# chapter 2 measuring national income - Carabaru

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```					CHAPTER 2 : MEASURING NATIONAL INCOME

a) Defn
b) Circular flow of Y & expenditure in 2, 3 & 4 sector
economy
c) Y – expenditure – output identity
d) National Y calculation
e) Uses of national Y statistics
f) Problems in management
DEFINITION OF NATIONAL INCOME
Money value of all g & s produced during a particular
period of time, usually a year ie the sum of all personal
incomes received from economic activities – Hanson

The collection of g & s reduced to a common basis by
being measures in terms of money – Hicks

Total income earned by resources owners ie rents,
wages, interest & profit – Tucker

Total value of final o/puts which comprises of g & s
produced by a country for a particular period of time,
usually a year - Economist
STOCK VS FLOW
Stock – accumulated qt of any items / goods at a
particular time
- eg :
Flow – measure the rate at which stock is changed
- affect level of stocks
- eg :
CIRCULAR FLOW MODEL
- Diagram show of 2 flows
i) the flow of products from bus to HH
ii) the flow of resources from HH to bus
- In exchange for resources, money payments flow
between bus & HH
MODEL OF CIRCULAR FLOW

i) 2 sector model
– closed economy
– Bus vs HH

ii) 3 sector model
– Bus vs HH vs Govt

iii) 4 sector model
– open economy
– Bus vs HH vs Govt vs Foreign
i) 2 sector model – (closed economy)
C
g&s

Factors of prodn
Y                Flow
Assume :                                i) Real flow
i) All Y will be spent                  ii) Money flow
ii) All g & s will be purchased
Σ Y = Σ output = Σ C
ii) 3 sector model

Net T                           Net T
GS           GOVT             C
C            I

\$ Inst

Y
Factors of prodn

Y=C+S
Y=C+I
NEW ITEM IN 3 SECTOR

Govt – purchase g & s
– collect T ie income T & corporate T
– pay for benefits & subsidies

ē         Y=C+I+G
IMPORTANT POINTS IN 3 SECTORS

i) S = I
ii) Y = Yd + T,            Yd = disposable income
iii)Leakages S + T
iv)Injections GS + I
a) ability to spend
b) Agg expenditure
c) GS = subsidies, transfer payment
iii) 4 sector model (Open Economy)

Net T                      Net T
GS         GOVT          C
C            I NX

\$ Inst

Y
Factors of prodn
X Rev                        X Rev
FOREIGN
M Exp                          M Exp
NEW ITEM IN 4 SECTOR

i) Foreign sector (X & M)
X : g & s, receive payment
M : g & s, payment
X & M by HH, Business & Govt

ii) Leakages : S + T + M
Injections : I + GS + X
effects on AE?
IMPORTANT CONCEPTS IN NATIONAL
INCOME ACCOUNT

1) Dom Y vs National Y
Dom : Y earned within country
National : Y earned by citizen
2) Transfer payment @ income – included in personal income
BUT excluded in NY
3) Personal Y vs Yd
4) GNP vs NNP – concept of depn
5) Net Value Added – only final g & s, to avoid double counting
6) Mkt P (mp) vs Factor cost (fc)
diff : indirect tax & subsidies
mp = P paid by purchaser to producers include indirect T but
exclude subsidies
fc = payment received by factors of prodn
METHODS OF CALCULATING NY

A) 3 approaches
i) Income approach
ii) Product @ output approach
iii) Expenditure approach

B) Components in every approach used

C) Calculation

D) Uses & problems
INCOME APPROACH
- looks at the flow of econ actvt from the income point
of view

Form
• w
• Interest & div earning on share
• Rent on property
• Undistributed π of firms
• Y of self employed L

Transfer payment
- recipients not adding to prodn agg
- not item in NY
OUTPUT APPROACH
- looks at the flow of econ actvt from the output point of
view
- Σ money values for the value added of g & s produced
in the country

By land owner → manufacturer → retailer → consumer
eg: Tree → sawmill → furniture → retailer → consumer
RM100      RM180      RM290       RM420
OUTPUT APPROACH

Item in GDP at mp
• Agriculture, forestry, fishing
• Mining & quarrying
• Manufacturing
• Construction
• Electric, gas, water
• Transportation, storage & communication
• Finance, insurance, property
• NX
EXPENDITURE APPROACH

- looks at the flow of econ actvt from the spending point
of view

Item in GDE at mp
• C : HH & govt
• I : new construction, new equipment, ∆ in stock
• G : exclude transfer payment
• NX : (X – M) for both g & s
Eg : CALCULATION

(+) Items in expenditure @ output approach
GDP at mp
GNP at mp
(+) subsidies
(-) indirect T
GNP at fc
(-) depn
NY
(+) transfer payment
(-) EPF
(-) SOCSO
(-) corporate T
Personal Y
(-) personal income T
Yd
USES OF NY

1)   To measure standard of living
2)   To compare economic performance
3)   To compare between 2 or more countries
4)   To know & analyze the contribution made of each sector
5)   Taxable capacity
6)   National planning

PROBLEMS IN CALCULATING NY
1) Comparison over country
2) Comparison over time
3) Illiteracy
4) Inaccessibility
5) False info

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