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NATIONAL

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CHAPTER 2 NATIONAL INCOME (GDP and GNP) MEASUREMENT * * THANK YOU * * * * The concept of Market Price and Factor Cost In most cases, Market Price (MP) Factor cost ... – PowerPoint PPT presentation

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Title: NATIONAL


1
CHAPTER 2
  • NATIONAL
  • INCOME (GDP and GNP)
  • MEASUREMENT

2
  • What is income?

3
  • Income is the money earn or paid as a reward for
    the resources owned.
  • For example
  • A worker earn income in the form of
    monthly payment.

4
Instead,
  • What is National Income?

5
National Income
  • is defined as
  • the total value of final outputs which
    comprises of goods and services produced by a
    country for a particular period of time, usually
    a year.

6
  • Tucker, defined national income
  • as
  • total income earned by resources owners, that is
  • rents, wages, interest and profit.

7
  • National Income
  • is the total amount of money that factors of
    production earned during a year.
  • This includes mainly payments of
  • wages,
  • rents,
  • profits and
  • interest of capital.

8
  • NATIONAL INCOME
  • NATIONAL PRODUCT
  • NATIONAL EXPENDITURE
  • (NI NP NE)

9
Or NI National Product (NP)
  • The national product refers to the value of
    output produced by an economy during the course
    of a year.

Or NI NP National Expenditure
  • refers to the value of money spent on goods
    and services in the economy in a year.

10
GDP and GNP
  • GDP Gross Domestic Product, is the value of all
    final goods and services produced by all sectors
    of the economy the citizens or foreign sectors
    within a country.
  • GNP Gross National Product, is the value of all
    final goods and services produced by all citizens
    of a country (within a country or abroad).

11
Circular Flow of Income Model
  • The basic circular flow model provides
  • a general picture of the interactions in terms
    of
  • income, output and expenditure
    among all sectors in an economy.

12
Circular Flow of Income Economic Models
  • 3 types
  • A 2-sector model of circular flow
  • - Comprises of Households and Firms
    sectors
  • A 3-sector model of circular flow
  • - Comprises of Households , Firms and
  • Government sectors
  • A 4-sector model of circular flow
  • - Comprises of Households, Firms,
  • Government and Foreign sectors

13
The 2-sector circular flow of national income
and expenditure
Y CI
Expenditure, C
on goods services
FIRMS
HOUSEHOLDS
Income,Y
Wages, rent, interest, profit
Factor payment
14
Assumptions in a 2 sector Circular Flow model
  • All income received by households will entirely
    be spend on consumption.
  • The households in the market will entirely
    purchase all goods and services produced by
    firms.
  • Therefore,
  • total income total expenditure total
    output

15
The 3 sector circular flow of national income and
expenditure
Y CIG
Net Taxes
Net Taxes
G. Expenditure
G. Expenditure
GOVERNMENT
Expenditure, C
Financial Institutions
FIRMS
HOUSEHOLDS
Income,Y
16
Assumptions in a 3sector Circular 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).

17
The concept of disposable income
  • The household income (Y) that can be spent by
    households will now be lesser after deducting the
    tax portion (t) paid to government.
  • It is now called as
  • disposable income (Yd).
  • Yd Y t.
  • and Disposable NI NI t.

18
The 4-sector circular flow of national income and
expenditure
Net Taxes
Net Taxes
G. Expenditure
G. Expenditure
GOVERNMENT
Expenditure, C
Financial Institutions
HOUSEHOLDS
FIRMS
Income,Y
Y CIG(X-M)
FOREIGNERS
19
Assumptions in a 4 sector Circular Flow model
  • Households now supply resources to both domestic
    and foreign markets. Households also consume both
    local and imported goods.
  • Firms purchased capital goods and engaged foreign
    workers from abroad to help them produce more new
    goods and services. They also exports goods and
    services produced to abroad or overseas.
  • Government involves either directly or indirectly
    with foreign sector. They may import as well as
    exports goods and services to abroad.

20
  • Lets have a
  • 5 minutes break

21
Methods of Measuring National Income
  • NI can be measured using 3 common approach
  • Income approach
  • Output approach
  • Expenditure approach
  • Irrespective of which approach used in
    calculating NI, will give us the same value

22
i) INCOME APPROACH
  • National Income is the total money values of all
    incomes received by productive persons and
    enterprises in the country during the year.
  • It is the total income of all factors of
    production including the income of self-employed
    person, labourers, capital and land (L,L,K,E)

23
Transfer Payment
  • should not be included in calculating NI to avoid
    double counting problem.
  • Transfer payment refers to income received
    without any direct contribution to the production
    of goods and services.
  • is simply transferred from one group or people to
    another without the recipients adding any value
    to production or volume of goods and services in
    the country.

