NATIONAL INCOME- CONCEPTS MEASUREMENT

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NATIONAL NATIONAL

INCOME- CONCEPTSINCOME- CONCEPTS

MEASUREMENTMEASUREMENT

Lecture

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What is What is income?income?

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IncomeIncome is the money earn or is the money earn or paid as a reward for the paid as a reward for the resources owned.resources owned.

For example:For example:

A worker earn income in the A worker earn income in the form form of monthly payment. of monthly payment.

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What is What is National National Income?Income?

Instead,

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National IncomeNational Income is defined as:is defined as:

the total value of the total value of final outputsfinal outputs which comprises of goods and which comprises of goods and services services produced by a countryproduced by a country for a particular period of time, for a particular period of time, usually usually a year.a year.

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Tucker,Tucker, defined national defined national incomeincome

as:as:total income earned by total income earned by resources owners, that is:resources owners, that is: rents, wages, interest and rents, wages, interest and

profit.profit.

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National IncomeNational Income:: is the total amount of is the total amount of moneymoney

that factors of production that factors of production earnedearned during a year.during a year.

This includes mainly payments of: This includes mainly payments of:

wages, wages, rents, rents, profits and profits and interest of capital.interest of capital.

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NATIONAL INCOME NATIONAL INCOME

= NATIONAL PRODUCT= NATIONAL PRODUCT

= NATIONAL = NATIONAL EXPENDITUREEXPENDITURE

(NI = NP =NE)(NI = NP =NE)

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Or Or NI = National Product (NP)NI = National Product (NP)

The national product refers to the The national product refers to the value of output producedvalue of output produced by an by an economy during the course of a economy during the course of a year. year.

Or Or NI = NP = National NI = NP = National ExpenditureExpenditure

refers to the value of money spent on goods and services in the economy in a year.

Firm ConsumersFactor Owners

Factor Market Product Market

Factor services Goods & services

ExpenditureRevenueCostFactor Income

Real Flow

Money Flow

The flow of economic activities in a 2-sector economy

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GDP and GNPGDP and GNP

GDP = Gross Domestic Product, is GDP = Gross Domestic Product, is the value of all final goods and the value of all final goods and services produced by all sectors of services produced by all sectors of the economy the citizens or the economy the citizens or foreign sectors within a country.foreign sectors within a country.

GNP = Gross National Product, is GNP = Gross National Product, is the value of all final goods and the value of all final goods and services produced by all citizens services produced by all citizens of a country (within a country or of a country (within a country or abroad).abroad).

Final Goods and Services

The term final goods and services refers to goods and services produced for final use.

Intermediate goods are goods produced by one firm for use in further processing by another firm.

Real GNP & Nominal GNP & Per capita GNP

Real GNP=(Nominal GNP/GNP Deflator)*100

Per capita GNP = GNP / Population size

Value Added

Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.– In calculating GDP, we can either sum

up the value added at each stage of production, or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced.

Value Added

Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers)

STAGE OF PRODUCTION

VALUE OF SALES VALUE ADDED

(1) Oil drilling $ .50 $ .50

(2) Refining .65 .15

(3) Shipping .80 .15

(4) Retail sale 1.00

.20

Total value added

$ 1.00

Exclusions from GDP

GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced.

GDP Versus GNP

GDP is the value of output produced by factors of production located within a country. Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP).

CONCEPTS OF NATIONAL INCOME Gross National Product: It is the total measure of the flow of

goods and services at market value resulting from current production during a year in a country, including net income from abroad.

GNP at Market Prices: When the total output produced in one year is multiplied by their market prices prevalent during that year in a country, plus net income from abroad, it is called GNP at Market Prices.

GNP at Factor Cost: It is the sum of the money value of the

income accruing to the various factors of production in one year in a country.

GNP at Factor Cost = GNP at market prices – Indirect Taxes + Subsidies.

CONCEPTS OF NATIONAL INCOME Net National Product (NNP): NNP is GNP net of

depreciation. NNP = GNP – Depreciation.

NNP at Market Prices: Net value of final goods and services evaluated at market prices: NNP at Market Prices = GNP at Market Price – Depreciation.

