National Income and Other Social

Accounts Analysis
 The economy’s income and expenditure
 The measurement of Gross Domestic Product
 Personal income and disposable income
 Factor cost and market price
 The components of GDP
 Real and Nominal GDP
 GDP and economic well-being
 How to determine nation economy?
 Refer to total income that everyone in the economy is
earning

 GDP – Gross domestic product

 GDP measure two things at once:

 The total income of everyone in the economy
 Total expenditures on the economy’s output and services

 Why?
 Because for an economy as a whole, income must equal
expenditure
 All expenditure in the economy ends up as someone’s
income
Note: Equality of income and expenditure
 Gross domestic product – is the market value of all final
goods and services produced within a country in a given
period of time.

 There are 3 approach in measuring GDP:

 Expenditure approach
 Income approach
 Output approach
 Measure GDP by summing all the money spend by buyers on
final goods and services

 Only final goods and services is accounted to avoid double

counting (counting a good more than once when computing
GDP)

 When double counting happened, most likely intermediate

goods is included in computing GDP
 Expenditure approach
 4 components in spending (GDP)
 Consumption (C)
 Investment (I)
 Government expenditure (G)
 Net export (X – M / NX)

Y = C + I + G + (X – M)
 Consumption
 Is the spending by households on goods (durable or nondurable
goods) and services

 Investment
 Is the purchase of capital equipment, inventories and structures
such as factory
 Government expenditure
 Include spending on goods and services by local, state and
federal government
 Exclude transfer payment such as social security benefit
 Example: Military spending

 Net export
 Equal the purchases of domestically produced goods by
foreigners (exports) minus the domestic purchases of foreign
goods (imports)
 Can be positive or negative; If X>M then NX positive, if X<M then
NX negative
 Import is minus because spending on import already included in
other component such as C, I and G
 Measure GDP by summing all income generated by production of goods and
services.
 All final goods and services are produced using factors of production. By
summing up the factor payments, we can find the value of GDP. Some
adjustments are required to balance the account.
 Compensation of employees
 includes the wages, salaries, fringe benefits, Social Security contributions, and
health and pension plans.
 Rent
 is the income of the property owners.

 Interest
 is the income of the money capital suppliers.

 Proprietor’s Income
 is the income of incorporated business, sole proprietorships, and partnerships.

 Corporate Profits
 is the income of the corporations’ stockholders whether paid to stockholders or
reinvested.
 Sum of the above items is the National Income (NI).
 The formula:
 GDP = Compensation of employees + Rent + Interest +
Proprietor’s Income + Corporate Profits + (Indirect business
taxes + Depreciation + Net foreign factor income)
 Indirect business Taxes
 (general sales taxes, business property taxes, license fees etc.)
should be added to NI. They are not considered to be payments
to a factor of production, but they are part of total expenditures.
 Depreciation
 is another cost, which should be added.

 Net foreign factor income

 (income earned by the rest of the world – income earned from
the rest of the world) should be added to adjust GNP to GDP.
 Some statistical discrepancy should be considered to
balance expenditure and income approach.
 Measure GDP by summing value-added of all product
produced in the whole economy

 Value added – the dollar value contributed to a final good at

each stage of production

 Example: Orange (RM 8) turns in to orange juice (RM 10),

value added at this stage of production is RM 2

 Hence, the sum of values added at all stage of production for

the above case is RM 10, GDP = RM 10
 Nominal GDP - defined as the market value of all final goods
produced in a country at current price.

 Hence, market value depends on quantities of goods and

services produced and their respective prices.

 It can be misleading when inflation is not accounted for GDP.

 Because GDP will appear higher than it actually is.

 Real GDP – the production of goods and services valued at
constant price.

Real GDP = (Quantity of all goods and services) X Base year

price

 Inflation lead GDP increase does not actually reflect the true
growth in economy.

 Hence, real GDP shows how the economy’s overall

production of goods and services changes over time.
 Is a price index that measures inflation or deflation in an
economy by calculating a ratio of nominal GDP to real GDP

 GDP price index = (Nominal GDP/Real GDP) X 100

 The GDP price index of the base year itself is equal to 100

 When economy is in deflation, GDP price index will be

lower than 100

 When inflation, GDP price index will be higher than 100

 Measurement of standard of living
 There is a correlation between national income
and standard of living.
 Countries with high national income such as
United States, the UK, Canada, Australia, etc. also
have high standards of living.
 The term standard of living refers to the
availability of goods and services in the country
together with other facilities. Those countries
with very low national income like Ethiopia and
Myanmar would normally have low living
standard.
 Comparison over time
 From national income figures, we are able to
state whether the economy is progressing,
stagnating or deteriorating.
 In the case of Singapore, national income has
improved steadily over the years. This is
indicative of a stable economy and high
productivity.
 Economies that are stagnating like India, China,
and Bangladesh should take positive steps to
increase their growth and development.
 Countries like Vietnam, Cambodia, Afghanistan
and some African countries have deteriorated in
terms of economic performance.
 Comparisons between countries.
 It is through national income that we can
differentiate the developed and developing
countries.
 According to OECD statistics, Singapore was the
13th richest country in the world.
 The poorer nations are Ethiopia, Myanmar,
Bangladesh and most of the Asian states.
 Balance of Payment
 It can define as the sum total of payments and
receipts that a country earns as a result of
international trading with the rest of the world.
 From national income data, we can roughly
estimate whether the country will face a deficit
or surplus balance of payments.
 If income paid abroad is far greater than income
received abroad, there will be an outflow of
currency from the country and this will lead to
disequilibrium in the BOP.
 National Planning
 The government will formulate the five year plan,
ten year plan, development plan, sectorial
activities plan, etc based on national income
statistics.
 The government will have to forecast future
developments on the basis of present economic
performance.
 This explains why all countries, rich or poor,
have to collate data on national income.
 Gross national product - GNP is the total value of all final
goods and services produced within a nation in a particular
year, plus income earned by its citizens (including income of
those located abroad).

GNP = GDP + Net property income from abroad (NPIA)

Net property income form abroad = income from foreign

sources - income paid to foreign citizens and entities
 is a term used to measure the
monetary value of the flow of output
of goods and services produced
within the economy over a period of
time.

 Is a sum of employees, proprietors,

rental, corporate, interest, and
government income less the
subsidies government pays to any of
those groups.
 Market price
 Refers to the prevailing price in the market
through the forces of demand and supply.
 It is the price that consumers have to pay to get
the goods and services.

 Factor Cost
 Means the sum of all income earned by all the
factors of production, for instance, suppliers of
land, labour and capital, which help to produce
the year’s national output in the economy.
 The difference between national income at
market price and national income at factor
cost arises from indirect taxes and
subsidies.
Factor Cost = Market Price + Subsidies –
Indirect Taxes.

Market Price = Factor Cost – Subsidies +

Indirect Taxes
 Is the market value of nation’s goods
and services minus depreciation
(Capital consumption)

 The formula
 NNP = Gross National Product (GNP) –
Depreciation (Consumption of fixed
capital)
 GDP and Well-being is positively related:
 Higher income lead to higher expenditure
 Country with larger GDP also can afford
 Better health care
 Better education

 In short, GDP does not directly measure those things that

make life worthwhile but it measure our ability to obtain
inputs into a worthwhile life
 Not a perfect measure of well-being
 Example: Leisure

 Not all productive activity is accounted

 It excludes the value of most activity outside of market
 Example: Volunteer work

 Exclude the quality of environment

 Example: Pollution

 Income distribution
 Pattern of income distribution in the market is not measure by GDP
 Higher GDP doesn’t says that all individual are rich