24
e.g Transfer Payment
  • Pensions
  • Welfare benefits
  • Scholarships
  • Unemployment benefits
  • Sale of a second-hand goods e.g. an existing
    house
  • Allowances to housewife
  • Interest on national debt

25
Example1
  • En. Ahmad previously was a self-employed man with
    an income of RM1, 500. He later quit from
    business become an employee of a manufacturing
    company and earn a salary of RM3, 200 per annum.
    In closing down his business, he had to dismiss
    two assistants, each previously receiving a
    salary of RM700 and RM800 respectively. Each of
    the assistants subsequently now received social
    security benefits (unemployment benefit) worth
    RM300 per month. What is the net change in
    national income?
  • The change in national income as a result of this
    was
  • Previously self-employed ? RM1, 500
  • Presently employed RM3, 200
  • Dismissal of 2 assistants ? RM1, 500
  • __________
  • Net Increase of NI is
    RM 200
  • Social security benefit is an example of
    transfer payment, so is not included in the
    calculation of national income.

26
Total Domestic vs Total National Income
  • Total Domestic Income is the total income earned
    within a territorial or geographic boundary.
  • It includes income earned by its citizens as well
    as its non-citizens i.e. foreign workers residing
    or working in the country.
  • Total National Income is the total income earned
    by citizens of the country irrespective whether
    the citizens reside / working in the country or
    outside the country (abroad).
  • It will exclude all income earned by foreign
    workers in the country.

27
Example 2
  • Given the following data, find the national
    income of country XYZ
  • Domestic Income RM800m
  • Income paid abroad RM200m
  • Income received from abroad RM180m
  • Answer The national income of country XYZ is as
    follows
  • RM800m ? 200m 180m RM780m

28
Personal Income vs Personal Disposable Income
  • Personal Income is the gross receipt of income
    regardless of its source. It can come from
    productive and non-productive sources (transfer
    payment). And minus the contribution to Employees
    Provident Fund (EPF) and contribution to SOCSO.
  • Thus it is totally different from gross
    earning of factor income (GDI or GNI).
  • Personal Disposable Income is gross personal
    income less by the personal income tax paid.

29
Income Approach
  • The components of this approach include
  • Wages and salaries
    RM xxx
  • Interest and dividends
    xxx
  • Rent and imputed rent
    xxx
  • Profits distributed and undistributed
    profits, xxx
  • income of self-employed
    xxx
  • Gross Domestic Income

  • (at factor cost) XXXX
  • ? Income paid abroad
    xxx
  • Income received from abroad
    xxx
  • Gross National Income
    XXXX
  • ? Depreciation or capital consumption
    xxx
  • Net National Income
    XXXX
  • (OR NATIONAL INCOME)

30
ii) OUTPUT APPROACH
  • Also known as Product Approach.
  • National Income (GNP) is equivalent to the money
    value of all goods and services produced by all
    sectors in the country during a year.

31
The problem of double counting
  • To avoid double counting, we only sum-up all the
    value-added of each sectors or at each stage
    of production to give us the national income
    value.

32
Value-added concept
  • To avoid double counting, calculation must be
    based on either one of the followings
  • Measure only the total market
  • value of all final goods and
  • services produced in the
  • country.
  • OR
  • b) Calculate national output based on the value
    added.

33
EXAMPLE
  • Firm Stage of Production Purchasing
    Selling Value
  • ____ ________________ Price (RM)
    Price (RM) Added (RM)
  • A Landowner sells trees -
    100 100
  • to sawmill owner
  • B Sawmill owner cut into 100
    180 80
  • timber sheets to furniture
  • manufacturer
  • C furniture manufacturer 180
    290 110
  • turns timber sheets into
  • furniture and sells to retailer
  • D 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
34
The concept of Market Price and Factor Cost
  • In most cases, Market Price (MP) gt Factor cost
    (FC)
  • Market Price FC indirect taxes
    subsidies
  • OR
  • Factor Cost MP indirect taxes subsidies

