Measuring Domestic Output and National

Income

Dr. Aidil Rizal Shahrin

October 21, 2021

NIVERSITI
A L AYA
Faculty of Business and
Accountancy

1
CONTENTS

1. Assessing the Economy’s Performance

2. Gross Domestic Product (GDP)
2.1 A Monetary Measure
2.2 Avoiding Multiple Counting
2.3 GDP Excludes Nonproduction Transactions
2.4 3 Ways of Measuring GDP
2.4.1 Production Approach
2.4.2 Expenditure Approach
2.4.3 Income Approach
2.5 Top GDP Around the World
3. Nominal GDP versus Real GDP
3.1 Consumer Price Index (CPI)
4. Shortcomings of GDP
5. Other National Accounts
5.1 Gross National Income
5.2 Gross National Disposable Income
6. Aggregate Demand & Supply of the Economy
2
ASSESSING THE ECONOMY’S PERFORMANCE

i. National income accounting (NIA) measures the economy’s

performance by measuring the flows of income and
expenditures over a period of time.
ii. National income accounts serve a similar purpose for the
economy, as do income statements for business firms.
iii. Department of Statistics Malaysia (DOSM) compiles
Malaysia’s economics and social data which include data for
National Account.

3
GROSS DOMESTIC PRODUCT (GDP) KDNK

i. The primary measure of the economy’s performance is its

annual total output of goods and services or, as it is called,
its aggregate output. it is about quantity
ii. There are several ways to measure aggregate output
depending upon how one wishes to define "an economy".
One of it is Gross Domestic Product (GDP).
iii. GDP is the most frequently used indicator in the national
income account.
not output
iv. It is a monetary measure of the total market value of all final
goods and services produced calculated mostly quarterly or
annually.

4
A MONETARY MEASURE

i. Money measure of goods and services allows the summing

of apples and oranges; money acts as the common
denominator. because price tax always change
ii. Without such a measure we would have no way of
comparing the relative values of the vast number of goods
and services produced in different years.
iii. In practice, there are 3 prices used in reporting GDP (in fact
NIA):
a. Basic Price
b. Producers’ Price
c. Purchasers’ Price
(see National Account Prices for detail explanation of prices
use in NIA).

5
AVOIDING MULTIPLE COUNTING final good and services

i. All goods and services produced in a particular year must be

counted once and only once.
ii. GDP includes only the market value of:
◮ Final goods; are consumption goods, capital goods, and
services that are purchased by their final users, rather than
for resale or for further processing or manufacturing.
And ignore
◮ Intermediate goods; goods and services that are purchased
for resale or for further processing or manufacturing
iii. Including the value of intermediate goods would amount to
multiple counting, and that would distort the value of GDP.

6
AVOIDING MULTIPLE COUNTING

sum of all value

Figure 1: Value Added in a Five-Stage Production Process

iv. From Fig.1, value added is the market value of a firm’s output
less the value of the inputs the firm has bought from others.
v. Finally, GDP is the sum of all values added of goods and
services produced by all firms in the economy.

7
GDP EXCLUDES NONPRODUCTION TRANSACTIONS

production of good and services

i. Nonproduction transactions must be excluded from GDP
because they have nothing to do with the generation of final
goods.
ii. Nonproduction transactions are of two types:
a. Financial Transactions: Purely financial transactions include
the following: government
◮ Public transfer payments: These are the social security
payments, welfare payments, and veterans’ payments that the
government makes directly to households.
◮ Private transfer payments: Such payments include, for example,
the money that parents give children or the cash gifts given at
Christmas time. They produce no output.
◮ Stock market transactions: The buying and selling of stocks (and
bonds) is just a matter of swapping bits of paper. However,
services provided by a stockbroker are included.
b. Secondhand Sales: It sales contribute nothing to current
production and for that reason are excluded from GDP.
8
3 WAYS OF MEASURING GDP

i. GDP can be measured as:

a. Production Approach:
Also known as output approach, which measures GDP as the
difference between value of output less the value of goods and
services used in producing these outputs during an accounting
period. This difference is call value added as mention earlier.
b. Expenditure Approach:
Measures GDP based on final uses of the produced output as
the sum of final consumption, gross capital formation and
exports less imports.
c. Income Approach:
Measure GDP as the sum of the factor incomes generated to
the economy. It can be done by adding all types of factor
incomes generated in the production process.
Theoretically, all these 3 approaches are identical.

