National Income Msurement

CHAPTER 2
NATIONAL
INCOME (GDP and GNP)
MEASUREMENT
What is
income?
Income is the money earn or

paid as a reward for the
resources owned.
For example:
A worker earn income in the
form
of monthly payment.
Instead,
What is
National
Income?
4
National Income
is defined as:
the total value of final outputs
which comprises of goods and
services produced by a country
for a particular period of time,
usually a year.
Tucker, defined national

income
as:
total income earned by
resources owners, that is:
rents, wages, interest and
profit.
National Income:
is the total amount of money
that factors of production earned
during a year.
This includes mainly payments of:
wages,
rents,
profits and
interest of capital.
7
NATIONAL INCOME
= NATIONAL PRODUCT
= NATIONAL
EXPENDITURE
(NI = NP =NE)
Or
NI = National Product (NP)
The national product refers to the

value of output produced by an
economy during the course of a
year.
Or
NI = NP = National
Expenditure
refers to the value of money spent
on
goods and services in the
economy in a year.
9
GDP and GNP
GDP = Gross Domestic Product, is

the value of all final goods and
services produced by all sectors of
the economy the citizens or foreign
sectors within a country.
GNP = Gross National Product, is
the value of all final goods and
services produced by all citizens of
a country (within a country or
abroad).
10
Circular Flow of
Income Model:
The basic circular flow model
provides
a general picture of the
interactions in terms of :
income, output and
expenditure
among all
sectors in an economy.
11
Circular Flow of
Income Economic
Models
3 types:
A 2-sector model of circular flow

- Comprises of Households and Firms sectors
- Comprises of Households , Firms and
Government sectors
- Comprises of Households, Firms,
Government and Foreign sectors
12
The 2-sector circular flow

of national income and expenditure
Y = C+I
Expenditure, C
on goods &
services
HOUSEHOLD
S
FIRMS
Income,Y
Wages,
rent,
interest,
profit
Factor payment
Assumptions in a
2 sector Circular Flow
model
All income received by households will

entirely be spend on consumption.
The households in the market will entirely
purchase all goods and services produced
by firms.
Therefore,
total income = total

expenditure = total output
14
The 3 sector circular flow of national income and

expenditure
Y = C+I+G
Net Taxes
Net Taxes
G.
Expenditure
G. Expenditure
GOVERNMENT
Expenditure, C
Financial
Institutions
FIRMS
HOUSEHOLD
S
Income,Y
15
Assumptions in a 3sector
Circular Flow model
C: households is assumed to spent only a

portion of their income on consumption.
Part of it as savings in financial institutions and
for paying taxes.
I: Investors are getting loans for capital
investment thus produced goods and services in
an economy.
G: Government expenditure will be made based
on tax revenue collected.
t: when government sector is included in the
model; tax revenue (t) will be collected (from
households personal income tax, and from
firms corporate income tax).
16
The concept of disposable

income
The household income (Y) that can be
spent by households will now be lesser
after deducting the tax portion (t) paid to
government.
It is now called as:
disposable income (Yd).
Yd = Y t.
and Disposable NI = NI t.
17
The 4-sector circular flow of national income and expenditure

Net Taxes
Net Taxes
G.
Expenditure
GOVERNMENT
G. Expenditure
Expenditure, C
Financial
Institutions
HOUSEHOLD
S
Y = C+I+G+(X-M)
Income,Y
FIRMS
FOREIGNERS
Assumptions in a 4
sector Circular Flow
model now supply resources
Households
to both
domestic and foreign markets. Households
also consume both local and imported
goods.
Firms purchased capital goods and engaged
foreign workers from abroad to help them
produce more new goods and services. They
also exports goods and services produced to
abroad or overseas.
Government involves either directly or
indirectly with foreign sector. They may
import as well as exports goods and services
to abroad.
19
Lets have a
5 minutes break
20
Methods of Measuring
National Income
NI can be measured using 3 common
approach:
a)
Income approach
b)
Output approach
c)
Expenditure approach
Irrespective of which approach used in
calculating NI, will give us the same
value
21
i) INCOME APPROACH
National Income is the total money

values of all incomes received by
productive persons and enterprises in
the country during the year.
It is the total income of all factors of
production including the income of
self-employed
person,
labourers,
capital and land (L,L,K,E)
22
Transfer Payment
should not be included in calculating NI

to avoid double counting problem.
Transfer payment refers to income
received without any direct contribution
to the production of goods and services.
is simply transferred from one group or
people to another; without the recipients
adding any value to production or volume
of goods and services in the country.
23
e.g; Transfer Payment
Pensions
Welfare benefits
Scholarships
Unemployment benefits
Sale of a second-hand goods e.g.
an existing house
Allowances to housewife
Interest on national debt
24
Example1:
En. Ahmad previously was a self-employed man with an
income of RM1, 500. He later quit from business become an
employee of a manufacturing company and earn a salary of
RM3, 200 per annum. In closing down his business, he had
to dismiss two assistants, each previously receiving a
salary of RM700 and RM800 respectively. Each of the
assistants subsequently now received social security
benefits (unemployment benefit) worth RM300 per month.
What is the net change in national income?
The change in national income as a result of this was:
Previously self-employed
RM1, 500
Presently employed
+ RM3, 200
Dismissal of 2 assistants
RM1, 500
__________
Net Increase of NI is:
+ RM 200
Social security benefit is an example of transfer payment,