35
Output Approach
  • The components are
    RM
  • The total value of final goods and services in
    the
  • economy or the total sum of value-added of
    all
  • industry or stage of production.
  • Gross Domestic Product at market price
    XXXX (GDP at mp)
  • ? Income paid abroad
    xxx
  • Income received from abroad
    xxx
  • Gross National Product at market price
    XXXX (GNP at mp)
  • ? Indirect taxes or taxes on expenditure
    xxx
  • Subsidies
    xxx
  • Gross National Product at factor cost
    XXXX
  • (GNP at fc)
  • ? Depreciation or capital consumption
    xxx
  • Net National Product at factor cost
    XXXX
  • (NNP at fc OR NATIONAL INCOME)

36
iii) EXPENDITURE APPROACH
  • 4 components included here
  • a) Household or consumer expenditure on
    consumption goods, (C).
  • b) Firm or producer expenditure of capital
    goods. Also known as gross investment or gross
    private capital formation (I).
  • c) Government expenditure on goods and
    services, excluding transfer payment (G).
  • d) Expenditure on exports and imports (X
    M).

Y C I G (X M)
37
Gross vs Net Investment
  • Gross Investment is the expenditure on new
    construction, purchase on new equipment and
    change in stock
  • Net Investment is gross investment minus
    depreciation of capital.
  • Depreciation (capital consumption) is defined as
    an allowance that is put aside for machinery
    wears out and stocks used up due to its obsolete
    and deteriorated nature after being used for some
    time.
  • Net Investment
  • Gross Investment Depreciation of
    capital

38
Expenditure Approach
  • The components include
    RM
  • the household expenditure (C), firm
    expenditure
  • or gross investment (I) and government
  • expenditure (G).
  • or change in stock
    xxx
  • Total Domestic Expenditure at market price
    XXXX (TDE at mp)
  • Exports and ? Imports
    xxx
    Gross Domestic Expenditure at market price
    XXXX
  • (GDE at mp)
  • ? Income paid abroad
    xxx
  • Income received from abroad
    xxx
  • Gross National Expenditure at market price
    XXXX
  • (GNE at mp)
  • ? Indirect taxes
    xxx
  • Subsidies
    xxx
  • Gross National Expenditure at factor cost
    XXXX
  • (GNE at fc)
  • ? Depreciation or capital consumption
    xxx
  • Net National Expenditure at factor cost
    XXXX
  • (NNE at fc) (OR NATIONAL
    INCOME)

39
Few things to remember
  • To change from market price to factor cost minus
    indirect tax plus subsidies.

DIRECT TAXES INDIRECT TAXES
Personal Income Tax Business/ Corporate Tax Profit Tax Expenditure or Consumption Tax Custom duties Export Tax Import Tax Tariff Services Tax
40
Few things to remember
  • To change from Domestic to National value plus
    or minus NPIFA
  • 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, SOCSO)
  • To change from PI to DPI minus income tax

41
Lets Try Some Exercises
42
Income ApproachGiven the information
  • RM million
  • Total wages and salaries received 255,650
  • Total interest and dividends received
    10,000
  • Total rent and imputed rent 80,880
  • Gross trading profits from companies
    65,500
  • Total income of self-employed 33,700
  • Income paid abroad 54,345
  • Income received from abroad
    76,680
  • Capital consumption
    445

Find i) GDP at factor cost ii)
GNP at factor cost iii) NI
43
Answer Income Approach
  • RM million
  • Total wages and salaries received 255,650
  • Total interest and dividends received
    10,000
  • Total rent and imputed rent 80,880
  • Gross trading profits from companies
    65,500
  • Total income of self-employed 33,700
  • GDI fc (GDP fc)
    445,730
  • Less income paid abroad (54,345)
  • Add income received from abroad 76,680
  • GNI fc (GNP fc)
    468,065
  • Less Depreciation on capital consumption
    (445) NNI fc
    467,620

44
Output Approach RM million
  • Agriculture, forestry and fishing 4,296
  • Mining and quarrying 6,700
  • Manufacturing 28,965
    Construction 15,550
  • Services 13,220
  • Net exports
    3,000
  • Appreciation 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
45
Answer Output Approach
  • Agriculture, forestry and fishing 4,296
  • Mining and quarrying 6,700
  • Manufacturing 28,965
    Construction 15,550
  • Services 13,220
  • Net exports
    3,000
  • Appreciation 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

46
Expenditure Approach
RM million
  • Total consumer expenditure (C) 50,000
  • Gross investment (I) 20,000
  • Government expenditure (G) 18,500
  • Add exports (X) 9,000
  • Less 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
47
Answer Expenditure Approach
RM million
  • Total consumer expenditure (C) 50,000
  • Gross investment (I) 20,000
  • Government expenditure (G) 18,500
  • Add exports (X) 9,000
  • Less 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

48
Uses of National Income
49
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.

50
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.