9
3 WAYS OF MEASURING GDP

ii. Many countries anchor their official estimate of GDP through

production approach (Malaysia too).
iii. It is favorable because:
◮ Allows for tracking of the overall performance of the whole
economy
◮ Provides data for the analysis of the productivity of each
economic activity and changes in the structure of the
economy
◮ Allows policy makers to analyze the performance of specific
enterprise against the industry averages

10
PRODUCTION APPROACH

i. The production approach consists of summing the gross

value added of all industries.
ii. The total gross value added is total differences between
gross output value of resident producing unit (measured at
producer price) and value of intermediate consumption
(measured at purchaser’s price) plus import duties (see
National Account Prices for explanation of adding import
duties).
iii. For each industry, this involves first determining its output
and then subtracting the goods and services that were used
up in the process of generating that output (see GDP
Product Approach Methodology for detail explanation of the
components)(Tab.2 also has import duties added, but the
amount not shown. Thus, it is also reported at purchaser’s
price)
11
PRODUCTION APPROACH

we have 5 sectors
Table 1: GDP by Production at Current Prices
RM Juta / Million
2021
Jenis Aktiviti Ekonomi 2015f 2016e 2017e 2018e 2019e 2020p
I II

Pertanian 97,539 105,756 117,995 108,757 109,549 116,084 30,113 34,823 Agriculture
Perlombongan dan pengkuarian 103,059 103,959 121,326 134,833 131,117 95,328 29,174 32,057 Mining and quarrying
Pembuatan 262,379 272,396 299,797 311,676 323,862 315,608 85,445 86,896 Manufacturing
Pembinaan 55,382 61,089 66,552 70,048 71,067 57,537 15,061 13,798 Construction
Perkhidmatan 643,883 689,969 747,360 804,993 860,497 816,292 206,673 200,332 Services
tambah Duti import 14,699 16,529 19,280 17,453 17,065 15,755 4,205 4,496 plus Import duties
KDNK pada harga pembeli 1,176,941 1,249,698 1,372,310 1,447,760 1,513,157 1,416,605 370,671 372,403 GDP at purchasers’ prices

Table 2: GDP by Production at Constant 2015 Prices

RM Juta / Million
2021
2015e 2016 2017 2018 2019e 2020p
I II

KDNK pada harga malar 2015 (RM bilion) 1,177 1,229.3 1,300.8 1,363.8 1,424.3 1,343.9 343.0 336.3 GDP at constant 2015 prices (RM billion)
Pertanian 98 94.0 99.5 99.6 101.6 99.4 22.6 24.1 Agriculture
Perlombongan dan pengkuarian 103 105.4 105.8 103.6 102.9 92.0 24.1 24.0 Mining and quarrying
Pembuatan 262 273.9 290.5 304.8 316.3 307.9 81.8 81.7 Manufacturing
Pembinaan 55 59.5 63.5 66.2 66.5 53.6 13.8 12.6 Construction
Perkhidmatan 644 680.6 723.4 773.0 820.9 775.7 196.7 189.9 Services

KDNK pada harga malar 2015 (Perubahan %) .. 4.4 5.8 4.8 4.4 -5.6 -0.5 16.1 GDP at constant 2015 prices (% change)
Pertanian .. -3.7 5.9 0.1 2.0 -2.2 0.2 -1.5 Agriculture
Perlombongan dan pengkuarian .. 2.2 0.4 -2.2 -0.6 -10.6 -5.0 13.9 Mining and quarrying
Pembuatan .. 4.4 6.0 5.0 3.8 -2.6 6.6 26.6 Manufacturing
Pembinaan .. 7.4 6.7 4.2 0.4 -19.4 -10.4 40.3 Construction
Perkhidmatan .. 5.7 6.3 6.9 6.2 -5.5 -2.3 13.4 Services

