Chapter Two:: Measuring National Income

CHAPTER TWO:
MEASURING
NATIONAL INCOME
irisz@econ.uitm.kedah.2016
1
 Measuring national income is
important as it is the basic data
required by most policy makers of
any economy.
 Measuring national income is to

total up the income received by all
economic agents ( land, labor,
capital, entrepreneur)
2
 A full time housewife is not regarded as an economic agent
because she does not hold any factors.
 So do full time students and pensioners.
 A housewife might receive a monthly allowance from her

husband, a student might received some money from his parents
and pensioners might receives some money as their monthly
pension.
 However, the money received by them cannot be calculated in

national income (NI) because those housewives, students and
pensioners do not produced any goods or services which can be
purchased by other individual.
 Nevertheless, if the housewife sells nasi lemak to get extra

income, or the student work as part time as sales promoter, then
the income received by them should be taken in NI account since
they had produced output.
3
 Generally, there are 4 main sectors in the economy namely households,
firms, government and international trade activities.
 Households constitutes of all individuals who make purchases of goods

and services produced in the economy and they also hold the factors of
production.
 Firms is the sector where all factors will be combined as inputs to

produced output that is the good and services that can be consumed.
 Entrepreneurs are one of the factors within the firm and they are the
one who is responsible to mix all the factors in the production process.
 The government also exist and they act as policy makers in the
economy.
 The government also takes part in producing output and involves in the
activities of export and import.
 The international trade sector comprises of all the activities of export

and import made with other countries.
4
3 different approaches to measure NI
1) The expenditure approach

It calculates from the expenditure side. It will be the total
of all expenditure made on the national output produced.
2) The income approach

This approach is done by adding up all the total income
received by all economic agents for their contributions of
factors of production of national output
3) The output/ product approach

It calculate NI from the production or output view. Thus,
by using this approach, it will total up the value of all
new output produced in an economy.
5
 All three different ways of measuring NI
should give the same answer. This means
that the terms “national expenditure”,
“national income” and “national output”
can be used interchangeably.
 However economists typically use the

term “national income” accounting.
 And it is not wrong to labeled it as “

national output” or “national
expenditure” measurement.
6
National expenditure= national income= national product
 Assumptions
1) All households income must equal to household

expenditure on goods and services.
2)Value of output must be equal to total expenditure on
goods and services.
3) Household income must be equal to value output
7
a) Expenditure approach
 The national expenditure is made up of four
economic sectors:
1) Personal consumption (C)

2) Investment (I)
3) Government spending/expenditure (G)
4) Net export (X-M)
8
 Personal consumption
Includes what is household and individuals purchases
of both durable and non-durable goods and services.
Personal consumption includes only spending that is
incurred by individuals or household for their own
personal use.
 Investment
This is the purchase of final product by business firms

for use in production or as addition to inventories and
the purchase of new homes by households. Investment
involves the production of new capital goods by
business, including changes in inventories of unsold
goods, materials over the year.
9
 Government spending/ public expenditure
Represents expenditure on final goods of business firms and all input

costs, including labor cost. The purchase of government goods and
services includes the cost of building schools, providing clinics and
hospitals, national defense and payment salaries to government
servant. Transfer payment are also government expenditure but not
included in national income accounting because no goods and
services are currently received in return.
 Net Export (Export- Import)
This represents to net excess of expenditure on export over imports.

Net exports is the difference between what a country earns by
exporting goods and services to other countries and what it pays for
goods and services that are imported from other countries.
In the expenditure method, GDP is calculated by
GDPmp= C+I+G+(X-M)
10
 To calculate national income by using
expenditure approach
1) Calculate GDP at market price
GDPmp= C+I+G+(X-M)
2) Calculate GNP at market price

GNPmp= GDPmp + net factor
income abroad
3) GNPfc= GNPmp- taxes + subsidies
4) National income= GNPfc - depreciation
11
5) To calculate personal income
PI= NI + transfer payment - corporate