25
so is not included in the calculation of national income.
Total Domestic vs Total

National Income
Total Domestic Income is the total income earned

within a territorial or geographic boundary.
It includes income earned by its citizens as well as its
non-citizens i.e. foreign workers residing or working
in the country.
Total National Income is the total income earned by
citizens of the country irrespective whether the
citizens reside / working in the country or outside the
country (abroad).
It will exclude all income earned by foreign workers in
the country.
26
Example 2:
Given the following data, find the national
income of country XYZ;
Domestic Income
RM800m
Income paid abroad
RM200m
Income received from abroad RM180m
Answer: The national income of country
XYZ is as follows:
RM800m 200m + 180m = RM780m
27
Personal Income vs Personal

Disposable Income
Personal Income is the gross receipt of

income regardless of its source. It can
come from productive and non-productive
sources (transfer payment). And minus the
contribution to Employees Provident Fund
(EPF) and contribution to SOCSO.
Thus it is totally different from gross
earning of factor income (GDI or GNI).
Personal Disposable Income is gross
personal income less by the personal
income tax paid.
28
Income Approach
The components of this approach include:
Wages and salaries
Interest and dividends
Rent and imputed rent
Profits: distributed and undistributed profits,
income of self-employed
= Gross Domestic Income
(at factor cost)
Income paid abroad

+ Income received from abroad
= Gross National Income
XXXX
Depreciation or capital consumption
= Net National Income
XXXX
(OR NATIONAL INCOME)
RM xxx
xxx
xxx
xxx
xxx
XXXX
xxx
xxx
xxx
29
ii) OUTPUT
APPROACH
Also known as Product

Approach.
National Income (=GNP) is
equivalent to the money value of
all goods and services produced
by all sectors in the country
during a year.
30
The problem of double

counting:
To avoid double counting, we

only sum-up all the valueadded of each sectors or at
each stage of production to give
us the national income value.
31
Value-added concept
a)
To avoid double counting, calculation must be

based on either one of the followings:
Measure only the total market
value of all final goods and
services produced in the
country.
OR
b) Calculate national output based on the value
added.
32
EXAMPLE:
Firm Stage of Production
Purchasing
Selling
Value
____
________________
Price (RM) Price (RM) Added (RM)
A
Landowner sells trees
100
100
to sawmill owner
B
Sawmill owner cut into
100
180
80
timber sheets to furniture
manufacturer
C
furniture manufacturer
180
290
110
turns timber sheets into
furniture and sells to retailer
D
retailer sells furniture to final
290
420
130
consumer
TOTAL VALUE
570
990
420
Total value added

= Total value of Sales Cost of intermediate goods
= 990 570 = 420
The concept of Market

Price and Factor Cost
In most cases, Market Price (MP) > Factor cost

(FC)
Market Price = FC + indirect taxes subsidies
OR
Factor Cost = MP indirect taxes + subsidies
34
Output Approach
The components are:

The total value of final goods and services in the
economy or the total sum of value-added of all
industry or stage of production.
= Gross Domestic Product at market price
(GDP at mp)
Income paid abroad

+
Income received from abroad
= Gross National Product at market price
(GNP at mp)
Indirect taxes or taxes on expenditure

+
Subsidies
= Gross National Product at factor cost
(GNP at fc)

= Net National Product at factor cost
(NNP at fc OR NATIONAL INCOME)
RM
XXXX
xxx
xxx
XXXX
xxx
xxx
XXXX
xxx
XXXX
35
iii) EXPENDITURE
APPROACH
4 components included here:

a) Household or consumer expenditure on
consumption goods, (C).
b) Firm or producer expenditure of capital
goods. Also known as gross investment or
gross private capital formation (I).
c) Government expenditure on goods and
services, excluding transfer payment (G).
d) Expenditure on exports and imports (X M).
Y = C + I + G + (X M)
36
Gross vs Net
Investment
Gross Investment is the expenditure on new

construction, purchase on new equipment and
change in stock
Net Investment is gross investment minus
depreciation of capital.
Depreciation (capital consumption) is defined as
an allowance that is put aside for machinery wears
out and stocks used up due to its obsolete and
deteriorated nature after being used for some time.
Net Investment
= Gross Investment Depreciation of
capital
37
Expenditure Approach
The components include;