Note: % change is year on year

12
EXPENDITURE APPROACH

i. To determine GDP using the expenditures approach, we add

up all the spending on final goods and services that has
taken place throughout the year.
a. Private Final Consumption Expenditures (C)
Final consumption includes goods and services, which are
used by households or the community to satisfy their individual
wants and social needs. It includes:
◮ Durable such as cars, refrigerators, air conditioners,
◮ Non-durable such as food, clothes
◮ Services such as hair cutting, doctors consultation.
are part of final consumption, with the exception of purchases:
◮ Own-construction
◮ Improvements of residential housing,
which is treated as part of gross capital formation.

13
EXPENDITURE APPROACH

b. Private Gross Capital Formation (Ig )

Gross capital formation is the same as the concept of
investment in capital goods used by economists. It involves
only produced capital goods (machinery, buildings, roads,
artistic originals, etc.) and improvements to non-produced
assets (land, natural resources). Gross capital formation
includes:
◮ Gross fixed capital formation, includes all goods and related
services that can be used repeatedly for more than one year to
produce other goods and services
◮ Changes in inventories, where the inventory includes materials
and supplies, work-in-progress, finished goods and goods for
resale.
◮ Acquisition less disposals of valuables (like jewelry and works
of art).
c. Government Final Consumption Expenditures & Gross Capital
Formation (G)
Also known as public. As for government final consumption
expenditure on current goods and services, it involves:
14
EXPENDITURE APPROACH

◮ Expenditures to produce non-market individual goods and

services less sales for delivery free of charge or at insignificant
prices to households such as education, health services, sports
and recreation etc.
◮ Expenditure to produce non-market collective goods and
services for general administration, national defense, security
and other common benefits to the community as a whole.
◮ Reimbursements from government’s social security funds to
households on specified goods and services bought by
households on the market
While government expenditures on of capital goods is called
public capital formation.

15
EXPENDITURE APPROACH

d. Net Exports (X-M)

Exports and imports exclude all transactions in land, buildings
and non-movable non-produced assets, and in financial assets
(stocks, bonds, money, monetary gold, etc.) Exports are valued
f.o.b. (free on board), i.e. at the prices at the domestic customs
frontier before being shipped out. Imports are normally valued
c.i.f. (i.e. including insurance and freight costs) at the domestic
custom frontier by customs.
ii. For Malaysia, private and government are separated when it
involves final consumption expenditure but not for gross
fixed capital formation, refer to the following table. (see GDP
Expenditure Approach Methodology for detail explanation of
the components)

16
EXPENDITURE APPROACH

Table 3: GDP by Type of Expenditure at Current Prices

RM Juta/ Million
2021
Jenis perbelanjaan 2015f 2016e 2017e 2018e 2019e 2020p Type of expenditure
I II

1. Perbelanjaan penggunaan akhir swasta 635,099 684,681 760,146 831,388 904,158 861,758 228,719 203,916 1. Private final consumption expenditure
2. Perbelanjaan penggunaan akhir kerajaan 154,021 157,023 167,320 173,289 176,710 184,043 44,204 45,463 2. Government final consumption expenditure
3. Pembentukan modal tetap kasar 304,423 318,895 343,942 350,365 347,022 296,558 78,426 76,490 3. Gross fixed capital formation
4. Perubahan inventori dan barangan berharga* -5,195 5,970 6,647 -4,387 -28,596 -17,016 -2,340 21,289 4. Changes in inventories and valuables*
5. Eksport barangan dan perkhidmatan 817,370 834,491 960,778 992,511 987,481 870,272 245,815 265,128 5. Exports of goods and services
5.1 Eksport barangan 681,275 686,896 801,394 830,137 817,260 777,665 225,519 244,046 5.1 Exports of goods
5.2 Eksport perkhidmatan 136,095 147,596 159,384 162,375 170,221 92,607 20,296 21,082 5.2 Exports of services
6. tolak Import barangan dan perkhidmatan 728,778 751,363 866,524 895,405 873,618 779,011 224,153 239,883 6. less Imports of goods and services
6.1 Import barangan 572,051 584,850 684,281 715,516 692,522 638,955 188,908 203,382 6.1 Imports of goods
6.2 Import perkhidmatan 156,727 166,513 182,243 179,889 181,096 140,055 35,245 36,502 6.2 Imports of services
Perbelanjaan atas KDNK pada harga pembeli 1,176,941 1,249,698 1,372,310 1,447,760 1,513,157 1,416,605 370,671 372,403 Expenditure on GDP at purchasers’ prices