NNP at Factor Cost: Net output evaluated at factor prices.

NNP at Factor Cost = NNP at Market Prices – Indirect Taxes + Subsidies (or)

= GNP at Market Prices – Depreciation – Indirect taxes + Subsidies

CONCEPTS OF NATIONAL INCOME Domestic Income or Product: Income generated or

earned by the factors of production within the country from its own resources is called domestic income or domestic product. Domestic Income = National Income – Net Income earned from abroad.

Personal Income: Personal Income is the total income received by the individuals of a country from all sources before direct taxes. Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contributions + Transfer Payments + Interest on Public Debt.

CONCEPTS OF NATIONAL INCOME Disposable Income: income that accrues after direct taxes

have actually been paid. Disposable Income = National Income – Business Savings – Indirect taxes plus Subsidies – Direct Taxes on Persons – Direct Taxes on Business – Social Security Payments + Transfer Payments + Net Income from abroad.

Real Income: Real income is national income expressed in terms of a general level of prices of a particular year taken as base. Real NNP = Current Year NNP x Base year Index / Current Year Index.

Per Capital Income: The average income of the people of a country in a particular year is called per capital income for that year. Per capita income = national income / population. Real per capita income = real national income / population.

CONCEPTS OF NATIONAL INCOME Nominal GDP

– Value of output measured at actual prices (current rupee output)

– Does not correct for inflation

Nominal GDP = Current year Quantities x Current year Prices

Real GDP– Value of output based on prices of some base period

(“constant” rupee output)– eliminates effect of inflation

Real GDP = Current year Quantities x Base year Prices

GDP Deflator = Nominal GDP x 100 Real GDP

CONCEPTS OF NATIONAL INCOME

Nominal GDP Real GDP

1992 (base year)

127 127

1994 160 143


GDP Deflator = Nominal GDP • 100 Real GDP

1992 GDP Deflator = 127• 100 = 100.0 127

1994 GDP Deflator = 160 • 100 = 111.9 143


Change in GDP Deflator (Inflation) from 1992 to 1994:

= (1994 Deflator - 1992 Deflator) • 100

1992 Deflator

= (111.9 - 100.0) • 100 = 11.9% 100.0

PRICE INDEX A price index (plural: “price indices” or “price indexes”)

is a normalized average (typically a weighted average) of

prices for a given class of goods or services in a given region, during a given interval of time. It is a statistic designed to help to compare how these prices, taken as a whole, differ between time periods or geographical locations.

Price indices have several potential uses. For particularly broad indices, the index can be said to measure the economy's price level or a cost of living. More narrow price indices can help producers with business plans and pricing. Sometimes, they can be useful in helping to guide investment.

Some notable price indices include: Consumer price index Producer price index GDP deflator

Consumer Price Index A consumer price index (CPI) is a measure

estimating the average price of consumer goods and services purchased by households. A consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation).

It is a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer.

Producer Price Index A Producer Price Index (PPI) measures

average changes in prices received by domestic producers for their output. It is one of several price indices.

Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.

GDP Deflator The GDP deflator (implicit price deflator for GDP)

is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. In most systems of national accounts the GDP deflator measures the ratio of nominal (or current-price) GDP to the real (or chain volume) measure of GDP.

The formula used to calculate the deflator is: Dividing the nominal GDP by the GDP deflator

and multiplying it by 100 would then give the figure for real GDP, hence deflating the nominal GDP into a real measure.

The GDP deflator is utilized as a measure of shifts in the prices of goods and services that are produced in a given country. It is understood that the GDP deflator can help provide a more accurate picture of the current status of the gross domestic product within the country. Because the GDP deflator is understood to be an example of an implicit price deflator for GDP, economists consider calculating this economic indicator as an essential component in ascertaining the current strength or weakness of the country’s economy.

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Circular Flow of Circular Flow of Income Model:Income Model:

The basic The basic circular flowcircular flow model model provides provides

a general picture of the a general picture of the interactionsinteractions in terms of : in terms of :

income, output and income, output and expenditureexpenditure among all among all sectorssectors in an economy. in an economy.