the household expenditure (C), firm expenditure
or gross investment (I) and government
expenditure (G).
+ or change in stock
=Total Domestic Expenditure at market price
(TDE at mp)
+ Exports and Imports
=Gross Domestic Expenditure at market price
(GDE at mp)
Income paid abroad
+ Income received from abroad
=Gross National Expenditure at market price
(GNE at mp)
Indirect taxes
+ Subsidies
=Gross National Expenditure at factor cost
(GNE at fc)
=
Net National Expenditure at factor cost
(NNE at fc) (OR NATIONAL INCOME)
RM
xxx
XXXX
xxx
XXXX
xxx
xxx
XXXX
xxx
xxx
XXXX
xxx
XXXX
38
Few things to
remember:
1)
To change from market price to factor
cost: minus indirect tax plus subsidies.
DIRECT TAXES
Personal Income Tax
Business/ Corporate
Tax
Profit Tax
INDIRECT
TAXES
Expenditure or
Consumption Tax
Custom duties
Export Tax
Import Tax
Tarif
Services Tax
39
Few things to
remember:
2)
3)
4)
5)
To change from Domestic to National

value: plus or minus NPIFA
To change from Gross to Net value:
minus capital consumption.
To change from NI to Personal
Income (PI): plus transfer payment
and any benefits minus any
contribution (EPF, SOCSO)
To change from PI to DPI: minus
income tax
40
41
Income Approach
million
Given theRM
information:
Total wages and salaries received
255,650
Total interest and dividends received

Total rent and imputed rent
10,000
80,880
Gross trading profits from companies
65,500
Total income of self-employed
33,700
Income paid abroad
54,345

Capital consumption
Find:
i) GDP at factor cost
ii) GNP at factor cost
iii) NI
76,680
445
42
Answer: Income
Approach
RM million
Total wages and salaries received
255,650
Total interest and dividends received

Total rent and imputed rent
10,000
80,880
Gross trading profits from companies

Total income of self-employed
65,500
33,700
GDI fc (GDP fc)
445,730
Less income paid abroad
(54,345)
Add income received from abroad
76,680
GNI fc (GNP fc)
Less Depreciation on capital consumption

467,620
468,065
(445) NNI fc
43
Output Approach
RM
million forestry and fishing

Agriculture,
4,296
Mining and quarrying
6,700
Manufacturing
28,965
Construction
15,550
Services
13,220
Net exports
3,000
Appreciation in stock
2,000
Income paid abroad
15,432
17,66
Indirect taxes
599
Subsidies
333
Depreciation of capital
1,545
Compute the value for: i) GDP at market price
ii) GNP at market price
44
iii) GNP at factor cost
Answer: Output Approach
Agriculture, forestry and fishing

4,296
Mining and quarrying 6,700
Manufacturing
28,965 Construction
15,550
Services
13,220
Net exports
3,000
Appreciation in stock
(2,000)
GDP mp
69,731
Less income paid abroad
(15,432)
Add income received from abroad 17,66
GNP mp
70,965
Less indirect taxes
(599)
Add subsidies 333
GNP fc
70,699
Less depreciation
(1,545)
NNP fc
(NNI)
69,154
45
Expenditure Approach
Total consumer expenditure (C)
million
Gross investment (I)
Government expenditure (G)
Add exports
(X)
Less imports
(M)
Change in stock
Net factor Income from abroad
Expenditure taxes
Subsidies
Capital consumption
RM
50,000
20,000
18,500
9,000
( 8,565)
1,000
250
870
695
2,750
Given the information above, calculate the values for:

i) GDP at market price
ii) GNP at market price
iii) GNP at factor cost
46
iv) NI
Answer: Expenditure
Approach
Total consumer expenditure (C)

50,000
RM
Gross investment (I) 20,000
million
Government expenditure (G) 18,500
Add exports
(X)
9,000
Less imports
(M)
( 8,565)
Change in stock
1,000
GDE mp (GDP mp)
89,935
Less Income paid abroad
(3,700)
Add income received from abroad
3,950
GNE mp (GNP mp)
90,185
Less Indirect taxes
(870)
Add subsidies
695
GNE fc
(GNP fc)
90,010
Less Depreciation
(2,750)
NNI fc
(NI)
87,26047
Uses of
National
Income
48
Uses and Importance of National

Income
Useful in measuring the standard of living of a nation

through estimating per capita income of the nation.
49

Income

Time series comparison (year to year). Measuring
growth of the economy.
50

Income

Comparison between two or more countries can be
made.
51

Income

made.
Able to know and analyze the contribution made and
performance by each production sector in the
economy and thus taken ample step for rectification
52

