DPB2023

MACROECONOMICS
CHAPTER 2
NATIONAL INCOME ACCOUNTING
 Chapter Objectives
In this chapter, you will able to:
2.1 Define concept in national income
accounting
2.1.1 Define gross domestic product
2.1.2 Define gross national product
2.1.3 Define net national product
2.1.4 Define market price and cost factor
 Chapter Objectives
2.1.5 Define national income (NI), national
nominal income and national real income
2.1.6 Define personal income
2.1.7 Define disposable personal income
2.1.8 Define per capita income
2.2 Calculate national income accounting
2.2.1 Using expenditure approach
2.2.2 Using income approach
 Chapter Objectives
2.2.3 Using product approach
2.3 Explain the problems related to national
income
2.3.1 Explain difficulties in calculating
national income
2.3.2 Explain the difficulties in compare
national income
2.3.3 Explain the uses of national income
data
Arrow Process
Chapter Review
Why use graphics from PowerPointing.com?
• Gross Domestic Product (GDP) • Standard of living
• Gross National Product (GNP) • Economic
• Net National Product (NNP) • Calculation performance
• Market price and cost factor • National planning
• Comparison between
• National nominal • Sectoral
periods
• National real income contributions
• Personal income versus • Comparison between • Economic policy
• Disposable income countries • Inflationary and
• Percapita income deflationary gaps

NATIONAL METHOD PROBLEMS FACTORS USES

INCOME

• Factors of
• Definition production
• Formula
• Technology
• Product approach
• Income approch • Government
• Expenditure • Political stability
approach
This illustration is a part of ”Building Plan”. See the whole presentation at slideshop.com/value-chain
 2.1. Define concept in
national income accounting
2.1.1 Gross domestic product
 Headline news
• MRT to generate between RM3 billion and
RM4 billion yearly in Gross national Income –
Bernama (18 Dis 2010)
 History of GDP
• GDP was first developed by Simon Kuznets for
a US Congress report in 1934.[4] 
• After the Bretton Woods conference in 1944,
GDP became the main tool for measuring a
country's economy. [5]

Dickinson, Elizabeth. "GDP: a brief history".

ForeignPolicy.com. Retrieved 25 April 2012.
 Why?
• An information on how much spending,
income and output is being created in an
economy over a period of time.
• National income data gives us this information

Total amount of The total income

expenditure taking place generated through
in the economy production of goods
C+I+G+X-M and services.
The total value of the
output of goods and
services produced in
the Malaysia
 What is National Income?
• a figure for the total production of goods and
services in a country entails a large amount of
data-collection and calculation
• which prescribed a greater role for the
government in managing an economy
• made it necessary for governments to obtain
accurate information so that their
interventions into the economy
 Why him? Or her?

Affect GDP or GNP? Affect GDP or GNP?