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Circular Flow of Income Circular Flow of Income Economic ModelsEconomic Models

3 types:3 types: A 2-sector model of circular flowA 2-sector model of circular flow

- Comprises of - Comprises of ‘Households’‘Households’ and and ‘Firms’‘Firms’ sectors sectors A 3-sector model of circular flowA 3-sector model of circular flow

- Comprises of - Comprises of ‘Households’ , ‘Firms’‘Households’ , ‘Firms’ and and

‘‘Government’Government’ sectors sectors A 4-sector model of circular flowA 4-sector model of circular flow

- Comprises of ‘- Comprises of ‘Households’, ‘Firms’, Households’, ‘Firms’,

‘ ‘Government’Government’ and and ‘Foreign’‘Foreign’ sectors sectors

The 2-sector circular flow of national income and expenditure

The 2-sector circular flow of national income and expenditure

Income,Y Income,Y

Expenditure, C Expenditure, C

FIRMSHOUSEHOLDS

Wages, rent, interest, profit

on goods & services

Y = C+I

Factor payment

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Assumptions in a Assumptions in a 2 – sector Circular Flow model2 – sector Circular Flow model

All All income receivedincome received by households will by households will entirely entirely be spendbe spend on consumption. on consumption.

The households in the market will entirely The households in the market will entirely purchase purchase all goods and services produced all goods and services produced by firms.by firms.

Therefore,Therefore,

total income = total total income = total expenditure = total outputexpenditure = total output

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The 3 sector circular flow of national income and expenditure

The 3 sector circular flow of national income and expenditure

Income,Y Income,Y


Y = C+I+G

FIRMSHOUSEHOLDS

Financial Institutions

GOVERNMENT

Net Taxes Net Taxes

G. Expenditure

G. Expenditure

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Assumptions in a 3–sector Assumptions in a 3–sector Circular Flow modelCircular Flow model

C: households is assumed to spent only a portion of their income on consumption.

Part of it as savings in financial institutions and for paying taxes.

I: Investors are getting loans for capital investment thus produced goods and services in an economy.

G: Government expenditure will be made based on tax revenue collected.

t: when government sector is included in the model; tax revenue (t) will be collected (from households – personal income tax, and from

firms – corporate income tax).

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The concept of disposable The concept of disposable incomeincome

The household income (Y) that can be The household income (Y) that can be spent by households will now be lesser spent by households will now be lesser after deducting the tax portion (t) paid to after deducting the tax portion (t) paid to government. government.

It is now called as:It is now called as:

disposable income (Yd). disposable income (Yd).

Yd = Y – t.Yd = Y – t.

and Disposable NI = NI – t.and Disposable NI = NI – t.

The 4-sector circular flow of national income and expenditureThe 4-sector circular flow of national income and expenditure

Income,Y Income,Y


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

FIRMSHOUSEHOLDS

Financial Institutions

GOVERNMENT

Net Taxes

Net Taxes

G. Expenditure

G. Expenditure

FOREIGNERS

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Assumptions in a 4 –sector Assumptions in a 4 –sector Circular Flow modelCircular Flow model

Households now supply resources to both Households now supply resources to both domestic and foreign markets. Households domestic and foreign markets. Households also consume both local and imported also consume both local and imported goods.goods.

Firms purchased capital goods and engaged Firms purchased capital goods and engaged foreign workers from abroad to help them foreign workers from abroad to help them produce more new goods and services. They produce more new goods and services. They also exports goods and services produced to also exports goods and services produced to abroad or overseas.abroad or overseas.

Government involves either directly or Government involves either directly or indirectly with foreign sector. They may indirectly with foreign sector. They may import as well as exports goods and services import as well as exports goods and services to abroad. to abroad.

