TOPIC 2

MEASURING
NATIONAL INCOME (NI)

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 2.1 The concept of income and
wealth
• Income is the total payment to the factors
of productions FOPs due to only productive
economic activities.
• Consists of :
 Rent
 Wages and salaries
 Interest
 Profit

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 • It is a flow, moves from one sector to
another.
• Income can be saved, invested and can
be change into wealth.
• Wealth is a stock measured at a point of
time. It consists of :
-personal wealth : houses, cars,
land, etc
-business wealth : machinery,
factory,
building, etc
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-social wealth : highways, 3
 National Income
• It is the total payments received by a country
during a year.
• The payments received due to only productive
economic activities.
• It is measured in monetary value using three
different approaches :
i. Product approach
ii. Expenditure approach
iii. Income approach
• All the three approaches will result in the same
total amount of economic wealth created in the
certain period known as GROSS DOMESTIC
PRODUCT (GDP)
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 Sectors in the economy

• Household -private sector

• Business/Firm -private sector
• Government -public sector
• Foreign -international
sector

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 Sectors in the economy
(cont’d)
1. Households sector

 The main sector in the economy .

 Own factors of production
 Buy goods and services
 Will affect the level of output in
the economy

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 2. Firms sector

 Production and productive sector

 Utilize factor of production.
 Offer or sell goods and services
 The level of investment affects
economic activities
 Increase in investment increases in
output, therefore increase total
income.
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 3. Government sector

 Consumes and also produces

goods and services
 Influences in stabilizing the
economy through policy, rules,
regulation, political
intervention, etc.
 Collect taxes.
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 4. Foreign sector

 Other countries in the world.

 Having economic relationship
with them means the nation
has an open economy.
 Activities involve exports and
imports of goods and
services.
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 2.2 Circular flow of income
• It describe the way in which the country’s
income flows backward and forward
between the sectors n the economy.
• It shows how household and firm interact
in the input and output market.
• It can be shown in :
i) two-sector economyClosed economy
ii) three sector economy
iii) four sector economy Open economy

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 Circular flow diagram

• circularflow.docx

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 National Income Accounting

• From the identity equation produced in

the circular flow, national income can be
measured using three different approaches
: income, expenditure or output approach.
NIacctgapproach.docx

• Which ever approach used, it will give the

same estimates of total economic activity
in the country (national income)

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 GDP and GNP
• Gross Domestic Product (GDP) is the market value
of all the final goods and services produced by
FOP’s located within a country.

• This would include output produced by non-

citizen.

• Measured by three different approach:

1) Add up all the final goods and services produced
from all industries (economic sectors) in
the country.
2) All income generated by FOP in the economy.
3) Expenditure done by all the four sectors in the
economy.
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 GDP and GNP (cont’d)

• Gross National Product(GNP) is the market

value of all the final goods and services
produced by residents of a country
whether they live in the country or abroad.
• GDP&GNP

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Market Prices and Factor Costs

• Market prices are prices actually paid by

the purchasers, which therefore include
indirect taxes and exclude subsidies given
to producers. Market price do not give the
real value of good and services.

• Factor costs are the real prices earned by

the sellers. So, they exclude the indirect
taxes and include the subsidies received
by producers from the government.
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 GDP and GNP (cont’d)

• Calculation:

GDP(FC) + indirect taxes – subsidies =

GDP(MP)

GDP(MC) + subsidies – indirect taxes

= GDP(FC)

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 Depreciation and NNP/NI

• Depreciation is capital wears out or capital

consumption
• Formula :

GDP (mp) – Depreciation = NDP (mp)

GNP (fc) – Depreciation = NNP (fc) =

NI

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 Personal Income(PI)
• NI is income earned but not yet received.
• Personal Income (PI) is the total income
that is actually received by households in
an economy in a year for consumption,
paying tax, saving and payment of
personal income tax.
• Calculation :
PI = NI + Transfer Payment – SOCSO –
EPF –
Insurance – Retained Earning/profit –
Corporate
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 Disposable Income (DI)

• Disposable Income(DI) is actual income

spent after paying the personal income
tax.
• Calculation :

DI = PI – Personal Income Tax

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 Nominal and Real Income (GDP or
GNP)
• Nominal income :
• Measures the value of the output in a
given period in the prices of that
period or the price of the current year
• Not adjusted to inflation yet
(actual value of income received)

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 Nominal and Real Income (GDP or
GNP)..cont’d

• Real Income:
• measures the changes in physical
output in the economy between
different time period valuing all goods
produced in the two period at the same
price or constant price. Already
adjusted to inflation.
• The real income depicts accurately the
state of the economy because it shows
the change in the quantity of output.
• Real GDP gives actual economic growth
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of a country in a particular period. 21
 Formula:
• Real Income = CPI base year x Nominal
Income
CPI current year

• Real GDP = CPI base year x Nominal

GDP
CPI current year

• Real GNP = CPI base year x Nominal

GNP
CPI current year

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 Economic growth/Per capital income

• Real Growth = Real GDP cy - Real GDP by x

100%
Real GDP by

• Nominal Growth = Nominal GDP cy - Nominal GDP by

x 100%
Nominal GDP by

• Per capital income = Real/ nominal GNP/GDP/NI

total population

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 Uses of National Income

• Standard of living comparison

• Measure economic performance
• National income planning
• Sectoral contributions
• Economic policy
• National expenditure
• Distribution

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 Problems Calculating national
income
• Illiteracy
• Lack of expertise
• Sophisticated machinery
• Double counting
• False information
• Inaccessibility
• Arbitrary definition
• Measuring quality

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