Chapter 2_ Measuring National Income and Output - Carabaru

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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
year

ØGross National Product (GNP) : Market value
of all final goods & svc produced by the
citizens of a country, regardless where they
are.

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
depreciation.
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

PI = National income + transfer payments – corporate
income taxes – retained earnings – social security
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
govt.

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
household.
- 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
GDPmp

GNPmp

GNPfc

NI

PI

DPI

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
Calculate:

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
Government expenditure                  990
investment                              1000
Personal income tax                      80
Subsidies                                30
Imports                                 400
depreciation                             40

Calculate:
•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
-Also oncludes fringe benefits such as social security or pension
funds contribution.
ii.Net interest
iii.Rental income
iv.Profits
-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
Example:
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

Calculate:
•GDP
•GNP
•NI
•Pesonal income
•Dispoable personal income
Solution:

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
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
Example:

Items                        RM (million)
Government services          1000
Transfer payments            150
Exports                      1500
Mining and quarrying         1800
Manufacturing                1500           Calculate:
•GDPmp
Depreciation                 100            •GNPfc
Subsidies                    150            •National income
Private investment           5000
Electricity, gas and water   700
Banking and tourism          3000
Rent                         200
Solution:

•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
performance.
Ø To draft Malaysian Plan.

4. Sectoral contribution
Ø Indentify the important sector that contribute toards economic
growth.
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
activity.
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
porfits.

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
services.

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)
Example:

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
160
or

Real GNP = Nominal GNP
GNP deflator

=    10,000     = RM6,250
(160/100)
2. Per capita income

ØRefers to average income per head of population
ØUsed as index of change in the standard of living of a
country
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
20
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
another
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
232,359
= 7.14%
THANK YOU

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