2 DEFINITIONS OF NIMoney value of all g & s produced during a particular period of time, usually a year. The sum of all personal incomes received from economic activities – HansonTotal income earned by resources owners such as rents, wages, interest & profit – TuckerTotal value of final outputs which comprises of g & s produced by a country for a particular period of time, usually a year - Economist
3 Cont…A popular measurement for an economic perfomance is Gross Domestic Product (GDP)Gross Domestic Product (GDP) = the market value of all final goods and services produced in a nation during a period of time, usually a year.Gross National Product (GNP) = the market value of all final goods and services produced by nation’s residents, no matter where they are located and includes also the factor payment receives from oversea.
4 2.2 Circular Flow of Income and Expenditure Two sector economy-firms and householdsThree sector economy-firms, household,governmentFour sector economyfirms, household,government and foreignmarket
5 A 2-sector circular flow of income and expenditure Expenditure, CY= C+IhouseholdsfirmsIncome, YHouseholds’ expenditure on g & sFirms produce g & sinvestmentFIRMSHOUSEHOLDSsavingFinancial institutionSupply of labour and other factor servicesFirms paid wages, rent, interest and profit to householdsA 2-sector closed economy circular flow model
6 From the figure:All income received by households will entirely be spend on consumption and saving.All goods & services produced by firms will entirely be purchased in the market.Meaning thatTotal Income= Total Output= Total ExpenditureNeglected the role of government in the economy.In real world international trade also take a big role in economy.Y=C+IC=consumptions made by householdsI = Investment made by firms
7 A 3-sector circular flow income Net TaxesNet TaxesGovernmentExpenditure on ResourcesExpenditure on g & sInvestmentExpenditure on g & sFinancial InstitutionsinvestmentsavingsHouseholdsFirmsFirms paid wages, rent, interest & profit to households
8 From the figureHouseholds will only spent a portion of their income on consumption of g & s produced by firms.Balance from the income will be saved in financial institutions which later shall be used by firms for future investment.Households and firms sectors are obliged to pay personal income tax and corporate income tax according to governmentGovernment impose tax that will become an income source to government and expend them on g & s produced by firms.Firms now will supply g & s not only to households sector but also government sectors.This will be considered in NI.
9 1. Saving (S) from households = investment (I) made by firms (S=I) Assuming:1. Saving (S) from households = investment (I) made by firms (S=I)2. Income (Y) that can be spent by households will now be lesserafter deducting the tax portion (t) paid to government. Y afterdeducting t now called as disposable income (Yd). (Yd=Y-t)3. The concept of leakages and injection are introduced here thatis S and t are forms of leakages as it reduces households abilityto spent in an economy, thus reduce aggregate expenditure.G and I are forms of injections withdrawals as it increaseaggregate expenditure.Y=C+I+GC=Consumptions made by householdsI = Investment made by firmsG= Government Expenditure made by government.
10 A 4-sector circular flow of income Net TaxesNet TaxesGovernmentExpenditure on ResourcesExpenditure on g & sExpenditure on g & sNet exportinvestmentHouseholdssavingsFinancialInstitutionsInvestmentFirmsFirms paid wages, rent, interest & profit to householdsExport RevenueExport RevenueForeign SectorExpenditure on ImportExpenditure on Import
11 Circular flow of open economy From the figureCircular flow of open economyApart from 3 sectors also consider foreign sector that involves imports and exports component in an economy.Import(M)=purchases of g & s from abroad for local or domestic consumptions by households, firms and government.Export(X)=sales of g & s by local or domestic sectors to abroad or oversea.Important points :1. Households supply resources and consume on imports goods2. Firms purchased capital goods and engaged foreign workers fromabroad to help produce more new g & s. Firms also export g & sproduced to abroad and overseas.3. Government involves either directly or indirectly with foreignsector. They may imports as well exports g & s to abroad.
12 4. The concepts of leakages & injections are expanded. Leakages components are now comprises of S, t, and M.It reduces the spending ability in an economy thus a fall inaggregate expenditure.Injections component are I, G, and X. It increases thespending ability in an economy thus a rise in aggregateexpenditure.The spending that been made from all sectors will become their earnings of income. Money earned by the factors of production will be spent out on g & s produced in the economy.Aggregate expenditure is the total spending on C, I, G and foreigners on net export (X-M)Y=C+I+G+(X-M)
13 METHODS OF CALCULATING NI There are 3 methods to calculate NIIncome Approach- It requires us to add up all the total income received by all economic agents that are wages, interest, rent and profit.Product (Output) Approach- The total value of all output produced in the economy such as manufacturing, construction, mining, quarrying, agriculture and so on. This is considered as National Product/Output.- Exclude the value of intermediate goods to avoid the problem of double counting.Expenditure Approach- 4 components in calculating NI that is [C,I,G, (X-M)]
14 Approaches in NY Accounting IncomeOutputExpenditureDefnfrom Y point of viewY received by productive person & enterprisesfrom the output point of viewvalue added of g & s (final outputs)from the spending point of viewby private & public sectorItemw – include fringe benefits, pension plans(net) interest & div earning on shareRent on property – include royaltyProfit of firmsY of self employedAgriculture, forestry, fishingMining & quarryingManufacturingConstructionElectric, gas, waterTransportation, storage & communicationservicesFinance, insurance, propertyNXChange in stocksC : HH & govtI : new construction, new equipment, ∆ in stockG : exclude transfer paymentNX : for both g & sGDP Valuefcmp
15 Uses of NITo measure and compare standard of livingTo compare economic performance over timeComparison between two or more countryAnalyze the contribution made by each sectors-by analyzing the contribution of each sector, we will be able to know which sector makes the most contribution to the country’s economic growth.To assist the government’s economic planning
16 Problems in measuring or calculating NI Illiteracy – the case of poor countries which make collection of data difficult. Being uneducated, they fail to give accurate value of their home produced goods.ii) Shortage of expertise in developing countries makes analysis of data unreliable.iii) Inaccessibility. This causes the collection of data in remote areas impossible. National income is underestimated,iv) False information – People will usually underestimate their earning to evade paying high taxes. This will result in underestimation of national income.
17 Concepts of Real and Nominal Income and Growth Rate Nominal income – actual wage or salary that one earns currently. The Nominal GDP measures the value of all goods and services produced expressed in current prices. i.e: Nominal GDP of Malaysia for year 2001 is RM334.6bReal income- has been deducted the reduction in the purchasing power that the wage or salary has in the market. Real GDP measures the value of all goods and services produced expressed in the price of some base year. Real GDP of Malaysia in the year 2001 is RM210.5bGNP deflator: (CPI1/CPI0)Growth Rate- GDP or GNP based on real income. It’s a percentage change in the quantity of goods and services produced from one year to another.Econ growth = (GDP1 – GDP0 / GDP0) *100Real economic growth = (nominal GNP x CPI0 / CPI1) or (nominal GNP/GNP deflator)
18 The Concept of Personal, Disposable &Per Capita Income Personal Income is the income that actually received by individuals and household in an economy in a year.PI=NI+TP-BT-SOCSO-EPF-KWSP-Undistributed ProfitDisposable Income is from the personal income remaining after the payment of personal income tax.DI=PI-Income TaxTotal personal income divided by the number of people in unit of currency per yearMeasuring wealth of the population of a nation.Per Capita Income= NIPopulation