CHAPTER 2

MEASURING NATIONAL
INCOME & OUTPUT
 NATIONAL INCOME:
DEFINITION
The aggregate income earned by a nation through
the production of goods & services over a period
of time, usually a year.
 COMPONENTS OF
MACROECONOMICS
Generally, there are 4 main sectors in the economy
namely:
➢ Households, Foreign
➢ Firms, Sector
➢ Government and
➢ International trade activities

Government

Business Household
 A Case of Two Sector Economy
( The Simple Economy)
The economy consist of just two kind economic agents.

❖ Household
▪ own all factors of production
▪ Spend of all income to purchase goods

❖ Firms
▪ Hire or buys the factors of production from
household
▪ Sell goods & services to household
▪ Pay any profits made to household
 A Case of Two Sector Economy
( The Simple Economy)
Consumers
expenditure
on G&S

Goods & Factors of

services production

Payments
to resources
5
A CASE OF THREE SECTOR ECONOMY
( CLOSED ECONOMY)
▪ A third sector includes the intervention of
Government.
▪ The government undertakes three important
macroeconomics activities in the economy. They are:
I. purchase goods and services
II. collection of taxes
III. payments of benefits and subsidies
A Case of Three Sector Economy
( Closed Economy) cont.

Supply of Factor of Production

Payment for Factor of Production

Taxes
Taxes
GOVERNMENT
Transfer
Payments
payment,
wages for G&S

Purchase of goods and services

Produce goods and services

A CASE OF FOUR SECTOR ECONOMY (
OPENED ECONOMY)
• The country now does trading with other countries. The
economy consists of export and import.
• Export (X) is an injection while Import (M) is a leakage.
• Thus, in four sector economy GDP is calculated by the
formula:

❖ (X-M) also called as net export.

Y= C + I + G + (X-M)
A CASE OF FOUR SECTOR ECONOMY ( OPENED
ECONOMY)

Supply of Factor of Production

Payment for Factor of Production

Taxes
Taxes
GOVERNMENT
Transfer
payment, Payments
wages

Purchase of goods and services

Payments for goods and services

Export Export

Import Import
 3 METHODS OF MEASURING
NATIONAL INCOME
THE THE OUTPUT /
THE INCOME
EXPENDITURE PRODUCT
APPROACH
APPROACH APPROACH

Adding up all the

Sum up total total income Total up the value of
expenditure made received by all all product/output
on the national economic agents for produced in an
output produced their contribution of economy.
factors.

• All three different methods should give the same answer.

• Circular flow of income will explain how the NI can be calculated using 3 different
kind of method but will produce the same figure of NI.
FORMULA
 CONCEPTS OF NATIONAL INCOME

GROSS DOMESTIC PRODUCT (GDP)

▪ GDP is the total money value of all final goods and services
produced within a country in a given time period.
▪ GDP excludes goods and services produced by Malaysian
citizens working overseas but includes goods and services
produced by foreign workers in Malaysia.
▪ It also excludes intermediate goods and only the value of final
goods are counted.
Expenditure GDPmp= C + I + ∆I + G + (X-M)

Product
GDPmp = Govmt services + Mining & quarrying +
Manufacturing +Electricity, Gas & Water + Banking

Income GDPfc = income + rent + dividend + interest + profits

 CONCEPTS OF NATIONAL INCOME cont

Market Price VS Factor Cost

• Current price in the market • The real price earned by

through the forces of demand producers or sellers
& supply

▪Market price differ from factor cost due to indirect taxes and
subsidies.
▪Taxes imposed made the market price higher than the factor cost,
hence we need to deduct the taxes from the market price.
▪Subsidies, on the other hand will make the market price lower than
factor cost therefore we need to add subsidies to the value of market
price to obtain the actual production cost

Factor cost (FC) = Market Price + Subsidies – Indirect taxes

so, Market Price (MP)= Factor cost – subsidies + Indirect taxes
 CONCEPTS OF NATIONAL INCOME cont

