CHAPTER 2 NATIONAL INCOME AND OUTPUT.pptx

MEASURING
NATIONAL INCOME
AND OUTPUT
DR. MOHD IQBAL BIN MOHD NOOR
SENIOR LECTURER
FACULTY OF BUSINESS MANAGEMENT
WEEK 2

Contents
01 Learning Outcomes
Introduction
Introduction of
National Income
02
03
Circular Flow of
Income
04 Concepts of
National Income
Problems in
Measuring National
Income
09
Uses of National
Income
08
Methods of
Measuring National
Income
05
Personal Income,
Disposable Income,
06
Nominal Income vs
Real income, Per
Capita Income &
Growth Rate
07

At the end of this chapter, students should be able to
Understand the significance of measuring national income
Understand the flow of national income in an economy
Calculate national income using three different approaches
Realize the problems in measuring national income.

Introduction of National
Income
02

Definition
National Income
National Income(NI) as measured by Gross
Domestic Product(GDP) is defined as the market
value of all final goods and services produced with
an economy during a specific time period.

Final Goods and services
A good or service that is consumed by the end user and does not
require any further processing eg. A Car
Intermediate good.
Material or item that is a final-product of a process, but is also used as
an input in the production process of some other good. For example, tire
is consumed directly as well as in the manufacture of a product (used in
a production of a car)
FINAL GOODS vs INTERMEDIATE GOODS

Intermediate goods Final goods

Circular Flow of Income
Definition
The circular flow of income model shows how the
economy works and how the national income is
determined and measured. The three models are:

The Circular Flow of Income Models
2 3
1
• Households
• Firms
2 - sectors model
• Households
• Firms
• Government
• International sector
• Households
• Firms
• Government
Households own all factors of
production and spend all
income by buying all final
goods
Firms hire factors of
production from households,
sell goods and pay any profit
made to households
The Government undertakes
three macroeconomic activities
in the economy. They are:
• Purchase goods/services
from firms
• Payment of benefit and
subsidies to firms and
households
• Collect taxes from
households and firms
● The International Sector
is doing an import (M) and
export (X)
● Export is an injection
because money flow into
circular flow (revenue)
● Import is leakage
because money flow out
from the circular flow
(expenditure)
3 - sectors model 4 - sectors model

HOUSEHOLDS FIRMS
Factor of production: Land, Labor, Capital, Entrepreneur
Income (Y): Rental, Wages & Salary, Interest, Profit
Goods and Services
Consumer Expenditure (C)
Factor
market
Product
market
Circular Flow of Income in 2 sectors economy model

HOUSEHOLDS FIRMS
Goods and Services
Factor
market
Product
market
Circular Flow of Income in 2 sectors economy model
financial Institutions
saving (S) Investment (I)

Thus; Income = Expenditure + Saving
Y = C + S
Saving in the bank will use as an investment, thus;
Y = C + I
From the above equation we can say that:
I = S or Injection = Leakages
So in two sector economy,
EQUILIBRIUM OF INCOME is Y = C + I
2 sectors economy model

HOUSEHOLDS FIRMS
Goods and Services
Factor
market
Product
market
Circular Flow of Income in 3-sectors economy model
GOVERNMENT
Taxes (T) Taxes (T)
Government
Spending
Government
Spending

•Government spendings are injection into flow since the
government makes expenditure on goods/services and transfer
payment to recipients through welfare program.
•Taxation represents leakage because money goes out of circular
flow.
•Therefore in 3-sectors economy,
EQUILIBRIUM OF INCOME equals to: Y = C + I + G
or S + T = I + G
3-sectors economy model

Circular Flow of Income in 4-sectors economy model
HOUSEHOLDS FIRMS
Goods and Services
Factor
market
Product
market
GOVERNMENT
Taxes (T) Taxes (T)
Government
Spending
Government
Spending
FOREIGN
SECTOR
Export (X)
Export (X)
Import (M)
Import (M)

•In 4 sector economy consists 4 kind of economics agents; households,
firms, government and foreign sector
•With foreign sector we have import (M) and export (X)
•Export is injection because money flow into circular flow (revenue)
•Import is leakage because money flow out from the circular flow
(expenditure)
•Therefore in 4 sector economy, equilibrium
of income equals to:
Y = C + I + G + (X-M)
S + T + M = I + G + X
4-sectors economy model

