Chapter 2_ Measuring National Income and Output - Carabaru

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Chapter 2_ Measuring National Income and Output - Carabaru Powered By Docstoc
					        Chapter 2:
Measuring National Income
       and Output
    Concepts of Natonal Income
ØGross Domestic Product (GDP) : Market value
 of all final goods & svc produced by factors of
 production located within a country in a given

  GDP = GNP - Income Received Abroad +
    Income Paid Abroad
ØGross National Product (GNP) : Market value
 of all final goods & svc produced by the
 citizens of a country, regardless where they

  GNP = GDP + *(Income Received Abroad
    – Income Paid Abroad)
        Market price and Factor cost
Ø MARKET PRICE : Current P in the market through the
  forces of DD & SS.
  GDPmp = GDPfc + indirect taxes - subsidies
  (the same calculation ca also applied to find the GNPmp)

Ø FACTOR COST : Real prices earned by producers.
  GNPfc = GNPmp - indirect taxes + subsidies
  (the same calculation ca also applied to find the GDPfc)
       Net National Product (NNP)
Ø NNP is defined as the market value of the net output of final
  goods and services by a nation during a year.
Ø NNP is GNP minus the value capital consumption or
Ø NNP also referred to as national income at market price.

  NNPmp = GNPmp – depreciation

  (in the production, some part of capital equipment are obsolete. In order
  to replace this obsolete, a certain part of GNP will be kept aside. This
  portion of the GNP cannot be used for consumption or investment
  purposes. The portion that we deduct is called depreciation value.)
    National Income Factor Cost (NI)

Ø NI at factor cost is defined as the total of all income
  payments made to factors of production.
Ø The difference - NNP at market price
                 - NI at factor cost
   NI = GNPfc – depreciation value

   NI = NNPmp + subsidies – indirect taxes
             Personal Income (PI)
Ø PI is the income that actually received by individual and
  household in an economy in a year.
Ø The deductions made from national income are:
• Corporate income taxes
• Retained earnings
• Social Security contributions – EPF and SOCSO
• Insurance premium

  PI = National income + transfer payments – corporate
        income taxes – retained earnings – social security
  contributions – insurance premium
   Disposable Personal Income (DPI)

• The PI as defined above is not the income of
  any one individual or household that is wholly
  used for consumption.
• Individuals will use a certain portion of their
  personal income to make payments to the

  DPI = Personal income (PI) – personal
  income tax
Methods of Measuring National Income

                     Expenditure approach

 3 approaches      Product / Output approach

                       Income approach
                1. Expenditure Approach
                   GDPmp = C + I+ G + (X-M)
Ø     NI is obtained by adding all the expenditure on goods and
      services in a year
Ø     Made up of four economic sector:

i.    Personal consumption (C)
      - purchase of goods and services by firms,    individual or
      - purchase of bonds and stocks are not included.

ii.   Investment (I)
      - purchase of capital goods by firms for use in production.
      - also refer to changes in the firm’s inventories.
         Inventories is stock of raw material, semi finished product.
iii.   Government spending (G)
       - expenditure made by the federal, state and local
          government for final goods and services.
       - e.g: cost of providing national national
          defenseconstuction of new building such as school,
          hospital and payment of salaries to public servants.

iv.    Net Exports (X-M)
       - net exports are the difference between the value of
          exports and the value of imports
     Formula for calculating national income and
            disposable personal income
1.   GDPmp = C + I+ G + (X-M)
2.   GNPmp = GDPmp + net factor income abroad
3.   GNPfc = GNPmp –indirect taxes + subsidies
4.   National income (NI) = GNPfc – depreciation
5.   Personal income (PI) = NI + transfer payments –
                                corporate income taxes –
                               retained earning – social
     security distribution – insurance
6.   Disposable personal income (DPI) = PI – personal
     income tax






National income calculation using expenditure approach
Example 1

                            COMPONENTS         RM MILLION
            1. Public Consumption                20 000
            2. Private Consumption               30 500
            3. Public Investment                 10 600
            4. Private Investment                15 000
            5. Change in Stock                    150
            6. Goods and services exported       1 000
            7. Goods and services imported        700
            8. Net factor income abroad           100
            9. Indirect taxes                     200
            10. Subsidies                         500
            11. Depreciation                       50
            12. Employees Provident Fund          200
            13.Tax on personal income             400
            14. Transfer payment                  100
            15. Social Security Contribution      100
            16. Retained earnings                  10
            17. Insurance Premium Payment         100

