Chapter 1

Measuring Domestic Output, National

Income and the Price Level
Learning Outcomes
On completion of the chapter, the student will be
able to:
🞂 Define and compute an economy’s output and
national income
🞂 Define economic growth
🞂 Define the concept of business cycle and identify
the five phases of the business cycle
🞂 Identify the shortcomings of GDP as measure of a
nation’s economic well-being

2
 Gross Domestic Product 国内生产总值
🞂 GDP is the total market value of all final goods and services produced annually
within a country’s borders.

GDP provides information about country’s economy, used to estimate the size of an
economy and growth rate.

🞂 3 approaches to measure GDP:

i) Expenditure 消费 Approach: compute GDP by adding the money spent by
buyers on final goods and services.
ii) Income 收入 Approach: compute GDP by adding the sum of all incomes
earned (wages, interest, rents, and profits) in producing goods and services.
iii) Value-Added 增值 Approach: compute GDP by adding the value added at
each stage of production in producing goods and services.
 Expenditure Approach
🞂 Only takes ‘ Final good’ into the calculation. Not
‘Intermediate good’.
🞂 Final Good -- a good in the hands of the final user or
consumer (no other buyer comes after)
🞂 Intermediate good 半成品 -- a good used as an input in
the production of a final good
🞂 Example
🞂 Bob finds a seed and plants it. Some time later an orange tree
appears.
🞂 He pays Harry RM 5 to pick and box the oranges. Later on, Bob
sells the oranges to Jim for RM 8. Jim make the orange juice and
sells to Jenny for RM 10.
🞂 GDP = RM 10 ( spent by Jenny and no buyer comes after her)

🞂 Expenditure approach only add the amount of money spent by

buyers on final goods and services.
🞂 If we count both final goods and intermediate goods, we would be
double counting ( counting the good more than once), GDP =
(RM5+RM8+RM10= RM 23)
 Income Approach
Compute GDP by adding the sum of all incomes
earned (wages, interest, rents, and profits) in producing
goods and services.

🞂1. Harry earns RM 5 in wages

🞂2. Bob’s profits= RM 8-RM 5 = RM 3
🞂3. Jim’s profits = RM 10 - RM 8 = RM 2
🞂GDP = Harry’s wages (RM5) + Bob’s profits (RM3) +
Jim’s profits (RM2)
GDP = RM 10
 Value- added approach
🞂 Compute GDP by adding the value added at each
stage of production in producing goods and services.

🞂 Bob grow oranges and he sells the oranges to Jim for RM

8 ( value added is RM 8), Jim sells the orange juice for
RM 10 ( value added is RM 2). Therefore, the
GDP = RM 8 + RM2
= RM 10
 GDP? GNP? What’s different?
GDP 国内生产总值 GNP 全民生产总值

GDP measures all final goods produced in Gross National Product (GNP) is the total
a country, whether by citizens or non- market value of all final goods and
citizen. services produced or income earned
annually by the citizens of a country.

Can be calculated by: GNP= GDP- Income earned by the rest of

i)Expenditure approach the world (IBW)+ Income earned from the
ii)Income approach rest of the world (IFW)
iii)Value added approach
 What’s Not Included in GDP
🞂 Certain Nonmarket Goods and services
-- dinner prepared by mum or chores performed at home by family members.
(not transacted over market)

🞂 Used Goods or second hand product

--GDP measure current production. Used car was counted when it was
originally produced.

Underground Activities, both legal and illegal (Examples: illegal gambling,

prostitution, drug sales)
--because no record exists.

🞂 Leisure
--too difficult to quantify
And other, try google…
 Can GDP measure the well being of the
economic accurately???.
🞂 GDP only provide rough indicator of the country’s economic, it cant provide
accurate info about people well-being in the country.
🞂 This is because GDP does not measure
🞂 i) Some very useful output because it is unpaid (homemakers’ services,
parental child care, volunteer efforts, home improvement projects).
🞂 Ii) improvements in product quality.
🞂 Iii) improved living conditions as a result of more leisure.
🞂 Iv) Underground Economy (no records exist)

In conclusion, for some countries, even though the value of GDP of the country is
lower compared to other countries, but the people there lives more happily.
 GDP and Per Capita GDP
Per Capita GDP
is the GDP divided
by the population.