FORMULA
Economics
Sectors
AS=AD
Approach
Leakage = Injection
Approach
1 SECTOR Y = C S = 0
2 SECTOR Y = C + I S = I
3 SECTOR Y = C + I + G S + T = I + G
4 SECTOR Y = C + I + G + (X-M) S + T + M = I + G + X

Concepts of National
Income
04

The Concept of National Income
● The differences between GDP and GNP
● Market Price and Factor Cost
● GNP and NNP
● Personal Income and Disposable income

The differences between GDP and GNP
● GDP is the total market value of
all final goods and services
produced (or income earned)
within a country.
● Example Ali is a Malaysian. John
is an American. Both are live and
work in Malaysia.
Thus the income from Ali and
John will be calculated in GDP.
● GNP is the total market value of all
final goods and services produced by
residents of a country.
● Example: Ali is a Malaysian.He lives
and works in Malaysia. Ahmad is also
a Malaysian but he lives and works in
America.
● Since both are residents of Malaysia,
thus the income earned by Ali and
Ahmad will be calculated in GNP. But
the income of John is not included in
GNP (because he is not a residents of
Malaysia)
GDP GNP

The differences between
Market Price (mp) and Factor Cost (fc)
MARKET PRICE (mp)
● Price that paid by the consumers
for the goods and services.
● The national product at market
price is the value of final product
(goods and services) in the market.
● The mp has an element of indirect
taxes and subsidies.
FACTOR COST (fc)
● Price that paid by the producers to
the factors of production.
● The national product at factor price
is the value of final product in the
production stage.
● Indirect taxes will make the market
price higher than factor cost
because the tax will increase the
price of goods and services.
● Subsidies will make the factor cost
higher

The differences between GNP and NNP
● GNP is the total market value of all final goods and services
produced by residents of a country.
● The NNP is the value of Gross National income which is
adjusted by the value of depreciation
NNP = GNP - depreciation
Another terms used for depreciation are:
1) Capital consumption
2) Capital consumption of fixed capital
is a reduction in the value
of asset, due to wear and
tear with the passage of
time

Personal Income and Disposable Personal Income
● Is the real income earned by
household before they pay their
personal income taxes.
● actual amount of income that can
be spent by individuals.
PERSONAL INCOME DISPOSABLE PERSONAL INCOME
Personal Income (PI)
= National income (NI)
+ Transfer Payment
- Corporate income taxes
- Retained earning
- Employee Provident Fund
(EPF)
- Social Security Contributions
(SOCSO)
- Insurance Premium
Disposable Personal Income (DPI)
= Personal Income (PI)
- Personal income tax

Methods of Measuring
National Income
05

In an economy, firm will use all of factors of production
(FOP) 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;
● Expenditure Approach
● Income Approach
● Output / Product Approach

1)Expenditure Approach
GDPmp = C + I + G + (X - M)
In order to calculate GDP at market price, we will add up
all of these items.
CONSUMPTION INVESTMENT
GOVERNMENT
SPENDING
EXPORT IMPORT
NET EXPORT

Items that included in the calculation of Gross Domestic Expenditure:
i) Consumption : which made by households. Also known as
private consumption
ii) Investment or capital formation: which made by firms. There are
three components of investment:
● Non residential investment
● Residential investment
● Change in business inventories or change in stock.
iii) Government expenditure: Also known as public consumption
iv) Net export (X-M) : Export - Import

Example
Qs1: Calculate the national income using the expenditure approach
Item RM (million)
Household expenditure (+) 26, 700
Investment (+) 10, 700
Government expenditure (+) 9, 700
Export (+) 23, 700
Import (-) 13, 700
GDPmp 57, 100
This is the GDPmp but not yet the National Income. How
to calculate the National income using the GDPmp?