Income

made.
Useful in measuring inequalities in the distribution of
income.
53

Income

made.
income.
Useful in revealing the expenditure pattern of a
country.
54

Income

made.
income.
country.
Useful in measuring the level and pattern of
investment.
55

Income

made.
income.
country.
Useful in measuring the level and pattern of
investment.
Balance of payments pattern.
56

Income

made.
performance by each production sector in the economy
and thus taken ample step for rectification
income.
Useful in revealing the expenditure pattern of a country.
Useful in measuring the level and pattern of investment.
Balance of payments pattern.
National income as an indicator of success or failure of
national planning.
57
Gross and Net

Investment
Gross investment is the total

amount spent on purchases of new
capital and on replacing
depreciated capital.
Net investment is the change in

the stock of capital and equals
gross investment minus
depreciation.
58
Economic Growth
e = GDP1 GDP0
X 100
GDP0
e = rGNP1 rGNP0
X 100
rGNP0
Higher economic growth shows higher
economic activities and performance.
59
Real GNP:
Real GNP = Price Index0 X Nominal
GNP1
Price Index1
Nominal GNP is the current value of

GNP according to the price in that
particular year, in which might has
experience a price rise from previous
years because of inflation.
Real GNP or GDP shows a better value

of measurement for comparison
purposes, because it has deflate the
value from the problem of inflation.
60
The Diference
between nominal and
Nominal Income would be the actual wage or salary that
is earned
The Nominal Gross Domestic
realcurrently.
income
Product measures the value of all the goods and

services produced expressed in current prices.
Nominal GDP of Malaysia for the year 2001 is RM334.6b
61
The Diference
between
nominal
and
Nominal Income would be the actual wage or salary that is earned
currently.
The Nominal
Gross Domestic Product measures the value
real
income
of all the goods and services produced expressed in current prices.
Nominal GDP of Malaysia for the year 2001 is RM334.6b
Real Income would be the income that has been deducted with the
reduction in the purchasing power that the wage or salary has in
the market place (i.e. rate of inflation is 3%). Real Gross Domestic
Product measures the value of all the goods and services produced
expressed in the prices of some base year. Real GDP of Malaysia for
the year 2001 is RM210.5b
62
per capita income
is defined as their total personal income

divided by the number of people in the country.
often used as a measure of the wealth of the

population of a nation, particularly in
comparison to other nations.
usually expressed in terms of a commonlyused international currency such as the Euro

or United States dollar.
Malaysias per capita income for the year 2001
is US$3,392 or RM12,867.
63
2 major problems
in measuring national
income
i) PRACTICAL PROBLEMS
a)
Problem of illiteracy
b)
Problem of expertise
c)
Problem of inaccessibility
d)
Lack of sophisticated
software machineries.
e)
Problem of false
information
64
ii) CONCEPTUAL PROBLEMS

a)
Arbitrary definition
b)
Problems in estimating
the
value of depreciation,
imputed rent, etc.
c)
Problem of double
counting
d)
Problem of measuring
quality
65
THANK YOU
66

National Income Msurement

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

National Income Msurement

Uploaded by

Copyright:

Available Formats

CHAPTER 2

Income is the money earn or

Tucker, defined national

The national product refers to the

GDP and GNP

GDP = Gross Domestic Product, is

A 2-sector model of circular flow

The 2-sector circular flow

All income received by households will

total income = total

The 3 sector circular flow of national income and

C: households is assumed to spent only a

The concept of disposable

The 4-sector circular flow of national income and expenditure

National Income is the total money

should not be included in calculating NI

e.g; Transfer Payment

Social security benefit is an example of transfer payment,

Total Domestic vs Total

Total Domestic Income is the total income earned

Personal Income vs Personal

Personal Income is the gross receipt of

Income paid abroad

Also known as Product

The problem of double

To avoid double counting, we

To avoid double counting, calculation must be

Total value added

The concept of Market

In most cases, Market Price (MP) > Factor cost

The components are:

Income paid abroad

Indirect taxes or taxes on expenditure

Depreciation or capital consumption

4 components included here:

Gross Investment is the expenditure on new

The components include;

To change from Domestic to National

Total wages and salaries received

Total interest and dividends received

Gross trading profits from companies

Total income of self-employed

Income paid abroad

Income received from abroad

Total wages and salaries received

Total interest and dividends received

Gross trading profits from companies

GDI fc (GDP fc)

Less income paid abroad

Add income received from abroad

GNI fc (GNP fc)

Less Depreciation on capital consumption

million forestry and fishing

Answer: Output Approach

Agriculture, forestry and fishing

Given the information above, calculate the values for:

Total consumer expenditure (C)

Uses and Importance of National

Useful in measuring the standard of living of a nation

Uses and Importance of National

Useful in measuring the standard of living of a nation

Uses and Importance of National

Useful in measuring the standard of living of a nation

Uses and Importance of National