,000,000$

• Task: Compute the annual GNP.

Problem 2: Year 2024 Philippines Data

• Context: Based on a Philippine Government report for the year 2024.

• Values Provided:

  • Exports ($X$): $5,025,521,000$

  • Imports ($M$): Twice the export amount ($2 \times 5,025,521,000$)

  • Investment ($I$): $60,890,000,000$

  • Government Expenditure ($G$): $62,000,000,000$

  • Consumption ($C$): Spending is less than $10,000,000,000$ of the government expenditure ($62,000,000,000 - 10,000,000,000$)

• Task: Find the GNP.