by

Ambigah Sandran
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PowerPoint Slides
by Ambigah d/o Sandran
LEARNING OBJECTIVES
The students will be able to learn :
The concepts in national income.

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Three approaches of measuring national income.

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Uses of national income

Difficulties in calculation national income.

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LEARNING OUTCOMES
At the end of the lecture, students will be able to :
Identify the concepts in national income.

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Distinguish three approaches of measuring

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national income.
Discuss the uses of national income

Explain the difficulties in calculation national

income.

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INTRODUCTION
There are many concepts on the calculation of
national income.

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Ambigah Sandran
National income known as the flow of goods and
services in a nation over a certain period of time,
usually or a year.

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NATIONAL INCOME

Definition:
1. National income is the total money value of all goods and

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services produced by a nation during one year after

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deducting the depreciation value of the machines used in
production.

2. National income is the total payments received by the

factors of production through the production of goods and
services in a country in a year.

3. National income as a total net output of the nation.

4. National income of a country is its annual consumption 5

and not its annual production.

NATIONAL INCOME: CONCEPTS

GDP

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DPI GNP

Concepts of
National
PI Income MP & FC

NI NNP
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NATIONAL INCOME: CONCEPTS
1. Gross of Domestic Product (GDP)
Is the total money value of the all final G&S produced

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within a country in a given time period.

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GDP can be measured at
** current prices: basis of prevailing prices
** constant prices: basis of fixed prices prevailing in a
base year
For example:
** GDP at current price of Malaysia for 2004
= RM449 Million
** GDP at constant price of Malaysia in 1987(base year)
= RM248 million 7
NATIONAL INCOME: CONCEPTS
1. Gross of Domestic Product (GDP)

GDP excludes G&S produced by Malaysia citizens

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working overseas as well as intermediate goods.

GDP included the output produced by foreign

workers in Malaysia such as Indonesians or
Nepalese.

The net income form abroad will make the difference

between gross domestic product and gross national
product.
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NATIONAL INCOME: CONCEPTS
2. Gross National product (GNP)

defined as the total market value of all final G&S

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produced by the residents of a country during a given
period of time.

For example:
** GNP included the income earned by the Malaysian
working abroad.

**GNP not included the income earned by the foreigner

workers work in Malaysia.
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NATIONAL INCOME: CONCEPTS
2. Gross National product (GNP)

only the final output that satisfied consumption will

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included

the value of intermediate goods and inputs will

excluded to avoid double counting.

GNP also can be defined as the sum of the GDP and

the net factor income from abroad.

net factor income from abroad = difference between

the income received from abroad and factor income 10

abroad to the GDP.

NATIONAL INCOME: CONCEPTS
2. Gross National product (GNP)

GNP

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= GDP + net factor income from abroad

Or

GNP
= GDP + [ factor income received from abroad factor
income paid abroad]

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NATIONAL INCOME: CONCEPTS
3. Market Price and Factor Cost

GDP measured at market price and also at factor

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cost.
market price refers to the current price in the
market through the forces of demand and supply.
market price
- actual prices paid by consumers
- includes indirect taxes and
- excluded subsidies given to producers
- does not reflect the real price
therefore the factor cost is the real price that is
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earned by producers or sellers.
NATIONAL INCOME: CONCEPTS
3. Market Price and Factor Cost

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GDP difference at market price and factor cost are

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due to indirect taxes and subsidies.

indirect taxes: excise duty, import duty, sales tax;

taxes on expenditure, sales tax or consumption tax.

subsidies: incentive from the government to

encourage producers to produce more.

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NATIONAL INCOME: CONCEPTS
3. Market Price and Factor Cost

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GDP at market price

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= value + indirect taxes - subsidies

GDP at factor price

= GDP at market price - indirect taxes + subsidies

GNP at factor price

= GNP at market price - indirect taxes + subsidies
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NATIONAL INCOME: CONCEPTS
4. Net National Product (NNP)

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defined as the market value of the net output of final

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goods and services produced by a nation during a
year.
also referred to as the national income at market
price

NNP = GNP at market price (value of capital

consumption or depreciation value during the year)

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NATIONAL INCOME: CONCEPTS
5. National Income at Factor Cost (NI)

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defined as the total of all income payments made to

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factors of production

NI = GNP at factor cost depreciation value

Or

NI = NNP at market price + subsidies indirect taxes

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NATIONAL INCOME: CONCEPTS
6. Personal Income (PI)

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the income that is actually received by individual and

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households in an economy in a year.
PI : can be spent, pay taxes or saved.
Deduction made from national income:
1. corporate income taxes
2. retained earning
3. social security contributions
4. insurance premium
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NATIONAL INCOME: CONCEPTS

6. Personal Income (PI)

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PI = (national income + transfers payments corporate income
taxes retained earnings social security contributions
insurance premium)

PI is a useful concept because estimating the potential

purchasing power of households.