**Formula:
Per Capita GDP = GDP/ Population
Calculating the GDP by using
expenditure approach
🞂 Expenditure approach only add the amount of money
spent by buyers on final goods and services.

🞂 The formula will be:

GDP = Consumption (C) + Investment ( I) + Government
purchase or expenditure (G) + (Export (X) – Import (M))

VERY IMPORTMENT FORMULA!!

Calculating the GDP with expenditure
approach
🞂 Consumption (C) - the sum of household spending on durable
goods, non-durable goods, and services.
🞂 Investment (I) is the sum of all purchases of capital goods
(Machinery, factories and etc)
🞂 Government Purchases or expenditure (G) is the Federal, state,
and local government purchases or expenditure of goods and
services.
🞂 Export (X) the country send the g/s to other countries.
🞂 Import (M) the country buy the g/s from other countries
 Expenditure Approach
Example: RM
(million)
Consumers’ expenditure (C) 717
Federal government purchases of goods
And Services ( G) 40.5
Exports of goods and services (X) 450
Imports of goods and services (M) 550
State and local government’s purchases ( G) 216.5
Gross private domestic investment (I) 77.7
Income earned by the rest of the world (IBW) 240
Indirect business taxes (IBT) 40.6
Income earned from the rest of the world (IFW) 340
Consumption of fixed capital (CFC) 120

Population = 10 million
Expenditure Approach
Calculate the following from the above data.
(i) Gross Domestic product (GDP)
GDP= C+I+G+(X-M)
=717+ 77.7+(216.5+40.5)+(450-550)
= 951.7
(ii) Gross National Product (GNP)
GNP= GDP-IBW+IFW
=951.7-
=1051.7
(iii) GDP per capital
=951.7/10
= 95.17
 Expenditure Approach
Answer:
(i) GDP = C + I + G + Xn
= RM717m + RM77.7m + (RM40.5m +
RM216.5m) + (RM450m – RM550m)
= RM951.7m

(ii) GNP = GDP – Income earned by the rest of the world +

Income earned from the rest of the world
= RM951.7m – RM240m + RM340m
= RM1051.7m

(iii). NI or NNP = GNP – Consumption of Fixed Capital (CFC) – Indirect Business

Taxes (IBT) – Capital Consumption Allowance (CCA) - Depreciation (DPR) – Statistical
Discrepancy (STAT)
= 1051.7-120-40.6
=891.1
National Income (NI) or Net National
Product (NNP)

🞂 NI or NNP measures the monetary value of the flow of

output of goods and services produced in an economy over a
period of time.

🞂 Two ways to calculating the NI or NNP, it depends on what

information you received from the table.
Calculating NI or NNP
🞂 Method 1: if you found the following items in the table
Items RM (billion)
Proprietors income 230 Enterprenuer
Compensation of 4821 labour
employee
Corporate profits 689 Enter
Rental income 54 land
Net interest 163 capital

You just need to combine them all together to get the value
of NI or NNP.