 Gross Domestic Product (GDP)
• “Gross” means total product
• the value of all final goods and services
produced in a country in 1 year
• Measures the output of goods and services
within the borders of the country regardless
Malaysian or foreigners
 Gross Domestic Product (GDP)
• Example: the Samsung’s factory in
Malaysia and ADABI factory in Malaysia is
calculated in GDP
• Aaron Aziz who work in Malaysia
 Others National Account
• In addition to GDP, the media often report
several other national accounts
• Why?
• Because they are necessary for studying the
macro economy
• Now take a briefly look at each
 2.1. Define concept in
national income accounting
2.1.2 Gross national product
 Gross National Product (GNP)
• Measures the output of nation’s factors of
production, supplied by nation’s residents
regardless of whether the factors are located
within or outside the country’s borders
 Gross Net Product (GNP)
• Ex: Malaysia’s doctors at England
• Can be larger than GDP
• GNP = GDP – net factor income payments
from abroad
• Can be at Market Price or Factor Cost
 2.1. Define concept in
national income accounting
2.1.3 Net national product
 Net National Product (NNP)
• NNP can be defined as sum total factor income
received by the factors of production during
the year (sum of the wages, rent, interest, profit
in a given year)
 Net National Product (NNP)
Formula
• Formula:
• NNP = GNP – depreciation; or
• NNPfc = NNPmp – Indirect Taxes + Subsidies
• NNPfc = NNPmp – net Indirect Taxes
 2.1. Define concept in
national income accounting
2.1.4 Market price and cost factor
 Market Price
• Market price – current price in the market
through the forces of demand and supply
• is the economic price for which a good or
service is offered in the marketplace.
• Is actual prices paid by consumers
• Includes indirect taxes and excludes subsidies
given to producers
 Market Price
• Indirect taxes are levied on goods such as
excise duty, import duty and sales tax
• Subsidies in an incentive from the government
to producer to produce more output
• So, in order to get market price value, we have
to include indirect taxes and exclude subsidies
given by government.
• We have GDPmp / GNPmp
 Market Price Formula
• GDPmp = GDPfc + indirect taxes – subsidies
• GNPmp = GNPfc + indirect taxes – subsidies
 Factor Cost
• Factor cost – real prices earned by producers or
sellers
• The value of factor cost is include subsidies
given by government and excludes indirect
taxes
• We have GDPfc / GNPfc
 Factor Cost Formula
• GDPfc = GDPmp - indirect taxes + subsidies
• GNPfc = GNPmp - indirect taxes + subsidies
 2.1. Define concept in
national income accounting
2.1.5 National income (NI),
nominal income and real income
 National Income (NI)
• Depreciation should be subtracted from GDP
• Therefore, the measurement to correct this
deficiency is national income (NI)
 National Income (NI) Formula
• Stated as a formula:
NI = GDP – depreciation (consumption of
fixed capital)
 National Nominal Income
• Also known as nominal GNP/GDP
• Nominal GNP/GDP is the sum value of all
produced goods and services at current prices.
• So far, GDP has been expressed as nominal
GDP
• Nominal GDP is also referred to as current-
ringgit or money GDP
 Changing Nominal GDP to
Real GDP
• We can convert the Nominal GNP/GDP to Real
GNP/GDP by using a deflator
• GDP deflator = current year price index x 100
base year price index
• The GDP deflator measures changes in the
prices of consumer goods, business investment,
government spending, export and import.
 National Real Income
• Also known as Real GDP
• Real GDP is the sum value of all produced
goods and services at constant prices
• Real GDP is inflation adjusted GDP so you
have to take away inflation from GDP
• Is used to measure the economic growth of a
country to overcome different value of money
over a year
 Formula of National Real Income

Real GNP/GDP = Nominal GDP x100

GDP deflator
 2.1. Define concept in
national income accounting
2.1.6 Personal income
 Personal income
• Income that actually received by individuals
and households (not businesses) in an economy
in a year
• Can be spent, used to pay taxes or to be saved
• To estimate the purchasing power of household
 Personal income formula
• Personal Income = National Income (NI) +
transfer of payment – Corporate income taxes –
retained earnings – social security contributions
– insurance premium
 Personal income formula
Transfer of payment
• Transfer of payment is benefits are not from
any productive work
• Benefits given by government such as
unemployment allowance, old age pensions
and other benefits to the public
 Personal income formula
Corporate Income Taxes
• A tax that levied by government to business on
the company profit
• Excludes from Personal Income
 Personal income formula
Retained Earning
• A certain portion of company profits retained
by corporations and being distributed among
shareholders
• It is channeled back into business operation
• Excludes from Personal Income
 Personal income formula
Social Security Constribution
• A contributions of certain percentage of the
worker’s income to provident fund or pension
funds
• In Malaysia, employees’ incomes are deducted
for the Employees Provident Fund (EPF) and
for the Social Security Contribution (SOCSO)
• Excludes from Personal Income
 Personal income formula
Insurance Premium
• A percentage of income that is used to pay for
insurance
• Excludes from Personal Income
 2.1. Define concept in
national income accounting
2.1.7 Disposable personal income
(DPI)
 Disposable Personal Income
• Part of the personal income that is left after the
payment of personal direct taxes
• Formula:
• DPI = Personal Income – personal income tax
 2.1. Define concept in
national income accounting
2.1.8 Per capita income
 Per capita Income
• Refers to average income per head of
population
• GDP divided by the size of the population
• This number is connected directly to standard
of living
• In general, the higher GDP per capita in a
country, the higher the standard of living.
 Per capita Income Formula
• Per capita Income = National Income/GDP
Total Population
 Example:
• Using 2000 as the base year, suppose you are
given the 2008 nominal GDP of RM740,721
million and the 2008 GDP deflator of 140
Calculate the 2008 real GDP
 2.2 Calculate National
Income Accounting
2.2.1 Expenditure Approach
 Methods of Measuring National Income
(GDP)
• National Income (GDP) can be calculated
using THREE approaches:
– Expenditure Approach
– Product Approach
– Income Approach

