CHAPTER 1

NATIONAL INCOME
ACCOUNTING

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 1
 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.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 2
 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.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 3
 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
CONCEPT OF NATIONAL INCOME
GNP(FC)= GDP (MP) – Indirect taxes + Subsidies

FACTOR COST (FC)

Factor cost is the real prices that is earned by the producers or
sellers.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 4
 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 INCOME
CONCEPT OF NATIONAL

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.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 5
 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

CONCEPT OF NATIONAL
INCOME

DISPOSABLE PERSONAL INCOME (DPI)

DPI is the part of the personal income that is left after the
payment of personal direct taxes.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 6
 EXPENDITURE
EXPENDITURE INCOME
INCOME
APPROACH
APPROACH APPROACH
APPROACH

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 7
 1. EXPENDITURE APPROACH

Consumption (C)
Government Spending (G)

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

Investment (I)

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 8
 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

Formulas in calculating
GNP (MP) = GDP (MP) + Net factor the national income using
Income abroad Expenditure approach
GDP (MP) = C + I + G + (X – M)

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 9
 ANI Calculated from
Expenditure Approach

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 10
 2. INCOME APPROACH

Wages and Salaries

Interest and dividend

Income approach will measure

Profit
the national income by adding
together all the incomes.

Rent

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 11
 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

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 12
 NI Calculated from Income
Approach

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 13
 To
To assist
assist in
in To
To identify
identify sectoral
sectoral
national
national 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 To
To compare
compare wealth
wealth
Income
Income between
between countries
countries

Public To
To measure
measure the
the rate
rate
Public sector
sector National
National of
of growth
growth of
of the
the
Expenditure
Expenditure country
country

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 14
 Problems
Problems of
of non-
non- Problem
Problem ofof less
less
monetized
monetized sector
sector sophisticated
sophisticated machinery
machinery

Problem
Problem of of
illiteracy
illiteracy Problem
Problem of
of
expertise
expertise

Problem
Problem of
of multi
multi
occupations
occupations Problem
Problem of
of
double
double counting
counting
Problem
Problem of
of false
false
information
information

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 15
 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

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 16