* Termasuk perbezaan statistik * Includes statistical discrepancy

Table 4: GDP by Type of Expenditure at Constant 2015 Prices

RM Juta/ Million
2021
Jenis perbelanjaan 2015f 2016e 2017e 2018e 2019e 2020p Type of expenditure
I II

1. Perbelanjaan penggunaan akhir swasta 635,099 672,260 718,702 776,054 835,711 799,447 209,251 185,135 1. Private final consumption expenditure
2. Perbelanjaan penggunaan akhir kerajaan 154,021 155,640 164,450 170,030 173,080 179,913 42,895 43,971 2. Government final consumption expenditure
3. Pembentukan modal tetap kasar 304,423 312,190 331,093 335,592 328,581 281,060 73,454 71,450 3. Gross fixed capital formation
4. Perubahan inventori dan barangan berharga* -5,195 297 1,032 -8,678 -13,987 -4,346 -1,657 15,800 4. Changes in inventories and valuables*
5. Eksport barangan dan perkhidmatan 817,370 828,155 900,064 917,462 907,877 827,086 233,004 241,116 5. Exports of goods and services
5.1 Eksport barangan 681,275 685,228 750,508 768,846 756,343 748,338 216,388 223,360 5.1 Exports of goods
5.2 Eksport perkhidmatan 136,095 142,927 149,556 148,616 151,534 78,747 16,616 17,755 5.2 Exports of services
6. tolak Import barangan dan perkhidmatan 728,778 739,230 814,571 826,694 806,952 739,280 213,932 221,127 6. less Imports of goods and services
6.1 Import barangan 572,051 578,719 644,246 662,747 647,361 620,086 184,561 191,192 6.1 Imports of goods
6.2 Import perkhidmatan 156,727 160,511 170,325 163,947 159,590 119,193 29,371 29,935 6.2 Imports of services
Perbelanjaan atas KDNK pada harga pembeli 1,176,941 1,229,312 1,300,769 1,363,766 1,424,310 1,343,880 343,014 336,345 Expenditure on GDP at purchasers’ prices

* Termasuk perbezaan statistik * Includes statistical discrepancy

17
INCOME APPROACH

i. GDP can also be obtained by the income approach, i.e. by

adding together all types of factor incomes generated in the
production process, such as (see GDP Income Approach
Methodology for detail explanation of the components):
a. Wages and salaries and bonuses and other compensation
payable to employees
b. Taxes on products and production payable to the government
(to account for expenditures that are diverted to the
government)
c. Operating surplus for the producers
ii. The most difficult part of the calculation of GDP by the
income approach is the estimation of operating surplus from
the net income (i.e. profit) reported by businesses.

18
INCOME APPROACH

iii. The income approach is considered less reliable mainly

because it is not easy to collect reliable information on
compensation of employees, and on net income (or profits)
needed for the estimation of operating surplus.

19
INCOME APPROACH

Table 5: Income Components of GDP at Current Prices

Komponen pendapatan
Income components 2015 2016 2017 2018 2019e 2020p

Pampasan pekerja
412,240 444,489 487,764 517,927 542,790 526,718
Compensation of employees

Lebihan kendalian kasar

709,048 740,473 819,897 881,924 914,615 851,080
Gross operating surplus

Cukai tolak subsidi ke atas pengeluaran dan import

55,653 64,735 64,648 47,908 55,752 38,807
Taxes less subsidies on production and imports
Cukai ke atas pengeluaran dan import
64,867 72,772 73,701 60,731 66,962 62,149
Taxes on production and imports
(tolak) subsidi
9,213 8,037 9,052 12,823 11,210 23,342
(less) subsidies