This fundamental gives the same result

when we measure National Income

EXPENDITURE =PRODUCT = INCOME

 Expenditure Approach
• In this method, national income is obtained by
adding all the expenditure on goods and
services in a year
• The national expenditure is made up of four
economic sectors:
– Personal Consumption (C )
– Investment (I)
– Government Spending (G)
– Net Exports (X-M)
 Expenditure Approach
• The best way to remember expenditure
approach by using this equation:

Net export
GDP = C + I + G + (X – M)

Personal Government
Investment expenditure
consumption
 Expenditure Approach
Items RM million
Private expenditure (C) + 12,000
Public expenditure (G) + 40,000
Private investment (I) + 10,000
Change in stock (I) +/-       600
Exports of goods and services (X) 11,000

Imports of goods and services (M) 8,500

Net Exports (X-M) + 2,500
Gross Domestic Product at market price 65,100
Factor income received from abroad 4,000
Factor income paid to abroad (-) 3,000
Net factor income payments from abroad (+) 1,000
Gross National Product at market price 66,100
 Personal Consumption (C)
• The purchase of goods and services produced
by a firms, individuals or households
• Includes only spending that only for personal
used
• Such as: personal computers, shoes, compact
disks, paying insurance premium, seeking
medical services and etc
Personal Consumption (C)
 Gross Private Investment (I)
• Includes all private domestic spending by
business for investment in assets to earn
profits in the future
• Refers to the purchase of capital goods by
firms for production
• Two components:
– Fixed capital formation & Change in inventories
• Example: a car purchased by company for
production purpose
 Government Spending (G)
• Is the expenditures made by a government
(federal, state and local) for final goods and
services
• Includes : national defense, schools, hospitals,
payment of salaries
• But transfer of payment (scholarship and
pension) is NOT included in government
spending because it does not represent the
purchase of goods and services
 Net Export
• Is a difference between value of export and
import of goods and services to other countries
• Obtain from:
Net export = Export - Import
 Expenditure Approach
Items RM million
Private expenditure (C) + 12,000
Public expenditure (G) + 40,000
Private investment (I) + 10,000
Change in stock (I) +/- 600
Exports of goods and services (X) 11,000

Imports of goods and services (M) 8,500

Net Exports (X-M) + 2,500

Gross Domestic Product at 65,100
market price
 Expenditure Approach
• Example: Calculate the National Income of
Country X by using Expenditure Approach
– GDP at market price
– GNP at market price
– GNP at factor cost
– National Income
– Personal Income
– Disposable Personal Income
 Expenditure Approach (cont.)
ITEMS RM Million
Gross National Product at 66,100
market price
Indirect taxes (-) 500
Subsidies (+) 250
GNP at factor cost 65,850
Depreciation (-) 850
National Income 65,000
Transfer payment (+) 1,000
Social security contribution (-) 200
Retained earnings (-) 100
Corporate tax (-) 800
Personal Income 64,900
Personal Income tax (-) 400
Disposable Personal Income 64,500
 2.2 Calculate National
Income Accounting
2.2.2 Income Approach
 Income Approach
• This approach is more complex and has
been used by major Malaysian trading
partners: United States and Japan
• By adding all the income paid to firms and
households in exchange for the factor of
production during period of time
 Income Approach
• Income earned by households include
payments for the land, labor and
capital required to produce the product
• Malaysia is not using this approach
 Items of Income Approach
• Using income approach, GDP is
expressed as follows:
• GDP = compensation of employees
+rents +profit + net interest + indirect
taxes and depreciation
 Items of Income Approach
• Another terms can be used:
– Wages
– Net interest
– Rental income
– Profits
 Item of Income Approach
Employee compensation
• Include wages, salaries and certain
supplements paid by firms and
government to labor
• Social security benefits
• Unemployment programs
 Item of Income Approach
Profits

