Economic Development - A Nation's Wealth

Economic Development Lesson

1. A Nation’s Wealth Lecture 5: Economic Development

2. A Nation’s Wealth For some, the Gross Domestic Product (GDP) may be the easiest and most accessible measure of economic well-being of a nation that can be associated with the standard of living of its people.

3. A Nation’s Wealth Standard of living as a social indicator may be attributed to the country’s social mobility, environment, and even income and poverty.

4. A Nation’s Wealth Adam Smith , the father of economics, in 1776, published a paper titled, “An Inquiry into the Nature and Causes of the Wealth of Nations” or simply, “The Wealth of Nations , ” that tackled the foundations of a lot of economic concepts.

5. A Nation’s Wealth

6. Gross Domestic Product (GDP) The market is composed of buyers and sellers who may be the government, firm, or household, and the interaction of the two creates income and expense that may be used to measure the goods and services that flow within the economy or the circular flow of national income .

7. Gross Domestic Product (GDP) Rafael sells buko pie to Ella at Php280. Income earned Php280. Expense incurred Php280.

8. Gross Domestic Product (GDP) The transaction shows that there is an equal monetary value that is involved, that is Php280, and both contributed to the economy as described in the circular flow of income . This is a simple instance of money flowing in and out of the markets of goods and services and the markets for factors of production.

9. Gross Domestic Product (GDP) This can be used to measure the gross domestic product (GDP) , which is considered by economists as a major measurement of a nation’s income, of course, at a given time and at a given place or region.

10. Gross Domestic Product (GDP) It is important to note that income should always be the same as the expense , although the case is not true all the time. Every economy wants a long-term economic growth; this is an indication of development .

11. Gross Domestic Product (GDP) There is a need to know if the economy is growing or contracting, and GDP can estimate such. GDP is the peso value of all final goods and services that are produced in one country in a year.

12. Gross Domestic Product (GDP) Finished goods do not include intermediate goods, such as the car seats, window shields, rubber tires, and stereo system for cars that are locally manufactured.

13. Gross Domestic Product (GDP) It is important to note that we include in the GDP only domestically produced goods and services , which would mean, for example, Apple products that are known to be produced in China are not included.

14. Gross Domestic Product (GDP) However, it can be comprised in the computation of the Gross National Product (GNP) by determining the difference between the two. Goods that are already included in the GDP of the previous periods are not included , like a house purchased years back or used clothes that are sold in the ukay-ukay .

15. Gross Domestic Product (GDP) Furthermore, GDP computation excludes financial transactions like investments in stocks and bonds as there is nothing really produced here; it is just a capital transfer. Non-material and illegal goods are not counted in the determination of the GDP as well.

16. Components of the GDP

17. Components of the GDP: Expenditure Approach The expenditure approach in computing the GDP summarizes the total expenses to buy final goods and services by households, firms, and the government.

18. Components of the GDP: Expenditure Approach GDP = C + I + G + (X – M) where: GDP = Gross Domestic Product C = Total spending on consumption goods and services I = Purchase of plants, equipment, buildings, etc. G = Government spending on goods and services (X – M) = Net exports or exports less the imports

19. Components of the GDP: Expenditure Approach Consumer spending is the peso value that households are spending for final goods and services in a year, such as supplies used at home, food, restaurant spending, and many more.

20. Components of the GDP: Expenditure Approach Government spending includes both national and local government units’ spending to acquire goods and services that are used for public facilities, such as when the government hires private contractors to build bridges, roads, hospitals, and the like.

21. Components of the GDP: Expenditure Approach Net exports are just the difference between the final goods and services derived from importations from exportations. The ideal situation is to have trade surplus , if not a trade balance, wherein the value of exports exceeds imports, or they are equal or balanced.

22. Components of the GDP: Income Approach The income approach in computing the GDP summarize the compensation of employees, net interest, rental income, corporate profits, and income of other firms.

23. Components of the GDP: Income Approach GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income Where: Total National Income = the sum of all wages, rent, interest, and profits Sales Taxes = The tax imposed on consumers for the sale of goods and services Depreciation = The cost allocated to capital assets over an estimated useful life Net Foreign Factor Income = The income that citizens make while abroad, less the income generated by foreigners in the country

24. Components of the GDP: Illustrative Example For example, a country has the following data for the year 2022 (in billions of dollars). Transfer payments $64 Interest income 160 Depreciation 26 Wages 77 Gross private investments 134 Business profits 210 Indirect business taxes 84 Rental income 85 Net exports 28 Net foreign factor income 22 Government purchases 166 Household consumption 314

25. Components of the GDP: Illustrative Example Using the expenditure approach : Household consumption (C) $314 Government purchases (G) 166 Gross private investments (I) 134 Net Exports (X – M) 28 GDP (Expenditure Approach) $642

26. Components of the GDP: Illustrative Example Using the income approach : GDP = NI + T + D, where NI = W + R + I + (X – M): **Net Income = Wages ($77) + Rental Income ($85) + Interest Income ($160) + Business Profit ($210) = $532. Hence: Net Income (NI) $532 Indirect Business Taxes (T) 84 Depreciation (D) 26 GDP (Income Approach) $642

27. Uses of the GDP With the use of GDP, we can compare the economic performance on an annual basis by determining the growth rate to help us understand where the economy stands.

28. Uses of the GDP For example, we want to know the percentage increase or decrease of GDP before the pandemic in 2019 and during pandemic in 2020. Using the data provided by the World Bank, we can compute: % Change Increase/ Decrease in GDP = = The answer is a percentage decrease of approximately 3.86%.  

29. Uses of the GDP To assess the efficiency and effectiveness of a government , the GDP is an indication of a positive or negative effect of the policy as an indicator of its success or failure and the extent of how economy is helped or hurt by this policy.

30. Uses of the GDP In effect, the government learns to refine and repeat the successes, and stop the mistakes and identify the economic stimulants that impact them. Of course, his is just a minor indicator of efficiency and effectiveness that may be used.

31. Uses of the GDP The third use of the GDP is to compare it with that of other countries. A higher GDP growth means a better quality of life and a higher standard of living in general . We determine the superpowers, tigers, rising tigers, etc., boosting the economic reputation and enhancing more business transactions with them.

32. Any Question?

33. Final Reminder: Please submit your asynchronous outputs on or before Wednesday, November 8, 2023, at 12:00nn . This is the final deadline for all outputs before the computation of prelim grades.