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Methods of Measuring Methods of Measuring National IncomeNational Income

NI can be measured using 3 common NI can be measured using 3 common approach:approach:

a)a) Income approachIncome approach

b)b) Output approachOutput approach

c)c) Expenditure approachExpenditure approach

Irrespective of which approach used Irrespective of which approach used in calculating NI, will give us the in calculating NI, will give us the same valuesame value

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i) INCOME APPROACHi) INCOME APPROACH National Income is the total money National Income is the total money

values of all incomes received by values of all incomes received by productive persons and enterprises in productive persons and enterprises in the country during the year. the country during the year.

It is the total income of all factors of It is the total income of all factors of production including the income of production including the income of self-employed person, labourers, self-employed person, labourers, capital and land (L,L,K,E)capital and land (L,L,K,E)

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““Transfer Payment”Transfer Payment”

should not be included in calculating NI should not be included in calculating NI to avoid double counting problem.to avoid double counting problem.

Transfer payment refers to income Transfer payment refers to income received without any direct contribution received without any direct contribution to the production of goods and services. to the production of goods and services.

is simply transferred from one group or is simply transferred from one group or people to another; without the people to another; without the recipients adding any value to recipients adding any value to production or volume of goods and production or volume of goods and services in the country. services in the country.

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e.g; e.g; Transfer PaymentTransfer Payment

PensionsPensions Welfare benefitsWelfare benefits Scholarships Scholarships Unemployment benefitsUnemployment benefits Sale of a second-hand goods e.g. Sale of a second-hand goods e.g.

an existing housean existing house Allowances to housewifeAllowances to housewife Interest on national debtInterest on national debt

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Example1:Example1: En. Ahmad previously was a self-employed man with an En. Ahmad previously was a self-employed man with an

income of income of RM1, 500RM1, 500. He later quit from business become . He later quit from business become an employee of a manufacturing company and earn a an employee of a manufacturing company and earn a salary of salary of RM3, 200RM3, 200 per annum. In closing down his per annum. In closing down his business, he had to dismiss two assistants, each business, he had to dismiss two assistants, each previously receiving a salary of previously receiving a salary of RM700RM700 and and RM800 RM800 respectively. Each of the assistants subsequently now respectively. Each of the assistants subsequently now received social security benefits (unemployment benefit) received social security benefits (unemployment benefit) worth worth RM300RM300 per month. What is the net change in national per month. What is the net change in national income?income?

The change in national income as a result of this was:The change in national income as a result of this was: Previously self-employedPreviously self-employed RM1, 500 RM1, 500 Presently employedPresently employed + RM3, 200+ RM3, 200 Dismissal of 2 assistantsDismissal of 2 assistants RM1, 500 RM1, 500

____________________ Net Increase of NI is: + RM 200Net Increase of NI is: + RM 200

Social security benefitSocial security benefit is an example of is an example of transfer payment,transfer payment, so is not included in the calculation of national income.so is not included in the calculation of national income.

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Total Domestic Total Domestic vs vs Total Total National IncomeNational Income

Total Domestic IncomeTotal Domestic Income is the total income earned is the total income earned within a territorial or geographic boundary. within a territorial or geographic boundary.

It It includesincludes income earned by its income earned by its citizenscitizens as well as as well as its its non-citizensnon-citizens i.e. foreign workers residing or i.e. foreign workers residing or working in the country.working in the country.

Total National IncomeTotal National Income is the total income earned is the total income earned by citizens of the country irrespective whether the by citizens of the country irrespective whether the citizens reside / working in the country or outside citizens reside / working in the country or outside the country (abroad). the country (abroad).

It will It will excludeexclude all income earned by all income earned by foreign workers foreign workers in the country. in the country.

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Example 2:Example 2:Given the following data, find the national

income of country XYZ; Domestic Income Rs 800m Income paid abroad Rs200m Income received from abroad Rs 180m

Answer: The national income of country XYZ is as follows:

Rs800m 200m + 180m = Rs 780m

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Personal Income Personal Income vsvs Personal Personal Disposable IncomeDisposable Income

Personal IncomePersonal Income is the gross receipt of is the gross receipt of income regardless of its source. It can income regardless of its source. It can come from come from productive productive and and non-productivenon-productive sources (transfer payment). And minus sources (transfer payment). And minus the contribution to Employees Provident the contribution to Employees Provident Fund (EPF). Fund (EPF).

