NATIONAL

1
CHAPTER 2

• NATIONAL
• INCOME (GDP and GNP)
• MEASUREMENT

2

• What is income?

3

• 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.

4
Instead,

• What is National Income?

5
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.

6

• Tucker, defined national income

• as
• total income earned by resources owners, that is
  
• rents, wages, interest and profit.

7

• 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.

8

• NATIONAL INCOME
• NATIONAL PRODUCT
• NATIONAL EXPENDITURE
• (NI NP NE)

9
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.

10
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).

11
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.

12
Circular Flow of Income Economic Models

• 3 types
• A 2-sector model of circular flow
• - Comprises of Households and Firms
  sectors
• A 3-sector model of circular flow
• - Comprises of Households , Firms and
• Government sectors
• A 4-sector model of circular flow
• - Comprises of Households, Firms,
• Government and Foreign sectors

13
The 2-sector circular flow of national income
and expenditure
Y CI
Expenditure, C
on goods services
FIRMS
HOUSEHOLDS
Income,Y
Wages, rent, interest, profit
Factor payment
14
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

15
The 3 sector circular flow of national income and
expenditure
Y CIG
Net Taxes
Net Taxes
G. Expenditure
G. Expenditure
GOVERNMENT
Expenditure, C
Financial Institutions
FIRMS
HOUSEHOLDS
Income,Y
16
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).

17
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.

18
The 4-sector circular flow of national income and
expenditure
Net Taxes
Net Taxes
G. Expenditure
G. Expenditure
GOVERNMENT
Expenditure, C
Financial Institutions
HOUSEHOLDS
FIRMS
Income,Y
Y CIG(X-M)
FOREIGNERS
19
Assumptions in a 4 sector Circular Flow model

• Households now supply resources 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.

20

• Lets have a
• 5 minutes break

21
Methods of Measuring National Income

• NI can be measured using 3 common approach
• Income approach
• Output approach
• Expenditure approach
• Irrespective of which approach used in
  calculating NI, will give us the same value

22
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)

23
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.

24
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

25
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, so is not included in the
  calculation of national income.

26
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.

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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

28
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.

29
Income Approach

• The components of this approach include
• Wages and salaries
  RM xxx
• Interest and dividends
  xxx
• Rent and imputed rent
  xxx
• Profits distributed and undistributed
  profits, xxx
• income of self-employed
  xxx
• Gross Domestic Income
• 
  (at factor cost) XXXX
• ? Income paid abroad
  xxx
• Income received from abroad
  xxx
• Gross National Income
  XXXX
• ? Depreciation or capital consumption
  xxx
• Net National Income
  XXXX
• (OR NATIONAL INCOME)

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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.

31
The problem of double counting

• To avoid double counting, we only sum-up all the
  value-added of each sectors or at each stage
  of production to give us the national income
  value.

32
Value-added concept

• 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.

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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
34
The concept of Market Price and Factor Cost

• In most cases, Market Price (MP) gt Factor cost
  (FC)
• Market Price FC indirect taxes
  subsidies
• OR
• Factor Cost MP indirect taxes subsidies

35
Output Approach

• The components are
  RM
• 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
  XXXX (GDP at mp)
• ? Income paid abroad
  xxx
• Income received from abroad
  xxx
• Gross National Product at market price
  XXXX (GNP at mp)
• ? Indirect taxes or taxes on expenditure
  xxx
• Subsidies
  xxx
• Gross National Product at factor cost
  XXXX
• (GNP at fc)
• ? Depreciation or capital consumption
  xxx
• Net National Product at factor cost
  XXXX
• (NNP at fc OR NATIONAL INCOME)

36
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)
37
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

38
Expenditure Approach

• The components include
  RM
• the household expenditure (C), firm
  expenditure
• or gross investment (I) and government
• expenditure (G).
• or change in stock
  xxx
• Total Domestic Expenditure at market price
  XXXX (TDE at mp)
• Exports and ? Imports
  xxx
  Gross Domestic Expenditure at market price
  XXXX
• (GDE at mp)
• ? Income paid abroad
  xxx
• Income received from abroad
  xxx
• Gross National Expenditure at market price
  XXXX
• (GNE at mp)
• ? Indirect taxes
  xxx
• Subsidies
  xxx
• Gross National Expenditure at factor cost
  XXXX
• (GNE at fc)
• ? Depreciation or capital consumption
  xxx
• Net National Expenditure at factor cost
  XXXX
• (NNE at fc) (OR NATIONAL
  INCOME)

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Few things to remember

• To change from market price to factor cost minus
  indirect tax plus subsidies.