FORMULA TO CALCULATE THE NATIONAL INCOME
GDP mp
GNP mp
NNP mp
GDP fc
GNP fc
NNP fc
GDPmp/fc GNP mp/ fc
GNPmp/fc NNPmp/fc
(+) subsidy
(-) indirect tax / tax on expenditure
(+) Net Factor income from abroad
(Factor income received - Factor income paid)
(-) depreciation / capital consumption
1
2
3

Question 1
Calculate the national income for this country.
Items RM million
Household expenditure 26, 700
Investment 10, 700
Government expenditure 9, 700
Export 23, 700
Import 13, 700
Indirect tax 1, 000
subsidies 1, 200
Net factor income abroad 25, 000
depreciation 850
Answer the questions:
a) Calculate the GDPmp
GDPmp = 26 700 + 10 700 + 9 700 + 23 000 – 13 000
GDPmp = 57 100 million
b) Calculate the GDP fc
GDP mp GDP fc
+ subsidies
- Indirect tax
GDP fc = GDP mp + 1 200 – 1 000
GDP fc = 57 100 + 1 200 – 1 000
GDP fc = 57 300 million

Question 1
Calculate the national income using expenditure approach
Items RM million
Household expenditure 26, 700
Investment 10, 700
Government expenditure 9, 700
Export 23, 700
Import 13, 700
Indirect tax 1, 000
subsidies 1, 200
Net factor income abroad 25, 000
depreciation 850
c) Calculate the GNP fc
GNP fc = GDP fc + net factor income abroad
GNP fc = 57300 + 25 000
GNP fc = 82 300 million
GDP fc GNP fc
+ net factor income abroad
d) Calculate the National income (NNP fc)
NNP fc = GNP fc - depreciation
NNP fc = 82 300 – 850
NNP fc = 81 450 million
GNP fc NNP fc
- depreciation

2) Output / Product Approach
GDPmp = Primary sector +
Secondary sector + Tertiary sector
In order to calculate GDP at market price, we will add up
all of these items.

Secondary Sector
● Construction
● Manufacturing
Primary Sector
● Agriculture
● Forestry
● Fisheries
● Mining &
Quarrying
Tertiary Sector
● Electricity, gas and
water
● Transportation,
storage and
communication
● Wholesale, retail
and trade, hotel
and restaurant
● Finance,
insurance,
property and
business
● Government

Example
Calculate the national income using the output approach
Items RM (million)
Agriculture 1, 450
Mining and quarrying 1, 600
Manufacturing 1, 200
Construction 800
Government services 1,100
Other services 450
GDP mp 6, 600
This is the GDPmp
but not yet the National
Income. How to
calculate the National
income using the
GDPmp?
Use the same formula
as before.
klik here.

Type of Approach
Gross Domestic Product at market
price (GDP mp)
Gross Domestic Product at
factor cost (GDP fc)
Gross National Product at factor cost
(GNP fc) National Income
Expenditure Approach
C + I + G + (X-M)
Output/Product Approach
Primary sector + secondary sector +
tertiary sector
(+) subsidy and
(-) indirect tax/ tax on
expenditure
(+) Net factor income from abroad
(income received - income paid)
(-) depreciation or
capital
consumption

Items that are not included in the GDP
● Sales of goods that were produced outside our domestic
borders
● Sales of used goods @ secondhand goods
● Illegal sales of goods and services (which we call the
black market) eg: poisons, drugs
● Transfer payments made by the government. eg:
scholarships, bonus etc
● Intermediate goods (eg: tyre) that are used to produce
other final goods (eg: car)

Personal Income, Disposable
Personal Income
06

PERSONAL INCOME
• Personal Income represents the real income actually received by
households before they pay personal income taxes.
• To calculate the Personal income:
+ National Income
+ Transfer payment
+ Dividend
- Undistributed profits
- Taxes on companies’ profits
- EPF (Employees Provident
Fund)
- SOCSO
- Insurance Premium
Personal
Income
Where you get
this figure?
Klik here

Calculate Personal income and Disposable Personal income using the items below
National Income 1, 595
Transfer payment (+) 100
Corporate income taxes (-) 25
Undistributed profits (-) 40
Social Security Contributions (-) 10
Employees Provident Fund (-) 50
Personal Income 1, 520
Personal Income Tax (-) 20
Disposable Personal Income 1, 500

DISPOSABLE PERSONAL INCOME
Disposable income is the actual amount of income that can be
spent by individuals after pay personal income taxes/direct
taxes.
Disposable income = Personal income
– income/direct taxes
Example: klik here

Nominal Income vs Real Income,
Per Capita Income & Growth Rate
07

NOMINAL INCOME vs REAL INCOME, PER CAPITA INCOME AND GROWTH
RATE
Nominal GDP/ GNP – National income that is measured at current
prices.
Real GDP/GNP – National income that is measured at a constant
price or in a based year