KDNK pada harga pembeli

GDP at purchasers’ prices 1,176,941 1,249,698 1,372,310 1,447,760 1,513,157 1,416,605

20
TOP GDP AROUND THE WORLD

i. In Fig.2 we have top 20 countries GDP in 2020

ii. For Malaysia, in 2020, the GDP is USD 336.7 billion.
iii. Obviously with that, we are not in the top 20

21
TOP GDP AROUND THE WORLD

Figure 2: Comparative GDPs in billion of U.S. Dollars, 2020

22
NOMINAL GDP VERSUS REAL GDP

i. How can we compare the market values of GDP from year to

year if the value of money itself changes in response to
inflation (rising prices) or deflation (falling prices)?
ii. The way around this problem is to deflate GDP when prices
rise and to inflate GDP when prices fall.
iii. A GDP based on the prices that prevailed when the output
was produced is called unadjusted GDP, nominal GDP, or
GDP in current prices.
iv. A GDP that has been deflated or inflated to reflect changes in
the price level is called adjusted GDP, real GDP, GDP in
terms of goods, GDP in constant prices, GDP in chained
(2015) price or GDP in 2015 prices (for 2015 base year).

23
CONSUMER PRICE INDEX (CPI)

prices
increase or
decrease

Figure 3: Calculating Real GDP (Base Year=Year 1)

24
CONSUMER PRICE INDEX (CPI)

i. A consumer price index is a measure of the price of a

specified collection of goods and services, called a basket, in
a given year as compared to the price of an identical (or
highly similar) collection of goods and services in a
reference year.
ii. That point of reference, or benchmark, is known as the base
period or base year. More formally,

Basket Costt
CPIt = × 100
Basket Cost0

where the denominator is basket price in the base year.

iii. Consider the basket only has pizza as in Fig.3 and the base
year is year 1. The base year CPI will automatically be 100.

25
CONSUMER PRICE INDEX (CPI)

iv. And the CPI of the following year:

$20 × 5 $100
CPI2 = × 100 = × 100 = 200
$10 × 5 $50
$25 × 5 $125
CPI3 = × 100 = × 100 = 250
$10 × 5 $50
v. And to calculate real GDP is
nominal GDPt
Real GDPt =
(CPIt /100)

where real GDP for year 2 and 3 are:

$140
$70 =
(200/100)
$200
$80 =
(250/100) 26
 CONSUMER PRICE INDEX (CPI)

vi. For Malaysia GDP above, the "current price" is the nominal
GDP while "constant price" is the real GDP with the base year
basket price of 2015.
vii. DOSM published CPI monthly which presents statistics
covering 12 main groups of goods and services (see CPI
Methodology for the details of goods and services measured
in the basket).

27
SHORTCOMINGS OF GDP

i. GDP is not a measure of the overall standard of living or

well-being of a country.
ii. It has several shortcomings as a measure of both total
output and well-being (total utility):
a. Nonmarket Activitie
Certain productive activities do not take place in any
market-the services of homemakers, for example, and the labor
of carpenters who repair their own homes. GDP only get data
on economic transactions involving market activities
b. Leisure
An increase in leisure time has clearly had a positive effect on
overall well-being. But our system of national income
accounting understates well-being by ignoring leisure’s value.

28
SHORTCOMINGS OF GDP

c. Improved Product Quality

Because GDP is a quantitative measure rather than a
qualitative measure, it fails to capture the full value of
improvements in product quality. Obviously quality
improvement has a great effect on economic well-being, as
does the quantity of goods produced.
d. The Underground (Shadow) Economy
Some of the people who conduct business there are gamblers,
smugglers, prostitutes, "fences" of stolen goods, drug growers,
and drug dealers. They have good reason to conceal their
incomes.