 Include all forms of income earned by

unincorporated businesses;
 Income earned by the stock-holders of
corporations regardless of whether
stockholders receive it
 Item of Income Approach
Net interest
 Is the difference between interest income
earned and interest payment
 Household received interest from savings and
fixed accounts
 They also pay interest on credit cards,
installment loans and mortgage loans
 Item of Income Approach
Indirect business taxes
 business sector has the DIRECT responsibility of
paying these taxes to the government sector
 The business sector collecting the taxes from the
household sector FOR the government sector
 The taxes are paid INDIRECTLY by the
household sector to business
 Example: Sales tax, service tax
 Item of Income Approach
Indirect business taxes
 paid by the business sector to the government
sector are considered DIRECT business taxes
 These include corporate profits taxes,
property taxes, and franchise taxes
 Income Approach
ITEMS RM MILLION
Income from employment 13,000
Income from self-employment 12,000
Income from rent, dividend and interest 10,000
Companies profits 23,000
nnp/ni 58,000
 Income Approach
ITEMS RM MILLION
Income from employment + 13,000
Income from self- + 12,000
employment
Income from rent, + 10,000
dividend and interest
Companies profits + 23,000
NNP/NI 58,000
 Income Approach (cont.)
ITEMS RM MILLION
GNP 71,000
(-) Depreciation 1,000
National Income (NI) 70,000
Transfer payment (+) 1,000
Social security 200
contribution (-)
Corporate tax (-) 800
Undistributed profit (-) 5,000
Personal Income 65,000
Personal income tax (-) 500
Disposable personal 64,500
income
 2.2 Calculate National
Income Accounting
2.2.3 Product Approach
 Product Approach

• Defines a nation’s GDP as the market value of

final goods and services newly produced
within a nation during a fixed period of time
• Also known as Output approach or Value
Added approach
• In Malaysia, there are THREE sectors
contribute in product approach:
 Product Approach
• The primary sector – Mining, Quarrying,
Agriculture, Forestry and Fishing
• The secondary sector – Manufacturing and
Construction
• The tertiary sector – Electricity; Gas and
Water; Wholesale and Retail Trade; Finance,
Insurance, Real Estate and Business Services;
Transport and Communication; Government
Services and other services
 Product Approach
 Include only final goods and ignore intermediate
goods altogether
 What is intermediate goods?
 Intermediate goods are goods and services that are
purchased for resale or for further processing or
manufacturing
Intermediate good
 Product Approach
• Include only final goods and ignore intermediate
goods altogether
• What is final goods?
• Final goods are goods and services that are acquired
for final use by the purchaser, and not for resale or
for further processing or manufacturing
Final goods
 Product Approach
The importance
• In developing countries, they prefer the
production approach for policy makers to
monitor the development in specific industries
in the long run planning
• In Malaysia, we have Malaysia Plan and
Industrial Master Plan (IMP3) and policy
makers need to know the contribution of
specific industries
 Production Approach
ITEMS RM Million
Agriculture, forestry and fishing 30,000
Mining and quarrying 37,000
Manufacturing  100,000
Construction  13,000
Electricity, gas and water 10,000
Transport, storage and 22,000
communication
Wholesale, retail, hotel and 47,000
restaurant
Finance, insurance and real estate 40,000
Government services 25,000
Other services 20,000
GDP at market price 344,000
 Production Approach
ITEMS RM
Million
Agriculture, forestry and fishing + 30,000
Mining and quarrying + 37,000
Manufacturing + 100,000
Construction + 13,000
Electricity, gas and water + 10,000
Transport, storage and + 22,000
communication
Wholesale, retail, hotel and + 47,000
restaurant
Finance, insurance and real + 40,000
estate
Government services + 25,000
Other services + 20,000
GDP at market price 344,000
Production Approach (cont.)
ITEMS RM Million
GDP at market price 344,000
Factor income received from 25,000
abroad
Factor income paid to 18,000
abroad (-)
Net factor income payments (+) 7,000
from abroad
GNP at market price 351,000
Indirect taxes (-) 500
Subsidies (+) 700
GNP at factor cost 351,200
Production Approach (cont.)
ITEMS RM Million
GNP at factor cost 351,200
Depreciation (-) 5,000
National Income 346,200
Transfer payment (+) 4,000
Social security contribution (-) 800
Retained earnings (-) 100
Corporate tax (-) 7,000
Personal Income 342,300
Personal income tax (-) 800
Disposable Personal income 341,500
 Formula of National Account
• Using 3 methods
GDP • Expenditure, Income, Product Approach