FORMULA
REAL GDP =
Nominal GDP
GDP deflator
GDP deflator =
REAL GDP = Nominal GDP X
Base year price index
Current year price index
GDP deflator =

EXAMPLE
Based on the table, calculate the real GDP in the year 2015.
Year Nominal GDP (RM million) Consumer Price Index (CPI)
2010 180 100
2013 210 105
2015 240 110
= RM 218.18 million
Note: The base year is a year corresponding to the value of CPI = 100
100
110
REAL GDP (2015) = 240 X

NATIONAL INCOME PER CAPITA
• National income per capita is the average income per head
of population.
• To measure standard of living:
• Per Capita Income = National Income (Nominal)
Total Population

GROWTH RATE
Growth Rate is a percentage change in quantity of goods and services produced from
one to another
GROWTH RATE (%) =
Real GNP this year – Real GNP last year
Real GNP last year

Question
Year / Item 2012 2015
Consumer Price Index 105 110
Nominal GNP (RM million) 43,000 48000
Population 30 32
Real GNP (RM million)
(a) Complete the table above.
(b) Calculate the real income per capita for 2015
(c) Between 2012 and 2015, the real GNP has (increase/decrease) by __________ %
The following table shows the value of nominal GNP and price index for a country.
The corresponding base year is 2010=100)

Answer
Year / Item 2012 2015
Consumer Price Index 105 110
Nominal GNP (RM million) 43,000 48000
Population 30 32
Real GNP (RM million)
(a) Real income per capita (2012)
REAL GDP = 43000 X 100
105
= 40,952.38
The following table shows the value of nominal GNP and price index for a country.
The corresponding base year is 2010=100)

REAL GNP = Nominal GNP X
(a) Real income per capita (2015)
REAL GNP = 48000 X 100
110
= 43,636.36
(b) Real income per capita (2015)
REAL GNP per capita =
Real GNP 2015
Total population 2015
REAL GNP per capita =
43, 636.36
32 (million)
= RM 1, 363.64
(c) Between 2012 and 2015, the real GNP has increased by 6.55%
43, 636.36 – 40, 952.38
40, 952.38
X 100 = 6.55%

to assess the
performance
of sectoral
contribution
USES OF
NATIONAL
INCOME
As a
measure of
economic
growth As an indicator of
success or failure
of Government
planning &
policies
to measure
standard of
living of a
country
to compare
the wealth of
different
countries
1
2
3
4
5
the higher is the income per capita,
the higher standard of living will be.
4
National income statistics enable us to
identify which sector makes the most
contribution to the country’s
economic growth; primary, secondary
or tertiary
5
To measure the rate of growth of the
country in a country’s economic
activities from one year to another.
1
The government can use it to forecast
future developments based on
current economic performance and
then creates short term or long term
planning
2
The National Income of a country can
be used to differentiate between
develop and developing countries.
The country with a higher income is
wealthier than the other country
3

Problems in Measuring
National Income
09

Problems
of double
counting
PROBLEMS IN
MEASURING
THE NATIONAL
INCOME
Problem of
non-
monetized
sector
Problem of
illiteracy
Problems of
expertise
and modern
machinery
False
Information
1
2
3
4
5
value of intermediate goods which
enter into final goods (e.g., paper
used in printing of books, raw
cotton used in garments, wheat
used in making bread, etc.) should
not be taken into account.
Some Third world countries still
use an obsolete machinery
which make the data become
questionable.
Similarly, the Lack of expertise
will lead to problems because
of unable to estimate the
income accurately.
Businessmen and other self-
employed people usually not disclose
their income or underestimates their
income to avoid paying high taxes.
Some producers are
illiterate and are unable
to keep accounts of their
productive activities. They
fail to provide accurate
information to
government.
The products they produce are
for self-consumption and not
for the market and records are
not kept of their productive
activity

Thank You!!
REFERENCES
Choo,T.W., Ahmad, N., Nisa, Z., Ramli,I. M., Ghani, R. A.(2017). Fundamentals of
Economics, Oxford Fajar
Special thanks to
Puan Nor Aziah Abd Kadir
Puan Adibah bt Hussin

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