income taxes – retained earnings –
SOCSO- EPF- insurance premium
Disposable income= PI- personal income tax
12
Example 1: calculate NI by using expenditure approach
1 Public consumption 20000
2 Private consumption 30500
3 Public investment 10600
4 Private investment 15000
5 Change in stock 150
6 Exported goods 1000
7 Imported goods 700
8 Net payment abroad 100
9 Indirect taxes 200
10 Subsidies 500
11 Depreciation 50
12 Employees’ provident fund 200
13 Tax on personal income 400
14 Transfer payment 100
15 Social security 100
16 Retained earnings 10
17 Insurance premium 100
13
 calculate GDP at market price
1) GDPmp= C+I+G+(X-M)
GDPmp=30500+10600+15000+
150+20000+(1000-700)
=76550
14
2) GNPmp= GDPmp + net payment abroad
GNPmp = 76550+ 100
= 76650
3) GNPfc = GNPmp- indirect taxes + subsidies
= 76650-200+500
= 76950
4) NI = GNPfc- depreciation
=76950-50
=76900
15
5) To calculate personal income, the steps are:
PI= national income (NI)+ transfer payments-
EPF-SOCSO-insurance premium-retained
earnings-corporate income tax
=76900+100-200-100-100-10
=76590
6) To calculate disposable income

Disposable income= PI-personal
income tax
=76590-400
=76190
16
Exercise 1:Calculate NI by using expenditure approach
No Items $million
1 Exports 500
2 Imports 400
3 Personal consumption expenditure 1400
4 Changes in stock -40
5 Indirect business tax 30
7 Government expenditure 990
8 Investment 1000
9 Personal income tax 80
10 Subsidies 30
11 Factors income paid abroad 80
12 Factors income received from abroad 90
14 EPF 50
15 Depreciation irisz@econ.uitm.kedah.2016
40
17
Exercise 2: calculate NI by using expenditure approach
No Items $million
1 Consumer expenditure 310
2 Public expenditure 570
3 Gross domestic capital formation 580
4 Stock 180
5 Export 410
6 Import 370
8 Subsidies 250
9 Factor income from abroad 450
10 Factor income to abroad 400
11 Depreciation 200
18
Exercise 3: calculate NI by using expenditure approach
No Items $million
1 Depreciation 10
2 Net factor income from abroad 25
4 Exports 150
5 Personal consumption 180
6 Changes in stock 50
7 Indirect business tax 40
8 Public investment 330
9 Imports 130
10 Subsidies 15
11 Personal income tax 40
12 Private investment 500
14 Government expenditure 600
15 Social security payments 10
16 Corporate income tax 20 19
b) Income approach
Income approach measures national income by adding all the
various types of income paid to firms, household in the forms
of wages, rent for land, interest for capital and profits to
entrepreneur.
In the income approach, all the figures are in factor cost because
only earnings of factors of production can be calculated.
National income is the sum of rewards paid to factors of

production or economic agents for the services rendered in
producing the national output.
Nevertheless, transfer payments must not be included in

calculating NI. There is no real output corresponding to these
payments.
20
 The major income components in national income
are:
1) Wages and salaries

Wages and salaries are the incomes received by
labor from the firms for services rendered. The
income also include fringe benefits such as social
securities or pension fund contributions. It is the labor
cost of producing the final products.
2) Net interest
This is the portion of business receipts used to pay for
borrowed funds that finance investment purchases.
Interest payments provides for savers and other
suppliers of loanable funds for investment projects.
21
3) Rental income
Income earned by those who supply the
services of land, mineral rights and
buildings for use by others. Payments for
rented inputs and the supplier can earn
income from supplying land.
4) Profits
Profits refer to corporate profits earned by
business corporation or payment of
dividend to shareholders.
22
To calculate national income (NI) by using income
approach
1) GDP= wages + salaries + rent + profit + interest

+ dividend
2) GNP=GDP+ net factor income abroad
3) NI=GNP-depreciation
4) PI= national income +transfer payment-
corporate income tax- retained earnings- social
security- insurance premium- undistributed
profits
5) Disposable income= PI-personal income tax
23
Example 1: measuring national income by using income approach
No Items $million
1 Income from employment 500