Thus it is totally different from gross Thus it is totally different from gross earning of factor income (GDI or GNI).earning of factor income (GDI or GNI).

Personal Disposable IncomePersonal Disposable Income is gross is gross personal income less by the personal income less by the personal personal income taxincome tax paid. paid.

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Income ApproachIncome ApproachThe components of this approach include:The components of this approach include: Wages and salaries Rs xxxWages and salaries Rs xxx Interest and dividends xxxInterest and dividends xxx Rent and imputed rent xxxRent and imputed rent xxx Profits: distributed and undistributed profits, xxx Profits: distributed and undistributed profits, xxx

income of self-employed xxxincome of self-employed xxx

= Gross Domestic Income = Gross Domestic Income (at factor cost) XXXX(at factor cost) XXXX Income paid abroad xxxIncome paid abroad xxx

++ Income received from abroad xxxIncome received from abroad xxx = Gross National Income = Gross National Income

XXXXXXXX Depreciation or capital consumption xxxDepreciation or capital consumption xxx

= Net National Income XXXX= Net National Income XXXX (OR NATIONAL INCOME)(OR NATIONAL INCOME)

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ii) OUTPUT APPROACHii) OUTPUT APPROACH

Also known as Product Also known as Product Approach.Approach.

National Income (=GNP) is National Income (=GNP) is equivalent to the equivalent to the money value of money value of all goods and services producedall goods and services produced by all sectors in the country by all sectors in the country during a year. during a year.

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The problem of double The problem of double counting:counting: To avoid double counting, we To avoid double counting, we

only only sum-upsum-up all the all the “value-“value-added”added” of each sectors or at of each sectors or at each stage of production to give each stage of production to give us the national income value.us the national income value.

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Value-added conceptValue-added concept To avoid double counting, calculation must To avoid double counting, calculation must

be based on either one of the followings:be based on either one of the followings:a)a) Measure only the total market Measure only the total market value of value of all final goods and all final goods and servicesservices produced in the produced in the country.country.

OROR

b)b) Calculate national output based on the Calculate national output based on the value value added.added.

EXAMPLE:

Firm Stage of Production Purchasing Selling Value

____ ________________ Price (RM) Price (RM) Added (RM)

A Landowner sells trees - 100 100 to sawmill ownerB Sawmill owner cut into 100 180

80 timber sheets to furniture manufacturerC furniture manufacturer 180 290

110 turns timber sheets into furniture and sells to retailerD retailer sells furniture to final 290 420

130 consumer TOTAL VALUE 570 990

420

Total value added = Total value of Sales – Cost of intermediate goods = 990 – 570 = 420

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The concept of Market Price The concept of Market Price and Factor Costand Factor Cost

In most cases, In most cases, Market Price (MP) > Factor cost Market Price (MP) > Factor cost (FC)(FC)

Market Price Market Price = FC + indirect taxes – subsidies = FC + indirect taxes – subsidies

OROR

Factor CostFactor Cost = MP – indirect taxes + subsidies = MP – indirect taxes + subsidies

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Output ApproachOutput ApproachThe components are: The components are: RMRMThe total value of final goods and services in the The total value of final goods and services in the

economy or the total sum of “value-added” of all economy or the total sum of “value-added” of all industry or stage of production. industry or stage of production.

= Gross Domestic Product at market price = Gross Domestic Product at market price XXXX XXXX(GDP at mp)(GDP at mp)

Income paid abroad xxxIncome paid abroad xxx ++ Income received from abroad xxxIncome received from abroad xxx= Gross National Product at market price = Gross National Product at market price XXXX XXXX

(GNP at mp)(GNP at mp) Indirect taxes or taxes on expenditure xxxIndirect taxes or taxes on expenditure xxx ++ Subsidies xxxSubsidies xxx= Gross National Product at factor cost XXXX= Gross National Product at factor cost XXXX

(GNP at fc)(GNP at fc) Depreciation or capital consumption xxxDepreciation or capital consumption xxx= Net National Product at factor cost XXXX= Net National Product at factor cost XXXX (NNP at fc OR NATIONAL INCOME)(NNP at fc OR NATIONAL INCOME)

