CHAPTER 2
NATIONAL
INCOME (GDP and GNP)
MEASUREMENT
1
What is
income?
2


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.
3
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.
5

Tucker, defined national income
as:
total income earned by resources
owners, that is:
rents, wages, interest and profit.
6

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)
8
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
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
12
The 2-sector circular flow
of national income and expenditure
Y = C+I
Expenditure, C
on goods & services
HOUSEHOLDS
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
HOUSEHOLDS
Income,Y
15
Assumptions in a 3–sector
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
G. Expenditure
GOVERNMENT
Expenditure, C
Financial Institutions
HOUSEHOLDS
Income,Y
Y = C+I+G+(X-M)
FIRMS
FOREIGNERS
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.
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
 Depreciation or capital consumption
= Net National Income
(OR NATIONAL INCOME)
RM xxx
xxx
xxx
xxx
xxx
XXXX
xxx
xxx
XXXX
xxx
XXXX
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 “value-added” of
each sectors or at each stage of
production to give us the national
income value.
31
Value-added concept
To avoid double counting,
calculation must be based on either
one of the followings:
a) 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)

Depreciation or capital consumption
= 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)
 Depreciation or capital consumption
=
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
INDIRECT TAXES
Personal Income Tax
Expenditure or
Business/ Corporate Tax Consumption Tax
Custom duties
Profit Tax
Export Tax
Import Tax
Tariff
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
Given the information:
Total wages and salaries received
RM million
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
Find:
i) GDP at factor cost
ii) GNP at factor cost
iii) NI
445
42
Answer: Income Approach
Total wages and salaries received
RM million
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)

Less Depreciation on capital consumption
NNI fc
468,065
(445)
467,620
43
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
44
iii) GNP at factor cost
iv) NI
Answer: Output Approach





Agriculture, forestry and fishing
Mining and quarrying
Manufacturing
Construction
Services
Net exports
Appreciation in stock
GDP mp
Less income paid abroad
Add income received from abroad
GNP mp
Less indirect taxes
Add subsidies
GNP fc
Less depreciation
NNP fc
(NNI)
4,296
6,700
28,965
15,550
13,220
3,000
(2,000)
69,731
(15,432)
17,66
70,965
(599)
333
70,699
(1,545)
69,154
45
Expenditure Approach
Total consumer expenditure (C)
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 million
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)
Gross investment (I)
Government expenditure (G)
Add exports
(X)
Less imports
(M)
Change in stock
GDE mp (GDP mp)
Less Income paid abroad
Add income received from abroad
GNE mp (GNP mp)
Less Indirect taxes
Add subsidies
GNE fc
(GNP fc)
Less Depreciation
NNI fc
(NI)
RM million
50,000
20,000
18,500
9,000
( 8,565)
1,000
89,935
(3,700)
3,950
90,185
(870)
695
90,010
(2,750)
47
87,260
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
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.
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.
Comparison between two or more countries can be made.
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.
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
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.
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.
Useful in revealing the expenditure pattern of a country.
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.
Useful in measuring the level and pattern of investment.
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.
Balance of payments pattern.
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.
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
eº = GDP1 – GDP0 X 100
GDP0
eº = 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 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
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

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.
Malaysia’s 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