(salaries and wages)
2 Income from self- 350
employment
3 Rent and interest 290
4 Profits 650
5 Stock appreciation 100
8 depreciation 200
24
How to calculate:
1) Calculate GDP
GDP= wages + salaries + rent + profit + interest +
dividend
=500+350+290+650
=1790
*stock appreciations must be subtracted from the total income
since through accounting conventions, it tend to get
included in the companies profit already.
So, 1790- 100 (stock appreciation)
=1690
2) Calculate GNP
GNP= GDP+ net factor income abroad
=1690+(450-400)
=1740
3) Calculate national income
NI= GNP- depreciation
=1740-200
=1540
25
Exercise 1:
No Items $million
1 Income from self-employment 35000
2 Income from employment 79000
3 Rent and interest 35000
4 Profits-distributed 47000
-undistributed 29600
-tax on profits 30000
5 Other sources of income 24000
6 Net property income from -4200
abroad
7 Depreciation 27000
26
c) Product/ output approach
 Involves adding up the value of everything produced in the country during the
year.
 One problem faced in this approach is double counting.
 To avoid the double counting which exaggerates nation income, we use the
concept of value added.
 Value added refers to the increase in the value of goods as the result from the
production process. This is calculated by deducting from the value of the firms
output the cost of the inputs goods used up in the producing that output.
 Under product approach, national income is measured by net value of all final
goods and services produced by nation during a year.
 In calculating gross domestic product under the product approach, only the
money value of final goods and services are included in the calculations.
 The value of raw materials and intermediate products are subtracted from the
value of GDP to avoid double counting.
27
Product/ output approach…cont
 There are many sectors in an economy like manufacturing,
agricultural, construction, banking, insurance, forestry and
others.
 The total value of products and services by these sectors will
give us the gross domestic product (GDP) at market price.
 In order to know the original cost of those goods produced,
we need to adjust the market price to factor cost.
 It will be the actual value of those outputs when they were
produced.
 The market price differ from the factor cost due to indirect
taxes and subsidies.
 The market price of the goods will be greater than the factor
cost by the amount of indirect taxes imposed on those
goods.
 To adjust the market price to factor cost, subsidies has to be
add and taxes has to be subtracted to the value of goods
and services at the market price.
 This will give the GDP at factor cost:
factor cost= market price + subsidies- indirect taxes
28
 The goods that are being produced by our economic agents in other
countries and the output produced by foreign factors operating in our
country.
 Whatever output produced by our economic agents is part of our
national product regardless of where they are.
 The GDP figure only includes whatever output produced in our
country.
 It does not contain the total output produced by our economics agents
who do the production in other countries.
 Since the concept of national product is to total up all the output
produced by all our economic agents, these output produced by our
economic factors at overseas must also be included.
 So we need to add “payment income from abroad” into our
calculation and subtract “payment income to abroad” to get the figure
of Gross National Product (GNP).
 These two adjustment will change the value of “Gross Domestic
Product” to “Gross National Product”
 GNP=GDP+ (factor income from abroad-factor income to abroad)
 GNP=GDP+ net factor income abroad
29
Another adjustment that need to be done is the

provision for depreciation/ capital consumption.
Depreciation tends to occur during the production
process.
The machinery and other capital assets are likely
to go through the course of wear and tears.
Thus, the provision of depreciation must be
excluded in order to make sure that only the
‘net investment’ is included in the national
product.
Net national product @ NI=GNPfc- depreciation
30
Steps to calculate output/product approach
GDPmp= final products in the economy
1) GDPmp= all final products in the economy (manufacturing,

mining, agricultural, banking, finance, construction and other
sectors in country)
2) GNPmp= GDPmp+ net factor income abroad
3) GNPfc=GNPmp-indirect taxes+subsidies
4) National income=GNPfc-depreciation
5) PI= national income + transfer payment- corporate income
tax- retained earnings- social security- insurance premium-EPF
6) Disposable income= PI-personal income tax
31
Example 1:calculate national income by using output
approach
No Items $million
1 Agricultural 270
2 Fishing 120
3 Forestry 180
4 Manufacturing 400
5 Construction 410
6 Banking and insurance 270
services
7 Other services 70
9 Subsidies 250
12 Depreciation 200
32
1) Calculate GDP at market price
GDPmp= all final goods and services produced
=270+120+180+400+410+270+70
=1720
2) Calculate GNP at market price

GNPmp=GDPmp+ net factor income abroad
=1720+(450-400)
=1770
3) GNPfc=GNPmp-indirect taxes +subsidies

= 1770-240+250
=1780
4) NI=GNPfc-depreciation
=1780-200
=1580
33
Exercise 1:calculate the NI using product approach
No Items $million
1 Agricultural, forestry and fisheries 36000
2 Mining and quarrying 11000
3 Manufacturing 98000
4 Construction 9000
5 Electricity, gas and water 3500
6 Transport, storage and communication 12000
7 Wholesale and retail trade 25500

