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# Prepared By:

## Siti Nurazani Binti Mustaffa

CHAPTER 2

NATIONAL INCOME
ACCOUNTING
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2.1.1 Define GDP, GNP and NNP
2.1.2 Compare market price and cost factor
2.1.3 Compare national nominal income and national real
income, personal income, disposable income and per capita
income.
2.1 CONCEPT IN NATIONAL INCOME
ACCOUNTING
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NATIONAL INCOME
The flow of goods and services by a nation over a period of time, usually a year
The total money value of all goods and services produced by a nation
after deducting the depreciation value of the machines used in
production.
The total payment received by the factors of production through the
production of goods and services in a country in a year.
The total of net output of the nation.
Annual consumption of a country and not its annual production.

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GROSS DOMESTIC PRODUCT (GDP)
The total money value of all final output produced by factors of
production in a country over a given period of time.
GDP excludes goods and services produced by Malaysian citizens
working overseas as well as intermediate goods.
GDP includes the output produced by foreign workers in Malaysia.
GDP per capita : Total GDP/total population; average GDP.
GDP per capita is commonly used as a measure of a countrys standard
of living.
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MARKET PRICE
COST FACTOR
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GDP can be measured by :
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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
consumers.

COST FACTOR
Refers to the real price
earned by the sellers
or producer. (prices of
factors production)

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The main difference:
When indirect taxation charged to a good = GDPmp > GDP fc
When subsidization charged to a good = GDPmp < GDP fc

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GDP at market price =
GDP at factor cost + indirect taxes - subsidies
GDP at factor cost =
GDP at market price - indirect taxes + subsidies
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GROSS NATIONAL PRODUCT (GNP)
The total market value of all final goods and
services produced by the residents of a
country during a given period of time.
Residents of a country- regardless of where
they are.
Only final goods and services that satisfy
consumption needs will be included .
The value of intermediate goods and inputs
will be excluded.
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GROSS NATIONAL PRODUCT
(GNP)
GNP = GDP + NET FACTOR
GNP = GDP + (factor income
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MARKET PRICE
COST FACTOR
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GNP can be measured by :
Can refer slide no 6
10
GNP at market price =
GNP at factor cost + indirect taxes - subsidies
GNP at factor cost =
GNP at market price - indirect taxes + subsidies
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NET NATIONAL PRODUCT (NNP)
The total market value of net output of goods and services
produced by a nation in a year.
Depreciation/ capital consumption occurs when the capital
equipment used in the production process becomes absolute
after a certain period of usage.

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NET NATIONAL PRODUCT (NNP)

NNP mp=
GNP at market price
depreciation value

AND

NNP mp =
NNP fc + indirect taxes -
subsidies

NNPfc=
GNPfc depreciation

AND

NNPfc =
NNPmp + subsidies
indirect taxes

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NATIONAL NOMINAL INCOME
The total of all income payments made to factors of
production (land, labour, capital and entrepreneur)

NI = GNP at factor cost depreciation value

OR

NI = NNP at market price + subsidies indirect
taxes
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The differences between NNP and NI is the market
price and factor cost.
GNP
mp
depreciation = NNP
GNP
fc
depreciation = NI

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NATIONAL REAL INCOME
The actual quantity of goods and services produced. The
standard of living depends very much on the quantities
of goods and services produced.
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PERSONAL INCOME
The income that is actually received by individuals and
households in an economy in a year.
Deduction from NI are as follows :
a. Corporate income taxes
b. Retained earnings
c. Social security distributions
Add : transfer payment unemployment allowance, old age
pensions etc.

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PERSONAL INCOME
Personal Income (PI)
National Income + Transfer Payment + Corporate
Income Taxes retained earnings Social
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DISDPOSABLE INCOME (DPI)
Part of the personal income that is left after the
payment of personal direct taxes.

Disposable Personal Income =
Personal Income Personal income Tax
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PER CAPITA INCOME
The average income of citizens of a nation , calculated by
dividing the national income for a certain year by the
population at that year.
Per capita Income =
National Income / Total
population
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2.2 METHOD OF NATIONAL
INCOME ACCOUNTING
Define national income accounting
Describe 3 methods to calculate the national income accounting
Describe the formula to calculate the national income accounting
Apply the national income accounting through Product Approach
Apply the national income accounting through Income Approach
(factor price)
Apply the national income accounting through Expenditure
Approach (value of final goods)

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NATIONAL INCOME ACCOUNTING
Measurement of aggregate economic activity,
particularly national income and its components.