NI or NNP = 230+4821+689+64+163
=
 Computing National Income
🞂 Compensation of Employees: Wages, salaries paid to
employees
🞂 Proprietors’ Income is all forms of income earned by self-
employed individuals and the owners of business.
🞂 Corporate Profits include all income earned by the stockholders
of corporations.
🞂 Rental Income (of Persons) is the income received by
individuals for the use of their non-monetary (non-financial)
assets, such as houses, land.
🞂 Net Interest: interest income received by Malaysian households
and government minus the interest they paid out.
 Calculating NI or NNP
🞂 Method I1: if you found the following items in the table
Example: RM
(million)
Consumers’ expenditure 717
Federal government purchases of goods And Services 40.5
Exports of goods and services 450
Imports of goods and services 550
State and local government’s purchases 216.5
Gross private domestic investment 77.7
Income earned by the rest of the world 240
Indirect business taxes (IBT) 40.6
Income earned from the rest of the world 340
Consumption of fixed capital 120
Population = 10 million
Refer to next slideshow for the steps :
Calculating NI or NNP
🞂 Method I1:
Step1 : Calculate GDP by using C+I+G+(X-M)
Step 2: Calculate GNP by using the formula below
GNP= GDP- IBW + IFW
Step 3: Used the GNP to calculate NI or NNP by using the
formula below:
NI or NNP = GNP – Consumption of Fixed Capital (CFC) – Indirect Business Taxes
(IBT) – Capital Consumption Allowance (CCA) - Depreciation (DPR) – Statistical
Discrepancy (STAT)

Lets do some additional exercise again..

🞂 Indirect Business Taxes usually comprise excise taxes,
sales taxes, and property taxes. ( these taxes are not part of
national income because they are NOT considered a
payment to any resource, but should be included in GDP
because these taxes are paid when we purchase goods and
services)
🞂 Capital Consumption Allowance or depreciation is the cost
to replace capital goods that break or wear down
🞂 Statistical discrepancies or pure computational errors often
occur
Other National Income Accounting
Measurements

🞂 Net Domestic Product (NDP) measures the total value of

new goods available in the economy in a given year after
worn-out capital goods have been replaced.

Net domestic product (NDP) = GDP – Capital consumption

allowance*

*The estimated amount of capital goods used up in

production through natural wear, obsolescence, and
accidental destruction.
Other National Income Accounting Measurements
🞂 Personal Income =
National income
– Undistributed Corporate Profits
– Social Security Taxes
– Corporate Profits Taxes
+ Transfer Payments

🞂 Disposable Income =
Personal Income – Personal Taxes

🞂 Per Capita Macroeconomic Measurements Divides these

factors by the population.
 Real GDP vs Nominal GDP

🞂 Nominal GDP is the value of the entire output produced

annually within a country’s borders, without adjustment for
price changes (inflation).
🞂 In other words, GDP not adjusted for price changes
The GDP that we just learned how to calculate is Nominal
GDP.

🞂 Real GDP is the value of the entire output produced

annually within a country’s borders, adjusted for price
changes (inflation).
🞂 In other words, GDP adjusted for price changes.
🞂 Formula : Real GDP= Nominal GDP/ Price index
If You Know the Price Index and
GDP For A Year, Can You Compute
Real GDP?
Real GDP = GDP x 100
Price Index

🞂 E.g. Nominal GDP was RM 9872, Price Index was

107,

Real GDP = RM 9872 x 100 = RM 9226

107
Real GDP, Economic Growth, and
Business Cycles
Economic Growth is measured by increases in Real GDP.
🞂 Annual economic growth has occurred if the Real GDP in
one year is higher than the previous year.

Economic growth= Real GDP1- Real GDP0 X100%

Real GDP0

Eg: In 2018, Malaysia real gdp was RM 2911 million, in

2019 Malaysia GDP is RM 3010 million. How many
percent of economic growth?
The Business Cycle
Recurrent swings (up and down) in Real GDP.
Five Phases/Stages of the Business Cycle

🞂 Peak: at the peak of the business cycle, Real GDP is at a temporary high.
🞂 Contraction: A decline in the real GDP.
🞂 Trough: The Lowest Point of the GDP.
🞂 Recovery: When the GDP is rising from the lowest point until the initial peak
🞂 Expansion: when the real GDP expands and become higher than the previous peak
Recession
The National Bureau of Economic
Research (NBER) definition of a
recession is “ a significant decline
in activity in the economy, lasting
more than a few months, visible in
industrial production, employment,
real income, and wholesale-retail
trade”.
Recessions occur when Real GDP
declines for TWO OR MORE
consecutive quarters.