8 Net factor income from abroad 8900
9 Capital consumption 7000
11 Corporate income taxes 945
12 Subsidies 830
13 Employees’ provident fund 14000
34
Exercise 1:calculate the NI using product approach…cont
Calculate the following based on the data given

above:
a) Gross Domestic Product at market price

b) Gross National Product at market price
c) Net national product at market price
d) National income
e) Personal income
35
Exercise 2:calculate the NI using product approach
Items RM Million
Consumption 11,800
Government services 9,200
Mining and Quarrying 8,000
Finance, insurance and other services 9,600
Manufacturing 28,000
Rent 23,000
Subsidies 790
Wholesale and retail trade 11,200
Agriculture, forestry and fishing 15,600
Transport, storage and communication 6,400
Construction 3,800
Profit 4,800
Electricity, gas and water 1,900
Tax on expenditure 15,000
Net factor income from abroad 8,250
Depreciation 23,000
The table below contains items from the national income account of a country.
Calculate :
i) Gross Domestic Product (GDP) at market prices .

ii) Gross National Product (GNP) at factor costs.
iii) National Income.
irisz@econ.uitm.kedah.2016 36
Exercise 3 :calculate the NI using product approach
ITEMS RM MILLION
Government expenditure 12,000
Private expenditure 20,000
Mining and quarrying 8,000
Finance and insurance 9,500
Manufacturing 25,000
Rent 40,000
Hotel and restaurant 12,600
Agriculture, forestry and fishing 22,800
Communication 7,400
Dividends received by individuals 1,300
Profit 46,200
Capital consumption 2,000
Tax on expenditure 15,000
Net factor income received from abroad 6,900
Subsidies 890
Transfer payments 1,400
Business taxes 12,500
Private income taxes 250
Employees provident funds 85
Social contributions 25
a) Calculate:
i) Gross domestic product (GDP) at market price.
ii) National Income.
iii) Disposable income.
Uses of national income
To indicate the general standard of

living
To measure the economic growth
Distribution of income
38
Use of national income…cont
 To assist government in the planning
 To identify which policy to be used during economic problems
 Sectoral contributions
 To know which sector contributes more to NI and which to be adjust.
 Economic policy
 With NI, new economic policy can be formulated
 National expenditure
 To know where the government finance its revenue
 Public sector
 NI shows that government sector play the dominant role in a centrally
planned economy
39
Problems in measuring national income
1) Practical problems
 Problems of illiteracy
 Problem of expertise
 Lack of sophisticated machinery
 Problems of false information
40
Problems in measuring national income
2) Conceptual problems
 Arbitrarydefinition
 Problems of estimation
 Problems of double counting
 Problem of measuring quality
41
I. DEPRECIATION=CAPITAL CONSUMPTION
II. DIRECT TAX=CORPORATE TAX=COMPANIES
TAX=BUSINESS TAX
III. EPF=EMPLOYEE PROVIDENT FUND
IV. SOCSO=SOCIAL SECURITY
CONTRIBUTION=SOCIAL SECURITY
PAYMENT
V. INDIRECT TAX=TAX ON EXPENDITURE=TAX
ON GOODS AND SERVICES=TAX ON
CONSUMPTION

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CHAPTER TWO:

 Measuring national income is to

 So do full time students and pensioners.

 A housewife might receive a monthly allowance from her

 However, the money received by them cannot be calculated in

 Nevertheless, if the housewife sells nasi lemak to get extra

 Households constitutes of all individuals who make purchases of goods

 Firms is the sector where all factors will be combined as inputs to

 The international trade sector comprises of all the activities of export

1) The expenditure approach

2) The income approach

3) The output/ product approach

 However economists typically use the

 And it is not wrong to labeled it as “

1) All households income must equal to household

1) Personal consumption (C)

This is the purchase of final product by business firms

Represents expenditure on final goods of business firms and all input

 Net Export (Export- Import)

This represents to net excess of expenditure on export over imports.

In the expenditure method, GDP is calculated by

2) Calculate GNP at market price

3) GNPfc= GNPmp- taxes + subsidies

4) National income= GNPfc - depreciation

PI= NI + transfer payment - corporate

Disposable income= PI- personal income tax

6) To calculate disposable income

National income is the sum of rewards paid to factors of

Nevertheless, transfer payments must not be included in

1) Wages and salaries

1) GDP= wages + salaries + rent + profit + interest

1 Income from employment 500

5 Stock appreciation 100

6 Factor income from abroad 450

7 Factor income to abroad 400

factor cost= market price + subsidies- indirect taxes

Another adjustment that need to be done is the

GDPmp= final products in the economy

1) GDPmp= all final products in the economy (manufacturing,

2) Calculate GNP at market price

3) GNPfc=GNPmp-indirect taxes +subsidies

7 Wholesale and retail trade 25500

Calculate the following based on the data given

a) Gross Domestic Product at market price

i) Gross Domestic Product (GDP) at market prices .

To indicate the general standard of

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