29
SHORTCOMINGS OF GDP

Figure 4: Shadow Economy

30
GROSS NATIONAL INCOME

i. To derive gross national income (GNI) from GDP, we must

add net primary income from abroad (NPI)
ii. Primary income is earnings arising from the provision of a
factor of production: labor, financial assets, land, and natural
resources
iii. Primary income includes the following components:
a. Income Associated with the Production Process
◮ Compensation of employees
◮ Taxes and subsidies on products and production
b. Property Income
◮ Investment income
◮ Rent

iv. Thus, GNI is

GNI = GDP + NPI

31
GROSS NATIONAL INCOME

Table 6: Malaysia Gross National Income

2021
2015e 2016 2017 2018 2019e 2020p
I II

KDNK pada harga malar 2015 (RM bilion) 1,177.0 1,229.3 1,300.8 1363.8 1424.3 1343.9 343.0 336.3 GDP at constant 2015 prices (RM billion)
Pendapatan primer bersih dari luar negara (RM billion) -21.0 -18.0 -19.1 -28.7 -21.8 -13.7 -2.2 -4.9 Net primary income from abroad (RM billion)
PNK pada harga malar 2015 (RM bilion) 1,156 1,211.3 1,281.7 1,335.1 1,402.5 1,330.2 340.8 331.4 GNI at constant 2015 prices (RM billion)
PNK pada harga malar 2015 (Perubahan %) .. 4.8 5.8 4.2 5.0 -5.2 0.0 14.5 GNI at constant 2015 prices (% change)

v. As you can see from Tab.6, Malaysia’s NPI is negative, which

suggest that we have net outflow of primary income during
this period.
vi. For some economies the distinction between GDP and GNI
is trivial, but for others the difference can be huge.

32
GROSS NATIONAL INCOME

Figure 5: GNI as a proportion of GDP, 2011

33
 GROSS NATIONAL INCOME

vii. Is it best to use GDP or GNI as a measure of the standard of

living? It depends.
viii. By focusing on income, GNI tells us which countries are
currently rich.
ix. Instead GDP tells us which countries produce the most.

34
GROSS NATIONAL DISPOSABLE INCOME

i. While to derive national disposable income (GNDI), one need

to add net secondary income from abroad (NSI). Secondary
income shows current transfer between residents and
nonresidents (e.g., by governments or charitable
organizations).
ii. Thus:

GNDI = GDP + NPI + NSI

= GNI + NSI

35
GROSS NATIONAL DISPOSABLE INCOME

Table 7: Malaysia Macro Economic Key Data at Current Prices

RM Juta/ Million
Jenis perbelanjaan 2015 2016 2017 2018e 2019p
Type of expenditure
Pendapatan primer bersih dari luar negeri -32,112 -34,592 -38,658 -45,082 -40,267
Net primary income from abroad

Pendapatan negara kasar (PNK) 1,144,829 1,215,105 1,333,652 1,402,369 1,470,426

Gross national income (GNI)

Penduduk (’000) 31,186 31,634 32,023 32,382 32,581

Population (’000)

Pendapatan negara kasar (PNK) per kapita (RM) 36,710 38,412 41,647 43,307 45,131
Gross national income (GNI) per capita (RM)

Pendapatan sekunder bersih dari luar negeri -21,325 -18,629 -17,300 -19,729 -21,294
Net secondary income from abroad

Pendapatan boleh guna negara kasar (PBNK) 1,123,504 1,196,477 1,316,351 1,382,640 1,449,131
Gross national disposable income (GNDI)

36
AGGREGATE DEMAND & SUPPLY OF THE ECONOMY

i. Demand in the economy arises from these four categories:

AD = C + Ig + G + X − M

where AD stands for aggregate demand.

ii. The demand must either be met from domestically
produced output (Y) or from imports (M).
iii. Because expenditure on goods must equal sales of goods
(demand must equal supply), we therefore have

Y + M = C + Ig + G + X

iv. From this equation we arrive at the expenditure measure of

output:
Y = C + Ig + G + (X − M)
37
 AGGREGATE DEMAND & SUPPLY OF THE ECONOMY

v. Crucial to arriving at this expenditure measure of output was

the assumption that supply equal demand.
vi. It is important to include investment the unsold output that
firm produce-their increase in inventories or stock building.
vii. This ensures that supply equals demand but make it
necessary to break investment down into gross fixed capital
formation (the new capital stock installed) and change in
inventories (unsold output).

38