51
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.
  • Comparison between two or more countries can be
    made.

52
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.
  • Comparison between two or more countries can be
    made.
  • Able to know and analyze the contribution made
    and performance by each production sector in the
    economy and thus taken ample step for
    rectification

53
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.
  • Comparison between two or more countries can be
    made.
  • Able to know and analyze the contribution made
    and performance by each production sector in the
    economy and thus taken ample step for
    rectification
  • Useful in measuring inequalities in the
    distribution of income.

54
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.
  • Comparison between two or more countries can be
    made.
  • Able to know and analyze the contribution made
    and performance by each production sector in the
    economy and thus taken ample step for
    rectification
  • Useful in measuring inequalities in the
    distribution of income.
  • Useful in revealing the expenditure pattern of a
    country.

55
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.
  • Comparison between two or more countries can be
    made.
  • Able to know and analyze the contribution made
    and performance by each production sector in the
    economy and thus taken ample step for
    rectification
  • Useful in measuring inequalities in the
    distribution of income.
  • Useful in revealing the expenditure pattern of a
    country.
  • Useful in measuring the level and pattern of
    investment.

56
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.
  • Comparison between two or more countries can be
    made.
  • Able to know and analyze the contribution made
    and performance by each production sector in the
    economy and thus taken ample step for
    rectification
  • Useful in measuring inequalities in the
    distribution of income.
  • Useful in revealing the expenditure pattern of a
    country.
  • Useful in measuring the level and pattern of
    investment.
  • Balance of payments pattern.

57
Uses and Importance of National Income
  • Useful in measuring the standard of living of a
    nation through estimating per capita income of
    the nation.
  • Time series comparison (year to year). Measuring
    growth of the economy.
  • Comparison between two or more countries can be
    made.
  • Able to know and analyze the contribution made
    and performance by each production sector in the
    economy and thus taken ample step for
    rectification
  • Useful in measuring inequalities in the
    distribution of income.
  • Useful in revealing the expenditure pattern of a
    country.
  • Useful in measuring the level and pattern of
    investment.
  • Balance of payments pattern.
  • National income as an indicator of success or
    failure of national planning.

58
Gross and Net Investment
  • Gross investment is the total amount spent on
    purchases of new capital and on replacing
    depreciated capital.
  • Net investment is the change in the stock of
    capital and equals gross investment minus
    depreciation.

59
Economic Growth
  • eº GDP1 GDP0 X 100
  • GDP0
  • eº rGNP1 rGNP0 X 100
  • rGNP0

Higher economic growth shows higher economic
activities and performance.
60
Real GNP
  • Real GNP Price Index0 X Nominal GNP1
  • Price Index1

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.
61
The Difference between nominal and real income
  • Nominal Income would be the actual wage or salary
    that is earned currently. The Nominal Gross
    Domestic Product measures the value of all the
    goods and services produced expressed in current
    prices.
  • Nominal GDP of Malaysia for the year 2001 is
    RM334.6b

62
The Difference between nominal and real income
  • Nominal Income would be the actual wage or salary
    that is earned currently. The Nominal Gross
    Domestic Product measures the value of all the
    goods and services produced expressed in current
    prices.
  • Nominal GDP of Malaysia for the year 2001 is
    RM334.6b
  • Real Income would be the income that has been
    deducted with the reduction in the purchasing
    power that the wage or salary has in the market
    place (i.e. rate of inflation is 3). Real Gross
    Domestic Product measures the value of all the
    goods and services produced expressed in the
    prices of some base year. Real GDP of Malaysia
    for the year 2001 is RM210.5b

63
per capita income
  • is defined as their total personal income divided
    by the number of people in the country.
  • often used as a measure of the wealth of the
    population of a nation, particularly in
    comparison to other nations.
  • usually expressed in terms of a commonly-used
    international currency such as the Euro or United
    States dollar.
  • Malaysias per capita income for the year 2001 is
    US3,392 or RM12,867.

64
2 major problems in measuring national income
  • i) PRACTICAL PROBLEMS
  • a) Problem of illiteracy
  • b) Problem of expertise
  • c) Problem of inaccessibility
  • d) Lack of sophisticated software
    machineries.
  • e) Problem of false information

65
  • ii) CONCEPTUAL PROBLEMS
  • a) Arbitrary definition
  • b) Problems in estimating the value of
    depreciation,
  • imputed rent, etc.
  • c) Problem of double counting
  • d) Problem of measuring quality

66
THANK YOU
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