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3 DIMENSIONS TO CALCULATE
NATIONAL INCOME ACCOUNTING
TOTAL OUTPUT
TOTAL INCOME
TOTAL
EXPENDITURE
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From the circular flow of income,
assuming that :
Household
Income =
Household
expenditure
Output=
expenditure
Household
Income =
Output
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THEREFORE ..
?
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NATIONAL INCOME CALCULATION USING 3
APPROACHES :
1. Expenditure approach (value of final goods)
3. Income approach (factor price)
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1. EXPENDITURE APPROACH
(value of final goods)

Using this method, national income can be calculated from the total of all
expenditure on final goods and services within a year.

National expenditure is made up of 4 economic sectors :
a. Personal consumption/ Private Expenditure (C)
b. Investment (I) - /+ changes in stock
c. Public expenditure / Government spending (G)
d. Net exports (X M)

In this method, GDP is calculated by adding up all the 4 items of
expenditure :
GDPmp = C + I + G + (X M)
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Other formula :
1. GDP mp = C + I + G+ (X-M)
2. GNP mp = GDP mp + net factor income abroad
3. GNPfc = GNP mp indirect taxes + subsidies
4. National Income = GNP fc Depreciation
5. Personal Income = National Income +transfer payments corporate
income taxes retained earnings- social security contributions
6. Disposable Personal Income = Personal Income personal income tax

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Refer to page 277 , 278 and 279 for illustration
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2. PRODUCT APPROACH

National Income can be calculated from the total of final
products created by each sector in the economy within a
year.

3 sectors contributing to the GDP
a. Primary sector
b. Secondary factor
c. Tertiary sector

GDP = Final products in the economy
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Other formulae :
1. GDP mp = All final products in the economy
2. GNP mp = GDP mp + net factor income abroad
3. GNP fc = GNP mp indirect taxes + subsidies
4. National Income = GNP fc Depreciation
5. Personal Income = National Income + transfer payments
corporate income taxes retained earnings- social security
6. Disposable Personal Income = Personal Income personal income
tax

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Refer to page 282 , 283 and 284 for illustration
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3. INCOME APPROACH
(factor price)

Can be calculated by adding all the various types of income paid to
firms and households in the form of wages for labour, rent for land ,
interest for capital and profits to entrepreneur.

All the figures are in factor cost.

GDP = Wages + Salaries + Rent + Profit +Interest + Dividend

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Other formulae :
1. GDP = wages + salaries + rent + profit + interest + dividend
2. GNP = GDP + net factor income abroad
3. National Income = GNP Depreciation
4. Personal Income = National Income + transfer payments
corporate income taxes retained earnings- social security
5. Disposable Personal Income = Personal Income personal
income tax

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Refer to page 280 and 281 for illustration
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2.3.1 Define problems related to national income
2.3.2 List the problems related to national income
2.3.3 Discuss the problems of national income accounting
a. Difficulties in calculating national income
b. Difficulties to compare national income between time
periods
c. Difficulties to compare national income between
countries
2.3.4 Rewrite factors affecting national income
2.3.5 Rewrite the uses of national income data
2.3 THE PROBLEMS RELATED TO
NATIONAL INCOME
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Problems related to national income
Problems of calculation of national income.
Problems of comparison of national income between
countries.
Problems of comparison of national income between
time periods.
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Difficulties in calculating national income
Double
counting
Accuracy of
information
Unpaid
activities
Transfer
payments
Activities that
are illegal yet
productive
Depreciation
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Difficulties to compare national income between
countries
Concept
Different
treatment of
item
Patterns of
income
distribution
Patterns of
expenditure
Unpaid
productive
activities
General price
level
Working
hours
Foreign
exchange
rates
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Difficulties to compare national income between time periods
General
price level
Quality of
goods and
services
Population
composition
and total
population
Patterns of
income
distribution
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THE FACTORS AFFECTING NATIONAL INCOME
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Quality and quantity factors of
production
Level of technical knowledge and
usage of modern technology
Level of specialization
Political stability
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THE USES OF NATIONAL
INCOME DATA
Standard of living comparison
Economic performance over time
National planning
Sectoral contributions
Economic policy
Government Policy
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