GDPmp = C + I + G + (X-M)
      = 20,000 + 30,500 + 10,600 +15,000 + 150 + (1,000-700)
      = 76,550

GNPmp = GDPmp + net factor income abroad
      = 76,550 + 100
      = 76,650

GNPfc = GNPmp + subsidy – indirect taxes
      = 76,650 + 500 – 200
      = 76,950

NI     = GNPfc – depreciation
       = 76,950 – 50 = 76900

PI     = NI + transfer payment – SOCSO – retained earnings –Insurance
       = 76,900 + 100 – 200 – 100 – 100 – 10 = 76,590

DPI    = PI – Personal income tax
       = 76,950 – 400 = 76190
Example 2:
                           Items       (RM millions)
   Exports                                 500
   Personal consumption expenditure        1400
   Changes in stock                         -40
   Indirect business tax                    30
   Government expenditure                  990
   investment                              1000
   Personal income tax                      80
   Subsidies                                30
   Imports                                 400
   Factors income paid abroad               80
   depreciation                             40
   Factor income receive from abroad        90

 •GDPmp (3450)
 •GNPmp (3460)
 •GNPfc (3460)
 •National Income (3420)
                    2. Income Approach
ØMeasure NI by adding all the various types of income paid to firm
and household.

ØAll the figures are in factor cost because only earnings of factor of
production can be calculated

ØThe major income components are:

i.Wages and salaries
-Receive by labor
-Also oncludes fringe benefits such as social security or pension
funds contribution.
ii.Net interest
iii.Rental income
-Refers to corporate profit earned by business corporation or
payment of dividend to shareholders
GDP = wages + salaries + rent + profit + interest + dividend

  Formula to calculate NI and DPI:

           GDP = wages + salaries + rent + profit + interest + dividend

                     GNP = GDP + net factor income abroad

                            NI = GNP – Depreciation

    PI = NI + transfer payments – corporate income taxes – retained earnings
                – SOCSO – insurance premium – undistributed profit

                         DPI = PI – personal income tax
                        Items                RM (million)
   Wages and salaries                            500
   Income from rent, dividend and interest       100
   Profit                                        200
   Corporate tax                                 80
   Depreciation                                  50
   Private investment                           1000
   Personal income tax                           20
   Transfer payments                             100
   Employees Provident Fund (EPF)                50
   Net factor income abroad                      400

   •Pesonal income
   •Dispoable personal income

1. GDP = wages and salaries + income from rent, dividend and
         interest + profit
       = 500 + 100 +200 = RM800m

2. GNP = GDP + net factor income from abroad
       = 800 + 400 = RM1200m

3.NI   = GNP – Depreciation
        = 1200 – 50 = Rm1150m

4.PI   = NI + transfer payments – corporate tax – EPF
        = 1150 + 100 -80 = RM1120m

5.DPI = PI – Personal Income tax
        = 1120 – 20 = RM1100m
          3. Product/Output Approach
Ø NI is measured by net value of all final goods and sevices produced
by a nation during a year.

ØOnly the money value of all final goods and services a re included.

ØRaw materials and intermediate goods are subtracted from the
value of GDP to avoid double counting.

Ø3 sectors contributing to the GDP:
•Primary sector – mining and quarrying, agriculture, forestry, fishing.
•Secondary sector – manufacturing and construction
•Tertiary sector – electricity, gas and water; wholesale and retail
trade; finance, insurance, real estate and business services, transport,
storage and other services
           GDP = final product in the economy

Formula to calculate NI and DPI:

                 GDPmp = all final product in the economy

               GNPmp = GDPmp + net factor income abroad

                GNPfc = GNPmp – indirect taxes + subsidies

                         NI = GNPfc – Depreciation

  PI = NI + transfer payments – corporate income taxes – retained earnings
              – SOCSO – insurance premium – undistributed profit

                       DPI = PI – personal income tax

 Items                        RM (million)
 Government services          1000
 Net factor income abroad     250
 Transfer payments            150
 Exports                      1500
 Mining and quarrying         1800
 Manufacturing                1500           Calculate:
 Indirect business tax        400            •GDPfc
 Depreciation                 100            •GNPfc
 Subsidies                    150            •National income
 Private investment           5000
 Electricity, gas and water   700
 Banking and tourism          3000
 Rent                         200

