MEASURING NATIONAL INCOME
Content
2.1 Concepts in National Income (NI)
2.2 Circular flow of income in a 2, 3, and 4 sector
economy.
2.3 Three approaches of measuring NI
2.3.1 Expenditure approach
2.3.2 Product approach
2.3.3 Income approach
2.4 Uses of NI
2.5 Problems in calculating NI
2.6 Real income, Percapita income and Growth rate
2.1: DEFINITION OF NATIONAL INCOME
The total income earned by resources owners,
including wages, rents, interest and profit
Determine the nation’s production and
employment depend on the amount of spending
To little spending will lead to unemployment
More spending will stimulate firms to produce
more and employ more people
next
2.2: CIRCULAR FLOW MODEL
Macroeconomics focuses on four sectors:
Households 2
Firms 3
Government 4
International sector
Payment for factors of production
Supply of labour, capital, land and entrepreneur
Households Firms
Purchase of goods and services
Payments for goods and services
Payment for factors of production
Supply of labour, capital, land and entrepreneur
Wages,transfer
payment Payment for GnS
Governmen
Households t Firms
Taxes Taxes
Purchase of goods and services
Payments for goods and services
Payment for factors of production
Supply of labour, capital, land and entrepreneur
Wages,transfer
payment Payment for GnS
Governmen
Households t Firms
Taxes
Taxes
Purchase of goods and services
Payments for goods and services
Eksport Eksport
International
Import sector Import
GDP –The total value of all final goods and services produced by
FOP in a country over a given period of time normally a year.
GNP – The total value of all final goods and services produced by a
residents of a country in a given period of time OR total income
earned by nationals of the country regardless of where they are.
GNP = GDP + (factor income from abroad – factor
income paid abroad)
Market price - current price in the market through the forces of
demand and supply.
Factor cost – real prices earned by producers
GDPfc = GDPmp + subsidies – indirect taxes
Personal income – the income that is actually received by
individuals and households in a year.
Disposable income – part of the personal income that is left after
the payment of personal direct tax.
GDPmp = C + I + G + (X-M)
GNPmp = GDPmp + (income received from abroad – income paid
abroad)
GNPfc = GNPmp + subsidies – indirect taxes
NNPfc (National Income) = GNPfc – depreciation
Personal Income = NNPfc + transfer payment – EPF – SOCSO –
Insurance Premium – Corporate tax –
Retained earnings
Disposable income = Personal Income – Personal Income Tax
National Income A/c RM (million)
Personal consumption 5000
expenditure
Wages & salaries 4000
Private investment 1500
Corporate profit 1000
Government expenditure 2500
Net export 600
Indirect taxes 200
Net income from abroad 400
Capital consumption 700
Subsidies 300
Transfer payments 200
Personal income taxes 1500
EPF 500
National income accounts RM million
Consumption expenditure 1200
Indirect business tax 50
Undistributed corporate profit 100
Transfer payment 520
Government expenditure 1500
Personal income taxes 60
Social Security Contribution 40
Private investment 2000
Exports 650
Corporate income tax 300
Imports 550
Interest paid by consumers 120
Capital consumption 250
Change in stock -120
Subsidies 30
Net property income from abroad 220
GDPmp = Primary sector + Secondary sector + Tertiary
sector
Primary sector – Mining & Quarrying, Agriculture, Forestry and
Fishing
Secondary sector – Manufacturing and Construction
Tertiary sector – Electricity, Gas and water, Wholesale and retail
trade, Finance, Insurance, Real estate and busines services,
Transport, Storage and communication, Government services
and other services.
Note: the calculation of GNPmp until Disposable Income are just
the same with the calculation in expenditure approach.