DIRECT TAXES INDIRECT TAXES
Personal Income Tax Business/ Corporate Tax Profit Tax Expenditure or Consumption Tax Custom duties Export Tax Import Tax Tariff Services Tax
40
Few things to remember

• 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

41
Lets Try Some Exercises
42
Income ApproachGiven the information

• RM million
• Total wages and salaries received 255,650
• Total interest and dividends received
  10,000
• Total rent and imputed rent 80,880
• Gross trading profits from companies
  65,500
• Total income of self-employed 33,700
• Income paid abroad 54,345
• Income received from abroad
  76,680
• Capital consumption
  445

Find i) GDP at factor cost ii)
GNP at factor cost iii) NI
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Answer Income Approach

• RM million
• Total wages and salaries received 255,650
• Total interest and dividends received
  10,000
• Total rent and imputed rent 80,880
• Gross trading profits from companies
  65,500
• Total income of self-employed 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)
  468,065
• Less Depreciation on capital consumption
  (445) NNI fc
  467,620

44
Output Approach RM million

• 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
• Income paid abroad
  15,432
• Income received from abroad 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
iii) GNP at factor cost
iv) NI
45
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

46
Expenditure Approach
RM million

• Total consumer expenditure (C) 50,000
• Gross investment (I) 20,000
• Government expenditure (G) 18,500
• Add exports (X) 9,000
• Less imports (M)
  ( 8,565)
• Change in stock
  1,000 Net factor Income
  from abroad 250
• Expenditure taxes 870
• Subsidies 695
• Capital consumption 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 iv)
NI
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Answer Expenditure Approach
RM million

• Total consumer expenditure (C) 50,000
• Gross investment (I) 20,000
• 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)
  87,260

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Uses of National Income
49
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.

50
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.

51
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.
• Comparison between two or more countries can be
  made.

52
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.
• Comparison between two or more countries can be
  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

53
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.
• Comparison between two or more countries can be
  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
• Useful in measuring inequalities in the
  distribution of income.

54
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.
• Comparison between two or more countries can be
  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
• Useful in measuring inequalities in the
  distribution of income.
• Useful in revealing the expenditure pattern of a
  country.

55
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.
• Comparison between two or more countries can be
  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
• Useful in measuring inequalities in the
  distribution of income.
• Useful in revealing the expenditure pattern of a
  country.
• Useful in measuring the level and pattern of
  investment.

56
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.
• Comparison between two or more countries can be
  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
• Useful in measuring inequalities in the
  distribution of income.
• Useful in revealing the expenditure pattern of a
  country.
• Useful in measuring the level and pattern of
  investment.
• Balance of payments pattern.

57
Uses and Importance of National Income

• Useful in measuring the standard of living of a
  nation through estimating per capita income of
  the nation.
• Time series comparison (year to year). Measuring
  growth of the economy.
• Comparison between two or more countries can be
  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
• Useful in measuring inequalities in the
  distribution of 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.

58
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.

59
Economic Growth

• eº GDP1 GDP0 X 100
• GDP0
• eº rGNP1 rGNP0 X 100
• rGNP0

Higher economic growth shows higher economic
activities and performance.
60
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.
61
The Difference between nominal and real income

• Nominal Income would be the actual wage or salary
  that is earned currently. The Nominal Gross
  Domestic 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

62
The Difference between nominal and real income

• Nominal Income would be the actual wage or salary
  that is earned currently. The Nominal Gross
  Domestic 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
• 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

63
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 commonly-used
  international currency such as the Euro or United
  States dollar.
• Malaysias per capita income for the year 2001 is
  US3,392 or RM12,867.

64
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

65

• 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

66
THANK YOU
Have A Nice Day!