MEASURING

NATIONAL INCOME
AND OUTPUT
CHAPTER 8
LAST CLASS…
 Circular flow of income and expenditure for;
 2-sector economy: HH & F
 3-sector economy: HH, F & G
 4-sector economy: HH, F, G & FS
LEARNING OUTCOMES
 Upon completion of this topic, you should be
able to:
1. Explain the GDP and GNP
2. Identify the three methods of national
income approaches
3. Explain the concepts of market price,
factor cost, nominal, real and per capita
income
GROSS DOMESTIC PRODUCT(GDP) AND
GROSS NATIONAL PRODUCT (GNP)
MEASURING NATIONAL INCOME
AND OUTPUT
 In an economy, firm will use all of factor
of production to produce goods and
services. Total income received by FOP
within a year will be known as national
Income. Basically, there are 3 approaches
to calculate NATIONAL INCOME;

1. Expenditure Approach
2. Output/ Product Approach
3. Income Approach.
EXPENDITURE APPROACH
Using this approach, GDP can be calculated by
adding all the expenditure of economic agents
(household, government, firm and foreign country)
on goods and services.

1.Personal consumption expenditure (C )

It also known as private expenditure/ consumption

and household expenditure/ consumption. Personal
consumption expenditure (C ) is spending made
by household on goods and services. Its cover
both durable and non-durable goods. For example,
consumption on car, doctor services and others.
EXPENDITURE APPROACH
2.Government spending (G)

It also known as public expenditure/ consumption

and government expenditure/ consumption.
Government spending (G) is spending made by
government sector on goods and services. Its
cover both durable and non-durable goods. For
example, expenditure on public school and hospital
and payment for wages and salaries to the
government workers. The important notes here is,
transfer payment like subsidies are not include here
since it is not an expenditure of government since it
is not a production of newly produced goods and
services.
EXPENDITURE APPROACH
3.Gross private investment (I)

Investments (I) is spending made by firm or

businesses sector. It covers the fixed investments
expenditure and change in stock/ inventories. Fixed
investment expenditure is spending of the firm on
capital goods when they invest in a business. For
example, spending on machinery, tools and
equipments. While change in stock refer to the
spending on unsold goods and raw materials.
EXPENDITURE APPROACH
4.Net Export (Xn)

Net export is the difference between export (X)

and import (M). Exports are the expenditure of
foreigners on our domestic goods and services, while
imports are our expenditure on goods and services
that produced by other countries. To get net export,
import is subtracted from export (X – M).
EXPENDITURE APPROACH
In order to calculate GDP at market price, we
will add up all of these items.

GDPmp = C + I + G + (X - M)

EXPORT IMPORT
CONSUMPTION

INVESTMENT

GOVERNMENT NET EXPORT

SPENDING (Xn)
OUTPUT/ PRODUCT APPROACH
This approach sometimes also called as value-added
approach. There are three sectors exist in economics;

1.Primary sector
Cover all the sectors that involve with natural
resources such as agriculture, mining, fishery and
forestry.

2. Secondary sector
Cover manufacturing and construction sector.

3. Tertiary sector
Services such as, education, insurance,
communications, transportations and health services.
OUTPUT/ PRODUCT APPROACH
GDP will be calculated by adding up all final goods
and services produced by all economic sectors. All
goods and services is measured at market price.
There are three sectors exist in economics.

GDPmp = PS + SS + TS

PRIMARY SECONDARY TERTIARY

SECTOR SECTOR SECTOR
INCOME APPROACH
Using this approach, GDP will be calculated by
adding up all income received by Factor of
Productions, labor, land, capital and
entrepreneur in a year.

1. Compensation of employees.
It is in terms of wages and salaries, fridge
benefits and others. This is an income for
labor and it is the largest components of
domestic income.
INCOME APPROACH
2. Rental income
Rental income is return for land. Rents consist
of income payments received by household and
businesses which supply property resources. For
example, monthly payments to the landlord.

3. Net interest
Interest consist of money income payments
flowing from private businesses to the
suppliers of money capital. For example,
interest payments to the household on their
saving deposits.
INCOME APPROACH
4.Corporate profit
It is the earning of a company. In general, it will be
divide into THREE;

a) Corporate tax
Since we take the value of corporate profit before tax
payments, thus we need to add corporate tax back.

b) Distributed profit (dividend).