Items RM million
Insurance and finance 1500
Hotel and catering 600
Personal income tax 100
Construction 1600
Mining and quarrying 200
Transportation 2300
Gas and petroleum 400
Transfer payments 200
Social security payments 150
Net factor income abroad 2100
Indirect taxes 50
Subsidies 60
Depreciation 2200
(Not tested in the final exam)
GDP = wages + salaries + rent + profit + interest + dividend +
indirect business tax + depreciation
GNP = GDP + (income received from abroad – income paid
abroad)
NNP = GNP – Depreciation
Personal Income = NNP + transfer payment – EPF – SOCSO –
Insurance Premium – Corporate tax –
Retained earnings
Disposable income = Personal Income – Personal Income Tax
Note: all figures are in factor cost because only earnings of FOP
can be calculated
Items RM million
Income from self-employment 10000
Wages and salaries 30000
Transfer payments 100
Rent and interest 2000
Distributed profit 700
Undistributed profit 600
Saving 300
Investment 16000
Personal income tax 500
Depreciation 1000
Net property income from abroad 5000
Indirect taxes 700
Summary of 2
approaches
EXPENDITURE APPROACH OUTPUT/ PRODUCT APPROACH
1) GDPmp = Consumption (C) + Investment (I) + 1) GDPmp = Primary sector + Secondary sector +
Change in Stock (∆S) + Government Tertiary Sector
Expenditure (G) + Export (X) – Import (M)
2) GDPfc = GDP mp – Indirect Taxes + Subsidies
(Other names for Indirect Taxes is Tax on expenditure, Consumption Tax, Excise Tax, Indirect
Business tax, Tax on Consumption)
3) GNPmp = GDPmp + Net factor Income From Abroad (NFIFA)
NFIFA = Factor Income From Abroad (FIFA) – Factor Income Paid Abroad (FIPA)
4) GNPfc = GNPmp – Indirect Taxes + Subsidies
@
GNPfc = GDPfc + NFIFA
5) National Income market price (NImp) @ NNP = GNPmp – Depreciation Value
(Other name for Depreciation Value is Capital Consumption)
6) NIfc = GNPfc – Depreciation value
7) Personal Income (PI) = NIfc + transfer payment – Employment Provident Fund (EPF) – Social Contribution
(SOCSO) – Insurance – Retained earnings – Corporate Tax – Distributed Profit
8) Disposable Personal Income (DPI) = Personal Income – Personal Income Tax
Notes: (Other name for C is private/personal consumption)
(Other names for I is Public and Private Investment)
(Other names for Gov Expenditure is Government Spending and Public
Consumption/Expenditure)
2.4 USES OF NY
1) To measure standard of living
2) To compare economic performance
3) To compare between 2 or more countries
4) To know & analyze the contribution made of each
sector
5) Taxable capacity
6) National planning
2.5 PROBLEMS IN Measuring NI
1) Comparison over country
i- Different method used
ii- Different price structure
iii- Statistics – problems in collecting data
1) Comparison over time
i- General price level
ii- Income distribution
iii- Composition of goods and services
iv- Quality of goods and services
v- Working hours and working condition
vi- Population
Problems in calculating NY
Practical problems
1- Illiteracy
2- Expertise
3- Lack of sophisticated machinery
4- Inaccessibility
5- False information
Conceptual problems
1- Arbitrary definition – whether to include certain items
2- Estimation
3- Double counting
4- Stock appreciation
5- No measurement of quality that is reliable
Real income/GNP – GNP measured on a fixed price or in a base
year
Nominal GNP – GNP measured in current price
Real GNP = base year price index x Nominal GNP
current year price index
Per capita income – Average income per head of population
Per capita income = National income
Total population
Growth rate – The percentage change in quantity of goods and
services produced from one year to another
Growth rate = GNP this year – GNP last year x 100
GNP last year
The table below shows the value of the nominal GNP and the price
index for a country for three years. Answer the following questions:
Year 2000 2001 2002
Price index 100 115 102
Nominal GNP 30000 35000 39000
a)Calculate the real GNP for year 2000, 2001 and 2002
b)Calculate growth rate between:
i) 2000 – 2001 (based on real GNP)
ii) 2001 – 2002 (based on nominal GNP)
Simple exercise
1)Refer to the question below and answer the following. (each
question is not related to each other)
Items RM
Indirect taxes 300
Subsidies 250
Depreciation 150
Net factor income from abroad 9500
Personal income 6500
a)If GDPfc is RM 27000, find GDPmp
b)If GDPfc is RM 30000, find GNPfc
c)If National Income is RM 50000, find GNPfc
d)If GDPmp is RM 38000, find GNPfc