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iii) EXPENDITURE iii) EXPENDITURE APPROACH APPROACH

4 components included here:4 components included here:

a)a) Household or consumer expenditure on Household or consumer expenditure on consumption goods, (C).consumption goods, (C).b)b) Firm or producer expenditure of capital Firm or producer expenditure of capital goods. Also known as gross investment or goods. Also known as gross investment or gross private capital formation (I). gross private capital formation (I). c)c) Government expenditure on goods and Government expenditure on goods and services, excluding transfer payment (G). services, excluding transfer payment (G).

d) Expenditure on exports and imports (X – M).d) Expenditure on exports and imports (X – M).

Y = C + I + G + (X – M)

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Gross Gross vsvs Net Net InvestmentInvestment

Gross InvestmentGross Investment is the expenditure on new is the expenditure on new construction, purchase on new equipment and construction, purchase on new equipment and change in stock change in stock

Net InvestmentNet Investment is gross investment minus is gross investment minus depreciation of capital. depreciation of capital.

DepreciationDepreciation (capital consumption) is defined as (capital consumption) is defined as an allowance that is put aside for machinery an allowance that is put aside for machinery wears out and stocks used up due to its obsolete wears out and stocks used up due to its obsolete and deteriorated nature after being used for some and deteriorated nature after being used for some time. time.

Net InvestmentNet Investment = = Gross Investment – Depreciation of Gross Investment – Depreciation of

capitalcapital

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Expenditure ApproachExpenditure ApproachThe components include;The components include; RsRs the household expenditure (C), firm expenditure the household expenditure (C), firm expenditure or gross investment (I) and government or gross investment (I) and government expenditure (G).expenditure (G). + or – change in stock xxx + or – change in stock xxx

=Total Domestic Expenditure at market price XXXX=Total Domestic Expenditure at market price XXXX(TDE at mp)(TDE at mp)

+ Exports and + Exports and Imports xxx Imports xxx ==Gross Domestic Expenditure at market price XXXXGross Domestic Expenditure at market price XXXX

(GDE at mp) (GDE at mp) Income paid abroad xxxIncome paid abroad xxx + Income received from abroad xxx+ Income received from abroad xxx==Gross National Expenditure at market price XXXXGross National Expenditure at market price XXXX

(GNE at mp(GNE at mp)) Indirect taxes xxxIndirect taxes xxx + Subsidies xxx+ Subsidies xxx==Gross National Expenditure at factor cost XXXX Gross National Expenditure at factor cost XXXX

(GNE at fc)(GNE at fc) Depreciation or capital consumption xxxDepreciation or capital consumption xxx

== Net National Expenditure at factor cost XXXXNet National Expenditure at factor cost XXXX (NNE at fc) (OR NATIONAL INCOME)(NNE at fc) (OR NATIONAL INCOME)

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Few things to Few things to remember:remember:1) To change from market price to factor

cost: minus indirect tax plus subsidies.

DIRECT TAXESDIRECT TAXES INDIRECT INDIRECT TAXESTAXES

Personal Income TaxPersonal Income Tax

Business/ Corporate Business/ Corporate TaxTax

Profit TaxProfit Tax

Expenditure or Expenditure or Consumption TaxConsumption Tax

Custom dutiesCustom duties

Export Tax Export Tax

Import TaxImport Tax

TariffTariff

Services TaxServices Tax

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Few things to Few things to remember:remember:

To change from Gross to Net value: minus capital consumption.