➢ INDIRECT TAXES : levied on goods. Also known as taxes on

expenditure, excise tax, indirect business taxes or tax on
consumption.
➢ SUBSIDY : an incentive from the government to encourage
producers to produce more.
 Question
ITEMS RM Mill
GDPmp 65 100
Indirect Taxes 500
Subsidies 250

➢ Find GDPfc.
Solution: GDPfc = GDPmp + subsidies – Indirect taxes
= 65 100 + 250 – 500
= 64 850
 CONCEPTS OF NATIONAL INCOME cont

GROSS NATIONAL PRODUCT (GNP)

▪ GNP is the total market value of all final goods and services
produced by the residents of a country during a given period
of time.
▪ GNP is simply the total income by citizens of the country
regardless where they are.

GNP = GDP + net factor income from abroad (NFIFA)

*NFIFA = FIRA-FIPA
GNP = GDP + (factor income received from abroad – factor income paid to
abroad)
 CONCEPTS OF NATIONAL INCOME cont

NATIONAL VS DOMESTIC
▪ The output produced by our economic agents in other countries
and the output produced by foreign economic agents operating in
our countries also need to be considered.
▪ GDP figure only included products which were produced
domestically, therefore in calculating Gross National Product (GNP),
we need to add these “factor payment from abroad”
▪ Note that GDP has already included the output produced by foreign
economic agents. Therefore, we need to deduct this items (factor
payment to abroad) as our only concerns are on total output
produced by our economic agents.
GNP = GDP + (Factor income from abroad – Factor
payment to abroad) @
GNP = GDP + net factor income from abroad
 Question 2
ITEMS RM Mill
GDPmp 65 100
Factor income received from abroad 4 000
Factor income paid abroad 3 000
Indirect Taxes 500
Subsidies 250
➢ Find :
1. GNPmp
2. GNPfc
 CONCEPTS OF NATIONAL INCOME cont

NATIONAL INCOME (NI) OR NET NATIONAL PRODUCT

FACTOR COST (NNPfc)
▪ National income at factor cost (NI) is defined as the total
of all income payments made to factor of production.

NI = GNPFC–Depreciation value
 Question 3
ITEMS RM Mill
GDPfc 90 000
Net factor income from abroad 2 000
Depreciation 150

➢ Find :
1. GNPfc
2. National income
 CONCEPTS OF NATIONAL INCOME cont

GROSS VS NET
▪ Another adjustment is concerns on the provision for depreciation
which tend to occur during the production process.
▪ Any capital goods, like buildings and machinery tend to lose value
over time due to wear and tear, and obsolescence concept.
▪ Depreciation measures the non-cash expenses that reduce the value
of assets.

Net National Product(NNP) = GNP – Depreciation

Net Domestic product(NDP) = GDP – Depreciation
Example:
NDPmp=GDPmp – Depreciation
NDPfc =GDPfc – Depreciation
GNPmp =GNPmp – Depreciation
 Question 4
ITEMS RM Mill
GDPmp 75 000
Net factor income from abroad 2 000
Depreciation 150
Indirect Taxes 400
Subsidies 300

➢ Find :
1. Net domestic product market price (NDPmp)
2. GDPfc
3. NDPfc
4. GNPmp
5. Net national product market price (NNPmp)
6. NNPfc
 Question 5
ITEMS RM Mill
GDPmp 65 100
Factor income received from abroad 4 000
Factor income paid abroad 3 000
Indirect Taxes 500
Subsidies 250

➢Find :
1. GNPmp
2. GNPfc
3. GDPfc
 Question 6

ITEMS RM
Mill ➢Find :
GDP factor cost 3 470 1. GDPmp
Subsidies 50
2. GNPmp
Indirect Taxes 30
Factor income paid abroad 80 3. GNPfc
Factor income received abroad 90
 Question 7

1. If GDP at factor cost is ITEMS RM Mill

RM 27 000, find GDP at Indirect taxes 300
market price. Subsidies 250
2. If GDPfc is RM 30 000,
Depreciation 150
find GNP at factor cost.
Net factor 9 500
3. If GDP at market price is
income abroad
RM38 000, find GNP at
factor cost.
MEASURING NATIONAL
INCOME & OUTPUT

CHAPTER 2