National Income

Analysis
National Income-
Meaning
 It is a sum total of factor incomes
accruing to normal residents of a
country within an accounting year.

 The concept of National Income

can be explained from three sides
–
I) Production
II) Income and
III) Expenditure
DEFINITIONS
 Central Statistical Organization: -
“National Income is the sum total of factor
incomes earned by the normal residents of a
country in the form of wages, rent, interest
and profit in an accounting year”.

 Prof. Kuznets: - “The sum total of the

market value of final goods and services,
produced by normal residents of a country in
one year is known as national product.”
Circular flow diagram
 summarizes the transactions
between the different economic
agents

 agents: households, firms

(business), government, and
foreigners (rest of the world)
Circular flow diagram
 Assumption: The economy composed
of households and firms only
 Households: own factors of production,
consume goods and service
 Firms: hire factors of production to
produce goods and services
 payments for goods and services

goods and services

FIRMS HOUSEHOLDS

factor services

factor payments
(wages, interest, rent, profit)

FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between
firms and households in a simple economy.
In the upper loop, the arrow emanating from firms to households represents the sale by firms of
goods and services to households. On the other hand, the arrow from households to firms
represents the payments.
n the lower loop, the arrow originating from the households to the firms shows that firms hire
labor and capital from households in order to produce goods and services. The arrow
emanating from the firms indicates their payments for the use of the factors of production.
 Revenue Spending
(=GDP) (=GDP)
MARKETS FOR
GOODS AND
Good and SERVICES
Good and
services sold
services
bought

FIRMS HOUSEHOLDS

Land, labor
Inputs for
and capital
Production MARKETS FOR
FACTORS OF
PRODUCTION
Wages, rent, Income (=GDP)
interest and
profit (=GDP)
Flow of goods & services
Flow of money: pesos
THE CIRCULAR FLOW DIAGRAM
Transfer payments
 Transfer payments – are
transactions wherein one party is
not obliged to deliver a good or
service in return for the payment.
 Examples: retirement benefits,
unemployment benefits,
scholarships, and donations.
Concepts/Aggregates of
National Income
 Gross Domestic Product at Market Price (GDPMP)
 Gross National Product at Market Price (GDP MP)
 Net National Product at Market Price (NNPMP)
 Net Domestic Product at Market Price (NDPMP)
 Gross Domestic Product at Factor Cost (GDPFC)
 Gross National Product at Factor Cost (GNP FC)
 Net National Product at Factor Cost (NNPFC)
 Net Domestic Product at Factor Cost (NDPFC)
 Factor Income From Net Domestic Product
Accruing to Private Sector
 Private Income
 Personal Income
Basic Concepts -
 Domestic and National Concepts
1.Domestic Income = National Income – NFYA
2. National Income = Domestic Income + NFYA
 Market Price and Factor Cost Concepts

1. Market Price = Factor Cost + NIT

2. Factor Cost = Market Price – NIT

 Gross and Net Concepts

1. Gross Product = Net Product + Depreciation

2. Net product = Gross Product –

Depreciation
Definition of GDP
 The market value of good i
(Vi) is equal to PiQi
 GDP = sum of the market
values of all final goods and
services produced within the
year. n n
GDP   Vi   Pi  Qi
i1 i1
GDP includes final
goods and services
only
 Final goods - goods and services that
are not purchased for the purpose of
producing other goods and services or
for resale
– Eg. Rice (final) and palay or unhusked rice
(intermediate product)

 Including intermediate goods and final

goods will result in “double counting”.
Approaches for measuring
National Income

1. Value-added Approach – measures GDP

as the sum of value added at each
stage of production (from initial to final
stage)
2. Income Approach (lower loop) –
measures GDP as the sum of incomes of
factors of production (wages, rent,
interest and profit.
3. Expenditure Approach – measures GDP
as the sum of expenditures on final
goods and services.
Value Added Method

STEPS –

 Classification of Productive
Enterprises
 Calculation of Value Added

1. Value of Output

2. Value of Intermediate Consumption

 Calculation of Domestic Income

 Calculation of National Income

 Value Added Approach
 Suppose that rice is the only final product of an economy:
It goes through several (3) stages of production.

Value of
Stage of Prod’n intermedia Value of Value-
te good Sales added
Farmer - Palay 12,000 12,000
Rice Miller -Milled 12,000 15,000 3,000
Rice
Retailers - Rice 15,000 20,000 5,000
GDP= Total Value 20,000
Added
Cautions Regarding Value Added

1) Value of intermediate goods is

not included in Product Method.
2) Value of second hand goods is
not included in product method.
3) Imputed rent is included in this
method.
Income Method
STEPS
 Classification of Productive
Enterprises
 Classification of Factor Income
1. Compensation of Employees (COE)
2. Operating Surplus (O.S.)
3. Mixed Income
 Calculation of Domestic Income
 Calculation of National Income
Income Approach
ITEMS SYMBOLS VALUE

Compensation of COE 1,093,800

Employees
Operating Surplus OS 2,215,100

Depreciation D 357,200
Net Indirect Taxes NIT 356,600
Gross Domestic Product GDP 4,022,700
Cautions Regarding Income
Methods
 Windfall gains

 Income from illegal activities

 Transfer earnings

 The sale and purchase of second

hand goods
 Imputed value of services
Expenditure Method
STEPS
 Identification and classification of
Economic Units incurring Final
Expenditure
 Classification of Final Expenditure
1. Final Consumption Expenditure
2. Final Investment Expenditure
 Calculation of Domestic Income
 NDPFC = Private Final
Consumption Expenditure +
Government Final Consumption
Expenditure + Gross Domestic
Capital Expenditure (Gross Fixed
Capital Formation + Change in
Stock) + Net Exports (Exports –
Imports)- Dep.-NIT

 Calculation of National
Income
Cautions Regarding
Expenditure Method
 Only final expenditure is included

in national income.
 Expenditure on shares and bonds

are not included.

 Expenditure on second hand

goods is not included in national

income.
 Expenditure on transfer payments

is not included in national income.

Nominal and Real GDP
 GDP at current prices or nominal GDP - GDP
measured using the prices of the year for
which it is calculated
 Nominal GDP can be a misleading indicator of
changes in output or income because it also
embodies changes in the prices of goods and
services.
 Real GDP or GDP at constant prices 
measures the total value of output using the
prices of a selected year (the base year).
 Real GDP better for analysis overtime because
it eliminates the effects of price changes
Real GDP

Nominal GDP
Real GDP   100.
GDP deflator
 Inflation Rate

CPI t  CPI t  1
Inflation Rate 
CPI t  1
GDP per capita
 Measures how much output or income was
produced or received, on the average, by an
individual in an economy
 Useful for comparing the performance of a
country overtime and a country’s
performance relative to its neighbors

GDP
GDP per capita 
population
 PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)

Per Capita GNI Per Capita GNI Poverty rate

Myanmar b 217 26.6
Nepal 250 30.9
Cambodia 350 34.7
Lao PDR 390 33.5
Bangladesh 440 49.8
Viet Nam 540 19.5
Pakistan 600 32.6
India 620 26.1
Sri Lanka 1010 22.7
Indonesia 1140 18.2
Philippines 1170 30.0
China 1500 3.1
Thailand 2490 9.8
Malaysia 4520 7.5
Korea, Rep. of 14000 3.6
Taiwan 14770 0.8
Singapore 24760 0.0
Some Limitations of GDP or
GNP as measures of growth
 Ignores income distribution
 Ignores environmental degradation
 Does not include activities that do
not go through the formal markets
sectors
 Does not include “illegal” activities
like drug trafficking, prostitution,
moonlighting