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. What is National Income?
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 = C+I
Expenditure, C
on goods & services
HOUSEHOLDS
FIRMS
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. Financial Institutions
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

16. 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).

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. Financial Institutions
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 = C+I+G+(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.

27. 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 m = 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)

30. 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.

33. EXAMPLE: Firm Stage of Production Purchasing Selling Value
____ ________________ Price (RM) Price (RM) Added (RM)
A Landowner sells trees
to sawmill owner
B Sawmill owner cut into
timber sheets to furniture
manufacturer
C furniture manufacturer
turns timber sheets into
furniture and sells to retailer
D retailer sells furniture to final
consumer
TOTAL VALUE
Total value added
= Total value of Sales – Cost of intermediate goods
= 990 – = 420

34. 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

35. Output Approach The total value of final goods and services in the
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)

39. 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 Approach Given the information:
RM million
Total wages and salaries received ,650
Total interest and dividends received ,000
Total rent and imputed rent ,880
Gross trading profits from companies ,500
Total income of self-employed ,700
Income paid abroad ,345
Income received from abroad ,680
Capital consumption
Find:
i) GDP at factor cost
ii) GNP at factor cost
iii) NI

43. Answer: Income Approach
RM million
Total wages and salaries received ,650
Total interest and dividends received ,000
Total rent and imputed rent ,880
Gross trading profits from companies ,500
Total income of self-employed ,700
GDI fc (GDP fc) ,730
Less income paid abroad (54,345)
Add income received from abroad ,680
GNI fc (GNP fc) ,065
Less Depreciation on capital consumption (445) NNI fc ,620

44. Output Approach RM million
Agriculture, forestry and fishing 4,296
Mining and quarrying 6,700
Manufacturing ,965 Construction ,550
Services ,220
Net exports ,000
Appreciation in stock ,000
Income paid abroad ,432
Income received from abroad 17,66 Indirect taxes
Subsidies
Depreciation of capital ,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 ,965 Construction ,550
Services ,220
Net exports ,000
Appreciation in stock (2,000)
GDP mp ,731
Less income paid abroad (15,432)
Add income received from abroad 17,66
GNP mp ,965
Less indirect taxes (599)
Add subsidies
GNP fc ,699
Less depreciation (1,545) NNP fc (NNI) ,154

46. Expenditure Approach RM million
Total consumer expenditure (C) 50,000
Gross investment (I) ,000
Government expenditure (G) 18,500
Add exports (X) ,000
Less imports (M) ( 8,565)
Change in stock ,000 Net factor Income from abroad
Expenditure taxes
Subsidies
Capital consumption ,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

47. Answer: Expenditure Approach RM million
Total consumer expenditure (C) 50,000
Gross investment (I) ,000
Government expenditure (G) 18,500
Add exports (X) ,000
Less imports (M) ( 8,565)
Change in stock , GDE mp (GDP mp) ,935
Less Income paid abroad (3,700)
Add income received from abroad ,950
GNE mp (GNP mp) ,185
Less Indirect taxes (870)
Add subsidies
GNE fc (GNP fc) ,010
Less Depreciation (2,750)
NNI fc (NI) ,260

48. 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 eº = rGNP1 – rGNP0 X 100 GDP0
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.
Malaysia’s per capita income for the year 2001 is US$3,392 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!