Some of profit will be paid to the stockholder as dividends.

c) Undistributed profit.
Income that wills remains in the company as retained
earnings. It will be invested later in new plants and
equipments.
INCOME APPROACH
5. Proprietors income
It is the net income of sole proprietorship
and partnerships.
INCOME APPROACH
GDP will be calculated by adding up all
income/return received by Factor of Production.
INCOME OF LABOR
NDPfc = Wages and salaries
+ Rental income RETURN FOR LAND

+ Net interest RETURN FOR CAPITAL

+ Corporate Profit + Proprietors income

INCOME OF
ENTREPRENEUR
IMPORTANTS NOTES ON
NATIONAL INCOME
1. Domestic versus National
 Grossdomestic product (GDP) only include production of goods and
services done by economic agents in a country, no matter they are
nations residents or foreigners. While GNP measure of production of
goods and services by citizen of a country, no matter where they are
located.

 Thus, in calculating GDP, we have

 Factor Income Paid Abroad (FIPA)
 Factor Income Received Abroad (FIRA)

 So,
in calculating GNP, we need to add FIRA and subtract FIPA from
GDP. So that,

GNP = GDP + FIRA - FIPA

2. Market Price versus Factor cost

 Both GDP and GNP can be measure in terms of:

 Market
Price: The value of output at final stage, when it reach
consumer.
 
 Factor
cost: The value of output at their cost when they are
produced.
 
 TheGDPmp/GNPmp are not reflecting the true value of the goods and
services because of the inclusion of indirect taxes and exclusion of
subsidies. So that the correct value of goods and services is reflected
by GDPfc/GNPfc. So that we need to convert GDPmp/GNPmp to
GDPfc/GNPfc by adding subsidies and subtract indirect tax.
 
GDPfc = GDPmp + subsidies – indirect tax
 
GNPfc = GNPmp + subsidies – indirect tax
3. Net versus gross
 
 In
GNP, we do not consider the wear and tear of equipment and the
facilities used in production process, which is known as
depreciation. So, we need to subtract depreciation in order to get
the net national product (NNP).

 NNPfc / NI = GNPfc – Depreciation

 
4. Personal income

 Personalincomes differ from national income. Sometimes, some

payments are recoded under national income, but it is not personal
income. For example, corporate tax. And sometimes, some
payments are personal income, but it is not recorded in calculating
national income, such as dividend.
 
 Personal income (PI) =
NI – Corporate TAX – EPF – SOCSO – Premium Insurance –
Undistributed Profit + Dividend + transfer Payments.
5.Disposable income
  Disposable income is the actual income that can be spending after
minus personal income tax.
Disposable Income (DI) = PI – Personal Income Tax

6. National Income per capita

Income percapita is the average income received by one person in a
country within a year.
National Income per capita = National Income / population.

7. Concepts of nominal versus real income.

Nominal GDP/GNP :
The market value of all final goods and services produced in a given

year valued at current prices.

 
Real GDP/GNP:
The market value of all final goods and services produced in a given
year valued at constant prices.

Real GNP / GDP year 1= CPIbase year x Nom GNP/ GDP year 1
CPI year 1
EXAMPLE (EXPENDITURE APPROACH)
The following are details of national income from country XYZ for
the year ending 2009

Items RM million
personal consumption 14000
Government spending 8000
Private gross investment 3500
Change in stock 100
Export 7500
import 5500
Factor income received abroad 900
Factor income paid abroad 700
Indirect tax 400
Subsidies 280
Depreciation 120

CALCULATE:
1. GDPmp
2. GDPfc
3. GNPfc
4. NNPfc/NI
Correction
2. GDPfc = 27480
EXAMPLE (OUTPUT APPROACH)
Following are the national product for the country ABC for the
year ended 2009
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
Personal income taxes 250
Employees provident funds 85
Social contribution 25
  EXPEND  
OUTPUT
  APP APPROACH   INCOME APPROACH
  C PS   WAGES
  I SS   RENTAL INCO
  G TS   NET INT
  Xn     COR PROFIT
GDPmp XX XX   PRO INC
  SUBSIDY NDPfc XX
  - IN TAX   + DEPRECIATION
GDPfc XX XX   XX
  FIRA
  - FIPA
GNPfc XX XX     XX
  - DEPRECIATION
NNPfc/ NI XX XX    XX
USES OF NATIONAL INCOME
STATISTICS
1. Measure of economic growth.