To change from NI to Personal Income (PI): plus transfer payment and any benefits minus any contribution (EPF )

To change from PI to DPI: minus income tax

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Income ApproachIncome ApproachGiven the information:Given the information:

RM millionRM million

Total wages and salaries receivedTotal wages and salaries received 255,650 255,650

Total interest and dividends receivedTotal interest and dividends received 10,000 10,000

Total rent and imputed rentTotal rent and imputed rent 80,880 80,880

Gross trading profits from companiesGross trading profits from companies 65,500 65,500

Total income of self-employedTotal income of self-employed 33,70033,700

Income paid abroadIncome paid abroad 54,345 54,345

IIncome received from abroadncome received from abroad 76,680 76,680

Capital consumption Capital consumption 445

Find: i) GDP at factor cost ii) GNP at factor cost iii) NI

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Answer: Income Answer: Income ApproachApproach

Rs millionRs million

Total wages and salaries receivedTotal wages and salaries received 255,650 255,650

Total interest and dividends receivedTotal interest and dividends received 10,000 10,000

Total rent and imputed rentTotal rent and imputed rent 80,880 80,880

Gross trading profits from companiesGross trading profits from companies 65,500 65,500

Total income of self-employedTotal income of self-employed 33,70033,700

GDI fc (GDP fc)GDI fc (GDP fc) 445,730 445,730 LessLess income paid abroad income paid abroad (54,345) (54,345) AddAdd income received from abroad income received from abroad 76,68076,680

GNI fc (GNP fc)GNI fc (GNP fc) 468,065 468,065 LessLess Depreciation on capital consumption Depreciation on capital consumption (445)(445) NNI fcNNI fc

467,620 467,620

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Output Approach Output Approach Rs million Agriculture, forestry and fishing 4,296Mining and quarrying 6,700Manufacturing 28,965 Construction 15,550Services 13,220Net exports 3,000Appreciation in stock 2,000

Income paid abroad 15,432 Income received from abroad 17,66

Indirect taxes 599 Subsidies 333 Depreciation of capital 1,545

Compute the value for: i) GDP at market price ii) GNP at market price iii) GNP at factor cost iv) NI

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Answer: Output ApproachAnswer: Output ApproachAgriculture, forestry and fishing 4,296Mining and quarrying 6,700Manufacturing 28,965 Construction 15,550Services 13,220Net exports 3,000Appreciation in stock (2,000) GDP mp 69,731

Less income paid abroad (15,432) Add income received from abroad 17,66 GNP mp 70,965 Less indirect taxes (599) Add subsidies 333 GNP fc 70,699 Less depreciation (1,545)

NNP fc (NNI) 69,154

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Expenditure Approach Expenditure Approach Rs millionTotal consumer expenditure (C) 50,000

Gross investment (I) 20,000Government expenditure (G) 18,500Add exports (X) 9,000Less imports (M) ( 8,565)Change in stock 1,000 Net factor Income from abroad 250

Expenditure taxes 870 Subsidies 695 Capital consumption 2,750

Given the information above, calculate the values for: i) GDP at market price ii) GNP at market price iii) GNP at factor cost iv) NI

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Answer: Expenditure Answer: Expenditure ApproachApproach RM millionTotal consumer expenditure (C) 50,000Gross investment (I) 20,000Government expenditure (G) 18,500Add exports (X) 9,000Less imports (M) ( 8,565)Change in stock 1,000

GDE mp (GDP mp) 89,935 Less Income paid abroad (3,700)

Add income received from abroad 3,950 GNE mp (GNP mp) 90,185 Less Indirect taxes (870) Add subsidies 695 GNE fc (GNP fc) 90,010 Less Depreciation (2,750) NNI fc (NI) 87,260

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Uses ofUses of National National IncomeIncome

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Uses and Importance of National Uses and Importance of National

IncomeIncome Useful in measuring the Useful in measuring the standard of livingstandard of living of a nation of a nation

through estimating per capita income of the nation.through estimating per capita income of the nation.

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through estimating per capita income of the nation.through estimating per capita income of the nation. Time series Time series comparison (year to year). comparison (year to year). Measuring Measuring

growth of the economy.growth of the economy.

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growth of the economy.growth of the economy. Comparison between two or more countriesComparison between two or more countries can be can be

made. made.

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made. made. Able to know and analyze the contribution made and Able to know and analyze the contribution made and

performance performance by each production sector in the by each production sector in the economy and thus taken ample step for rectificationeconomy and thus taken ample step for rectification

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Useful in measuring Useful in measuring inequalities in the distribution of inequalities in the distribution of income.income.