• GDP +/- net factor income from abroad

GNP • GDP +/- (factor income received – paid to)

• GNP factor cost – subsidies + indirect tax

GNP MP
 Formula of National Account
• GNP market price + subsidies -
GNP FC indirect tax

• GDP – depreciation (consumption of

NI fixed capital)

• NI – Corporate Profit – SOCSO &

PI EPF + Transfer Payments + Dividend
 Formula of National Account
• Personal Income (DI) – Personal
DPI Taxes

• GDP or National Income /

INCOME
PERCAPITA population
 Checkpoint
• Is the economy in 2014 up or down?
• Find out time series data of nominal GDP and
real GDP from 1990 - 2014
 2.3 Problems Related With
National Income Accounting
2.3.1 Difficulties in calculating
2.3.2 Difficulties in comparison
between countries and time
period
Difficulties in
calculating
(occurs within Difficulties
the countries)
Problems of in
national comparison
income
accounting
Between Between
countries time
period
 Problems of National Income
Accounting
Difficulties in calculating

 Double counting Problems occur

 Accuracy of information within the
country
 Unpaid activities
 Underground activities/illegal activities
 Non-monetized sector
 Difficulties in calculating
Double Counting
 Double counting occurs when the same goods
in an economy are counted twice
 Example: Final price of pizza: Cost to make pizza:
RM 20.00 RM 3.00 - flour
If count twice:
RM20.00 + RM3.00 =
RM23.00

Double counting problem will make

the value of national income not
accurately
 Difficulties in calculating
Double Counting
 Economists avoid double counting by only
including the value of final goods in GDP

Goods that have been purchased for

final use by a consumer

Final price of pizza: Cost to make pizza:

RM 20.00 RM 3.00 - flour
If count twice:
RM20.00 + RM3.00 =
RM23.00
 Difficulties in calculating
Accuracy information
 Lack of illiteracy and expertise to collect data
especially in Least Developed Countries
(LDCs) or Third World countries
 Difficulties in calculating
Unpaid activities
 Some activities in economy are paid and
unpaid yet productive
 Example: Housework and volunteer is unpaid
activities and not included in national
accounting Baker’s bake loaf
for customer and Which one
customer pay for it calculate in
national
Baker’s bake loaf accounting?
for family
 Difficulties in calculating
Illegal activities

