CHAPTER 2

NATIONAL INCOME
ACCOUNTING

DR. NOORKARTINA MOHAMAD

BEM 4063 MACROECONOMICS
DEFINITION OF NATIONAL INCOME

The flow of goods and services by a nation

over a period of time, usually a year.

OR

National Income is the total payment

received by the factors of production
in a country during a year.
GROSS DOMESTIC PRODUCT (GDP)
GDP is the total money value of the all final goods and services
produced within a country in a given time period.

GNP = GDP + net factor income from abroad

CONCEPT OF NATIONAL
INCOME

GROSS NATIONAL PRODUCT (GNP)

 
GNP is the total market value of all final goods and services produced
by a country’s residence in a given time period.
 CONCEPT OF NATIONAL INCOME

MARKET PRICE (MP)

Market price refers to the current price in the market through the forces
of demand and supply. Market prices are the
actual price paid by the consumers.

GDP (FC)= GDP (MP) – Indirect taxes + Subsidies

OR
GNP(FC)= GDP (MP) – Indirect taxes + Subsidies

FACTOR COST (FC)  

Factor cost is the real prices that is earned by the producers or
sellers.
 CONCEPT OF NATIONAL INCOME

NET NATIONAL PRODUCT (NNP)

NNP is GNP minus the value of capital consumption or
depreciation during the year. NNP is also referred as
National Income at market prices.

NI = GNPFC–Depreciation value
 OR

NI = NNPMP + Subsidies–Indirect Taxes

NATIONAL INCOME (NI)

 
National income at factor cost (NI) is defined as the total of all income
payments made to factor of production.
CONCEPT OF NATIONAL INCOME

PERSONAL INCOME (PI)

Personal income is the income that is actually received by individuals
and households in a nation during a year.

DPI = PI – Personal income tax

DISPOSABLE PERSONAL INCOME (DPI)

 
DPI is the part of the personal income that is left after the
payment of personal direct taxes.
 METHODS OF CALCULATING NI

EXPENDITURE
EXPENDITURE PRODUCT
PRODUCT INCOME
INCOME
APPROACH
APPROACH APPROACH
APPROACH APPROACH
APPROACH
1. EXPENDITURE APPROACH

Consumption (C)

Government Spending (G)

Net Exports (X – M)
Expenditures are made up by four
economic sectors such as:

Investment (I)
 Disposable personal income = Personal income –
Personal income tax

Personal income = NI+ Transfer payments –

Corporate income taxes – Retained earnings –
Social security contributions – Insurance premium

National Income = GNP (FC) – Depreciation

GNP (FC) = GNP (MP) - Indirect tax +

Subsidy

GNP (MP) = GDP (MP) + Net factor Formulas in calculating

Income abroad the national income using
Expenditure approach
GDP (MP) = C + I + G + (X – M)
ANI CALCULATED FROM EXPENDITURE APPROACH
2. INCOME APPROACH
Wages and Salaries

Interest and dividend

Income approach will measure the national

Profit
income by adding together all the incomes.

Rent
 Disposable personal income = Personal income –
Personal income tax

Personal income = NI+ Transfer payments –

Corporate income taxes – Retained earnings –
Social security contributions – Insurance premium

National Income = GNP - Depreciation

GNP= GDP + Net factor income abroad

GDP = Wages + Salaries + Rent +

Profit + Dividend + Interest Formulas in calculating the
national income using
Income approach
NI CALCULATED FROM INCOME APPROACH
3. PRODUCT APPROACH

Primary Sector

Tertiary Sector
NI is measured by net value of all final goods
and services produced by a nation during a year.

Secondary Sector
 Disposable personal income = Personal income –
Personal income tax

Personal income = NI+ Transfer payments –

Corporate income taxes – Retained earnings –
Social security contributions – Insurance premium

National Income = GNP (FC) - Depreciation

GNP (FC) = GNP (MP) - Indirect tax +

Subsidy

GNP (MP)= GDP (MP) + Net factor

Income abroad
Formulas in calculating the
national income using
Product approach
GDP (MP) = All final products
NI CALCULATED FROM PRODUCT APPROACH
 To
To assist
assist in
in national
national To
To identify
identify sectoral
sectoral
planning
planning contribution
contribution

To
To measure
measure
standard To
To compare
compare
standard of
of living
living
over
over time
time

Distribution
Distribution of
of USES OF NI
To
To compare
compare wealth
wealth
Income
Income between
between countries
countries

Public
Public sector
sector National
National To
To measure
measure the
the rate
rate of
of
Expenditure
Expenditure growth
growth of
of the
the country
country
 Problems
Problems of
of non-
non- Problem
Problem of
of less
less
monetized
monetized sector
sector sophisticated
sophisticated machinery
machinery

Problem
Problem of of
illiteracy
illiteracy Problem
Problem of
of
expertise
expertise
PROBLEMS OF
CALCULATING NI

Problem
Problem of
of multi
multi
occupations
occupations Problem
Problem of
of double
double
counting
counting
Problem
Problem of
of false
false
information
information
REAL INCOME, PER CAPITA INCOME AND GROWTH
RATE

REAL INCOME
Real GNP = Base year index x Current Nominal GNP

Current price index

GROWTH RATE
g = Real GNP year 1 – Real GNP year 0 x 100

Real GNP year 0

PER CAPITA INCOME

Per capita income = National Income
Population