•GDPmp = government services + mining and quarrying +
          manufacturing + electricity, gas and water + banking
          and tourism
              = 1000 + 1800 + 1500 + 700 + 3000 = RM8000m

2.GDPfc = GDPmp + subsidies – indirect taxes
         = 8000 + 150 – 400 = RM7750m

3.GNPfc = GDPfc + net factor income abroad
         = 7750 + 250 = RM8000m

4.NI        = GNPfc –Depreciation
             = 8000 – 100 = RM7900
Uses of national income
•   Standard of living comparison
Ø Compare the standard of living of people in different countries at
  different times.

2. Economic performance over time
Ø By comparing the NI of one time period to thatn another.

3. National Planning
Ø NI statistics are very important tool for the government to formulate
  its short term and long term economic planning.
Ø To forecast future development based on current economic
Ø To draft Malaysian Plan.

4. Sectoral contribution
Ø Indentify the important sector that contribute toards economic
Ø Before 1980s – agr sector
Ø 1980s – manufacturing
Ø Now – services sector became the major contributor
5.   Economic policy
Ø    NI statistics are important tool in macro analysis.
Ø    NI estimates are the most comprehensive measure to aggregate economic
Ø    So future economic policies can be formulated

6.   Inflationary and deflationary gaps
Ø    To know the purchasing power of money and help govt. implement anti-
     deflationary or anti-inflationary measure to stabilize the economy.

7.   Distribution of income
Ø    Among different sectors of production if the form of rent, wages, interest and

8.   National expenditure

9.   Public sector
          Difficulties in calculating national income
•   Problems of non-monetized sector
Ø Usually arise in most third world
Ø Esp. in agricultural sector due to large qtty og agr output does
  not reach the market either consumed directly or exchange for
  other goods and services

2. Problems of illiteracy
Ø Small producer in third world countries are illiterate are unable to
  keep account of their productive activities.
Ø Product that produced are self-consumption and not for the
  market – record are not kept of their productive activity.

3. Problems of expertise
Ø Lack of professional such as statisticians, researches,
  programmers – major problem in third world countries

4. Problems of less sophisticated machinery
Ø Non-availability of sophisticated machinery such as advanced
  computer or program to compute national income.
5.   Problem of double counting
Ø    Possibilities of intermediate goods being included in the national income more
     than once.
Ø    The best way to avoid problem is calculate only the value of all final goods and

6.   Problem of false information
Ø    People do not disclose their income or underestimate their income to avoid
     paying higher taxes.

7.   Problems of multi occupation
Ø    People engaged in a number of economic activities which are not included in
     the national income.
    Real income, per capita income and growth rate
•   Real income
Ø Real income or real GNP (or real GDP) is GNP measured on a fixed price
  or base year.
Ø Nominal GNP is measured in current price.
Ø We can convert the nominal GNP to real GNP using a GNP deflator (same
  cases with GDP).
Ø GNP deflator is obtained by comparing the base year index with the current
  year price index.

    GNP deflator = current year price index
                   base year price index

    Real GNP    = base year price index   x Nominal GNP
                 current year price index

                = Nominal GNP
                  GNP deflator

(same formula can be used to calculate Real GDP)

If the current price index is 160 while the base year price index
is 100 and the nominal GNP is RM10,000 million, then the real
GNP is:

Real GNP = base year price index x Nominal GNP
           current year price index

             = 100 x 10,000 = RM6,250

Real GNP = Nominal GNP
           GNP deflator

             =    10,000     = RM6,250
2. Per capita income

ØRefers to average income per head of population
ØUsed as index of change in the standard of living of a
      Per capita income = National Income
                         Total population

E.g: The national income of a country with a total
population of 20 million is RM50,000 million. So the per
capita income is:
      Per capita income = 50,000 = RM2,500
3. Growth rate
ØEconomic growth of the country can be measured as
a gross domestic product (GDP) or growth national
product (GNP) based on real income.
ØThe growth is the percentage change in the quantity
of goods and services produced from one year to
    growth rate (g) = Real GNP this year – Real GNP last year x 100
                              Real GNP last year

e.g: If the real GDP for year 2003 is RM232,359 million and RM248,954
million for year 2004. the growth rate from year 2003 to 2004 is:

        g = 248,954 – 232,359
          = 7.14%

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