 National Income data will be using to

calculate the economic growth, which can be
compare over time. So, we can assess
whether the country is growing or not.

Economic Growth = National Income year 1 - National Income year 0 x 100

National Income year 0
2. Compare economic performance amongst countries.

 Economic performance can be compare by comparing their

economic growth. So that, we will know the performance of our
country. Are we approaching the develop country or not?

 Besides, national income can be use as a tool to differentiate

between countries, develop, developing or less develop country.

3. Assist in government planning and policies.

 The data of national income shows the economic condition.

National income is usefuldata that help government to design their
future planning. From the data, the policy makers can view the
historical trends and performance of the economy. Besides, they
can forecast or project the future data.

 In addition, using this data, government can design and take

necessary action. For example, the national income data showed
the negative result thatimplies economic downturn. Therefore,
government will take action to correct back the economy.
4. Sectoral contributions.

 An economy consists of variety of economic activities which can be group into 3

economic sectors; primary sector, secondary sector and tertiary sector. By
looking at each percentage of each sector produce, we can determine which
sectors are more productive and contribute the most to the country. So that,
government will know, which country they should put more attention or to
develop more.
 
 Besides, havig time series data for these sectors, we can view its revolutionary
changes happened to the sectors and how it change the economy of a country.
 
5. Standard of living indicators.

 Standard of living reflect to the level of comfort in everyday life that can be
enjoyed by an individual. Most common measurement of standard of living is
Income percapita. Income percapita is important, since using National Income
only, is not a correct measure of standard of living of people in a country.

 Normally, a country with high national income will have high standard of living.
When average income that received by the household increase, their
consumption will increase too and therefore, standard of living will increase.
 PROBLEMS IN CALCULATING
NATIONAL INCOME
1. Data collection

 Not every people knows the important of calculating National Income. Some of
them may neglect the information of income they receive or may not
cooperate in data collection.
 For example, a mother that selling nasi lemak in fornt of her house and do not
register her busniess at all. However, she has recieved lot of income from her
business and this nasi lemak business has helped her in her daily life. Since, the
business is not registered, the income will not be recoreder and include in
calculation of national income.

2. Problem of non-monetized sector.

 Non-monetized sector is the barter or subsistence part of an economy where

money is not used as a medium of exchange. It usually arises in less develop
places or in rural areas, where many workers get their wages in kind, maybe in
terms of food or accommodation.
 For example, in agriculture sector, the products will not reach the market
whether it is consumed by the farmers itself or it has been exchanged with
goods or service. Since there is no monetary transaction happen, the activities
3. Non -market transactions

 Non-market transactions represent work such as household labor, care giving

and others that does not have a monetary value but remains a vitally
important part of the economy.
 For example, home repairs, clothes sewn at home and any other D.I.Y
products that perform by that particular people themselves but do
contribute to the economy. However, since there are no economic
transactions happen, it will not be recorded in the national income.

4. Double counting.

Double counting issue arise when both values of fnal goods and intermediate
goods are included. Most products go for several production processes before
they reach the markets. Some of the resources are intermediate resources.
So, this may lead to double counting. For example:
 Flour  Pisang goreng

 When a company produce flour as a final good, it already calculated. But

then when a pidsang goreng seller sell pisang goreng, he still includes flour
in calculation.
 Therefore, to avoid this problem, the calculation of national income should
include only final goods.
5. Problem of expertise and sophisticated machinery

 To deal with massive volume of data, we need a person that highly skilled.
However, for most developing countries, or less developed, we are
shortage of this expertise. This will contribute to error in calculating
national income.

 Besides, poor countries, mostly they lack of highly advance technology or

machine to deal the massive volume data.

6. Underground Economy

 Official national income will not include any transaction from illegal or
underground transactions. These underground transactions are, illegal
trade, income that do not reported to tax authorities and others. For
examples incomes are incomes from smuggling, un-authorised gambling,
black marketing and other illegal and immoral activities.

 Besides, some companies may also do not disclose their income or may give
false information on their income to avoid paying high corporate tax.
Therefore, these situations may contribute to underestimation of national
income