PI is not the income of any individual or household that is

wholly used for consumption.
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NATIONAL INCOME: CONCEPTS

7. Disposable Personal Income (DPI)

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DPI is the personal income that is left remaining after the
payment of personal direct taxes

DPI = Personal income personal income tax

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 Methods of

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measuring

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national Income

Expenditure Income Product

approach approach approach

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EXPENDITURE APPROACH
national income obtain by adding all the
expenditure on goods and services in a year.

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there are four economic sector for this approach:
1. Personal Consumption (C)
2. Investment (I)
3. Government Spending (G)
4. Net Export (X-M)

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 EXPENDITURE APPROACH
1. GDP mp = C+I+G+(X-M)

2. GNP mp = GDP mp + net factor income abroad

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3. GNP fc = GNP mp indirect taxes + subsidies

4. National Income = GNP fc depreciation

5. Personal Income (PI) = national income + transfer payments

corporate income taxes retained earnings social security
contributions insurance premium

6. Disposable Personal Income (DPI) = Personal income personal

income tax
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 Example; Calculate the
a) Gross domestic product at market price
b) Gross domestic product at factor cost
c) Gross national product at factor cost

Item RM (millions)
Export 5

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Personal consumption expenditure 7
Indirect business tax 3
Government expenditure 0.55
Investment 4
Personal income tax 0.72
Subsidies 0.89
Imports 10
Factors income paid abroad 4
Factors received from abroad 10 23

Depreciation 1.35
INCOME APPROACH

measures national income by adding all the various

types of income paid to firms and household in the

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form of wages for labor, rent for land, interest for

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capital and profits to entrepreneurs.

In this approach, all the figures are in factor cost cause

only earnings of factors of production can be
calculated.

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INCOME APPROACH

major income components are:

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1. Wages and salaries

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2. Net interest
3. Rental income
4. Profits

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 INCOME APPROACH
1. GDP = wages +salaries + rent + profits +interest + divided

2. GNP = GDP + net factor income abroad

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3. National income = GNP depreciation

4. Personal income (PI) = national income + transfer payments

corporate income taxes retained earnings social
security contributions insurance premium undistributed
profits

5. Disposable personal income (DPI) = personal income

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personal income tax
PRODUCT APPROACH

also known as
output approach

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value added approach

measured by net value of all final G&S produced by a

nation during a year.

Only the final value added and raw material or

intermediate will subtracted to avoid double counting.

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 PRODUCT APPROACH
1.GDP mp = all final products in the economy

2. GNP mp = GDP mp + net factor income abroad

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3. GNP fc = GNP mp indirect taxes + subsidies

4. National Income = GNP fc depreciation

5. Personal income (PI) = national income + transfer

payments corporate income taxes retained earnings
social security contributions insurance premium

6. Disposable personal income (DPI) = personal income 28

personal income tax

USES OF NATIONAL INCOME
Standard of living comparison

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Economic performance over time

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National planning
Sectoral contributions
Economic policy
Inflationary and deflationary gaps
National expenditure
Public sector
Distribution of income
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DIFFICULTIES IN CALCULATING NATIONAL INCOME

Problems of non-monetized sector

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Problem of illiteracy

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Problem of expertise
Problem of less sophisticated and machinery
Problem of double counting
Problem of false information
Problem of multi-occupations

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SUMMARY
National income is the total income received by
all the citizen of a country within the period of
one year.

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GNP is the total value of final goods and services
produced by factors of production owned by the
residents of a country living both within the
country and abroad.
GDP is the total value of final goods and services
produced by factors of production within the
country.
NNP in the GNP excluding depreciation. Net
national product at factor cost is also known as
national income. 31
SUMMARY
There are three approaches to calculate the
national income: expenditure approach, income
approach and product approach.

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KEY TERMS:
Term Definition

The flow of goods and services by an a nation over

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National income

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a period of time, usually a year.

The total market value of all final goods and

GDP services produced by factor of production in a
country over a given period of time.

Total market value of all final goods and services

GNP produced by the residents of a country during a
given period of time.

Refers to the current price in the market through the

Market price
forces of demand and supply. 33
KEY TERMS:
Term Definition

These are the real prices earned by producers or

Factor cost

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sellers.

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The market value of the net output of goods and
NNP
services produced by a nation in a year.

The income that is actually received by individuals

Personal income
and households in a year.

Disposable Part of the personal income that is left after the

personal income payment of personal direct taxes.
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KEY TERMS:
Term Definition

Personal The purchase of goods and services produced by

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consumption firms, individuals or households.

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The purchase of capital goods by firms for use in
Investments production and in changes in the farm's
inventories.
Government The expenditure incurred by federal, state and
spending local governments for final goods and services.

The difference between the value of export and

Net export
the value of imports.

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KEY TERMS:
Term Definition

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Wages and Income received by labour from firms for services

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salaries rendered to them.

The difference between total interest payments

Net interest received and total interest payments made by
households.

Rental income Payments for rented inputs.

Corporate profits earned by business corporations

Profits
or payments of dividends to shareholders. 36