• Illegal activities such as gambling and

prostitute are excluded from national
accounting in certain countries especially in
Malaysia.
 Difficulties in calculating
Non-monetized sector
• Non-monetized sector is the sector that its
output does not reach the market and only
consume among them. The output rendered
out based on love,
• The output is not bought and soldkindness
troughand
market courtesy
• A good example: agriculture sector
• It is occur especially in the Third World
countries (Asia, Africa, Oceania & Latin
America)
Difficulties in calculating
Non-monetized sector
Third World countries
Difficulties in calculating
Non-monetized sector
Third World countries
Difficulties in calculating
Non-monetized sector
 Problems of National Income
Accounting
Difficulties in comparisons
Between countries
 Concepts use in national income
 Different treatment of items
 Different currencies
 Patterns of income distribution Problem occurs
between the
 Patterns of expenditure country
 Difficulties in comparisons between
countries
Concepts of national income
• Some countries include the value added of
goods (product approach) BUT some others
not.
• Also, the types of services sector for each
country is differ. Examples, in Thailand the
value of Commerce Services include in product
approach.
 Difficulties in comparisons between
countries
Different treatment of items
• Illegal activities such as gambling and
prostitute are excluded from national
accounting in certain countries especially in
Malaysia
• But for Thailand, gambling and prostitute
activities are calculated in their national
income.
 Difficulties in comparisons between
countries
Different currencies
• Each countries use their own currencies and
the value is differ based on exchange rate
• Therefore, the value of GDP or GNP would not
provide an accurate comparisons
 Difficulties in comparisons between
countries
Pattern of income distribution
• The unfair income distribution exist in certain
countries, especially the country that have
many divisions and large population.
• So, the small country get higher standard of
living than large country.
 Difficulties in comparisons between
countries
Pattern of expenditure
• Some of the countries expend more on war
such as Soviet & Russia
• But this expenditure does not improve the
country standard of living
• Therefore, their value of GDP per capita is
lower than others countries
 Problems of National Income
Accounting
Difficulties in comparison between time period

 General price levels

 Quality of goods and services
Problems occur
 Population composition between the time
 Pattern of income distribution periods
Difficulties in comparisons between time
period
General price level
• The price level will change over the time.
• Therefore, the value of nominal GDP will
differ over the time.
• If the price increase, the value of nominal GDP
also increase.
• To overcome this problem, the real GDP value
is the best way because it take out the value of
inflation.
Real GDP = Nominal GDP x 100
GDP deflator
Difficulties in comparisons between time
period
Quality goods and services
• The value of goods and services may change
over the time due to improvement in
technology. The value of goods
and services
calculate in product
approach
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Difficulties in comparisons between time
period
Population composition
• If the country has more population, but less
GDP, so the value of GDP per capita become
smaller.
• Therefore to increase the value of standard of
living, the country should increase the GDP.
Difficulties in comparisons between time
period
Income distribution
• The value of GDP figures do not reflect an
income distribution in the economy.
• So an increase in GDP does not necessarily
means that all individuals in the economy are
better off.
 Standard of
living
Income Economic
distribution performance

The uses of national income

National
Economic planning
policy
Sector
contribution
 The uses of national income
Standard of living
• Countries with lower NI will have low standard
of living (Myanmar, Vietnam, Cambodia)
• Countries with higher NI will have high
standard of living (Japan, USA, UK)
 The uses of national income
Economic performance
• The national income can shows whether the
country economy is growing, stagnant or
decline
• It can estimate the economic performance over
the time
 The uses of national income
National planning
• The performance in national income helps
government to forecast future development of
the country
• Examples: Five year Malaysia Plan
 The uses of national income
Sector contribution
• To identify the important sectors that
contribute economic growth
• In Malaysia, the tertiary sector gives highest
contributions to national income
 The uses of national income
Economic policy
• The data in national income helps the
government choose the right economic policies
and development program.
 The uses of national income
Income distribution
• To determine the regional disparities,
inequality of income and level of poverty in the
country.
• The figures of wages, rents, profit, interest and
etc (income approach) will indicate the country
distribution of income.
 Factors of Modern
production technology

The factors of national income

Political Specialization
stability
 The factors of national income
Quality of factors of production
• A good quality and quantity of factors of
production can determine the level of national
income
Knowledgeable of labor
Quality

Quantity Large area of land

 The factors of national income
Modern technology
• The high-end and modern technology can help
increase the production thus, increase national
income.
• It is important for country to implies R&D
activities in order to enhance the production
level.
Technology
 The factors of national income
Specialization
• The specialization impose on labor can
improve works level and production efficiency
• It can contributes in high productivity thus
increase the national income.

Specialization
of labor
 The factors of national income
Political stability
• A stable economic and political system helps
the allocation of resources
• Wars, strikes and social unrest will discourage
investments and business activities

Political
stability