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Useful in revealing the Useful in revealing the expenditure patternexpenditure pattern of a of a country.country.

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Useful in measuring the level and pattern of Useful in measuring the level and pattern of investment.investment.

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Useful in measuring the level and pattern of Useful in measuring the level and pattern of investment.investment.

Balance of paymentsBalance of payments pattern. pattern.

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performance performance by each production sector in the economy by each production sector in the economy and thus taken ample step for rectificationand thus taken ample step for rectification


Useful in revealing the Useful in revealing the expenditure patternexpenditure pattern of a country. of a country. Useful in measuring the level and pattern of Useful in measuring the level and pattern of investment.investment. Balance of paymentsBalance of payments pattern. pattern. National income as an indicator of success or failure of National income as an indicator of success or failure of

national planningnational planning..

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Gross and Net Gross and Net InvestmentInvestment Gross investmentGross investment is the total is the total

amount spent on purchases of amount spent on purchases of new capital and on replacing new capital and on replacing depreciated capital.depreciated capital.

Net investmentNet investment is the change in is the change in the stock of capital and equals the stock of capital and equals gross investment minus gross investment minus depreciation.depreciation.

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Real GNP:Real GNP:

Real GNP = Real GNP = Price IndexPrice Index00 X Nominal X Nominal GNPGNP11

Price IndexPrice Index11

Nominal GNP is the current value of GNP according to the price in that particular year, in which might has experience a price rise from previous years because of inflation.

Real GNP or GDP shows a better value of measurement for comparison purposes, because it has deflate the value from the problem of inflation.

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The Difference The Difference between between nominalnominal and and real incomereal income

Nominal IncomeNominal Income would be the actual wage or salary that would be the actual wage or salary that is earned currently. is earned currently. The Nominal Gross Domestic The Nominal Gross Domestic Product measures the value of all the goods and Product measures the value of all the goods and services produced expressed in current prices.services produced expressed in current prices.

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The Difference The Difference between between nominalnominal and and real incomereal income

Nominal IncomeNominal Income would be the actual wage or salary that is would be the actual wage or salary that is earned currently. earned currently. The Nominal Gross Domestic Product The Nominal Gross Domestic Product measures the value of all the goods and services produced measures the value of all the goods and services produced expressed in current prices.expressed in current prices.

Real IncomeReal Income would be the income that has been deducted with would be the income that has been deducted with the reduction in the “purchasing power” that the wage or salary the reduction in the “purchasing power” that the wage or salary has in the market place (i.e. rate of inflation is 3%). has in the market place (i.e. rate of inflation is 3%). Real Gross Real Gross Domestic Product measures the value of all the goods and Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year.services produced expressed in the prices of some base year.

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per capita incomeper capita income is defined as their total personal income is defined as their total personal income

divided by the number of people in the divided by the number of people in the country. country.

often used as a measure of the wealth of often used as a measure of the wealth of the population of a nation, particularly in the population of a nation, particularly in comparison to other nations.comparison to other nations.

usually expressed in terms of a usually expressed in terms of a commonly-used international currency commonly-used international currency such as the Euro or United States dollar.such as the Euro or United States dollar.

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2 major problems 2 major problems in measuring national in measuring national incomeincome

i) PRACTICAL PROBLEMSi) PRACTICAL PROBLEMS a) a) Problem of illiteracy Problem of illiteracy b)b) Problem of expertiseProblem of expertisec)c) Problem of inaccessibilityProblem of inaccessibilityd)d) Lack of sophisticated Lack of sophisticated

software machineries.software machineries.e)e) Problem of false Problem of false

informationinformation

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ii) CONCEPTUAL PROBLEMSii) CONCEPTUAL PROBLEMS

a)a) Arbitrary definitionArbitrary definition

b)b) Problems in estimating the Problems in estimating the value of depreciation, value of depreciation,

imputed rent, etc.imputed rent, etc.

c)c) Problem of double countingProblem of double counting

d)d) Problem of measuring Problem of measuring quality quality

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THANK YOUTHANK YOU

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NATIONAL INCOME- CONCEPTS MEASUREMENT