CHAPTER 2

NATIONAL INCOME
ACCOUNTING
Student should be able to:
Define concept in • GDP, GNP, NNP, Mp and Cf
National Income • National nominal income and national real income
Accounting • PI, DPI and PCI

Calculate the • Expenditure Approach

national income • Income Approach
accounting • Product Approach

Explain the • Difficulties in calculating NI

problems related • Difficulties in compare NI
to national income • Uses of NI data
 DEFINITION OF NATIONAL INCOME
The flow of goods and services by a nation over a
period of time, usually a year.

OR

National Income is the total payment received by the

factors of production in a country during a year.
GROSS DOMESTIC PRODUCT (GDP)
GDP is the total money value of the all final goods and services
produced within a country in a given time period.

GNP = GDP + net factor income from abroad

CONCEPT OF NATIONAL INCOME

GROSS NATIONAL PRODUCT (GNP)

GNP is the total market value of all final goods and services produced
by a country’s residence in a given time period.
 CONCEPT OF NATIONAL INCOME

MARKET PRICE (MP)

Market price refers to the current price in the market through the forces of demand
and supply. Market prices are the
actual price paid by the consumers.

GDP (FC)= GDP (MP) – Indirect taxes + Subsidies

OR
GNP(FC)= GDP (MP) – Indirect taxes + Subsidies

FACTOR COST (FC)

Factor cost is the real prices that is earned by the producers or sellers.
NET NATIONAL PRODUCT (NNP)
NNP is GNP minus the value of capital consumption or
depreciation during the year. NNP is also referred as
National Income at market prices.
NI = GNPFC–Depreciation value
OR
NI = NNPMP + Subsidies–Indirect Taxes

NATIONAL INCOME (NI)

National income at factor cost (NI) is defined as the total of all income payments made to
factor of production.
PERSONAL INCOME (PI)
Personal income is the income that is actually received by individuals as payment for factors of
production or as payment for items other than factors of production during a year.

NATIONAL INCOME
+ Transfer Payments
+ Interest on government loans
+ Interest on consumer loans
- Corporate income taxes
- Undistributed corporate profit
- EPF contributions
- SOCSO
- Insurance Premium
= PERSONAL INCOME
DISPOSABLE PERSONAL INCOME (DPI)
DPI is the part of the personal income that is left after the
payment of personal direct taxes.
DPI = Personal Income – Personal Income Tax @ Zakat

PER CAPITA INCOME (PCI)

• The average income of the citizens of a nation, calculated by dividing
the national income for a certain year by the population at year
• PCI = National Income
Total Population
 METHODS OF CALCULATING NATIONAL
INCOME

EXPENDITURE PRODUCT INCOME

APPROACH APPROACH APPROACH
 • Using the expenditure
GDP: Expenditure Approachapproach, the nation’s
aggregate expenditure equals the sum of

 Consumption, C
 Investment, I
 Government Purchases, G
 Net Exports, (Exports, X, minus Imports, M)
 Change in stocks

 GDPmp = C + I + G + (X – M) + changes in
stocks
 Expenditure Approach
Plus Consumption
Plus Investment
Plus Government Purchases
Plus Exports

Minus Import
Plus Change in stocks
Gross Domestic Product at market price

Plus Factor income received

Minus Factor income paid
Gross National Product at market price
Plus Subsidies
Minus Indirect taxes
Gross National Product at factor cost
 Activity 1
ITEM RM(millions)
Calculate:
Exports 500

Personal consumption 1400

i. GDP mp
expenditure
ii. GDP fc
Changes in stock -40

Indirect tax 30
iii. GNP fc
Government expenditure 990
iv. GNP mp
Investment 1000 v. NI
Subsidies 50

Import 400

Factors income paid abroad 80

Depreciation 40

Factors income received from 90

abroad
GDP: Product Approach
National Income is measured by net value of all final goods
and services produced by a nation during a year
Calculating the GDP by adding up the value of all final goods
and services produced by all economic sectors

• In Malaysia, three sectors contributing to the GDP:

• Primary: Mining&Quarring, Agriculture, Forestry & Fishing
• Secondary: Manufacturing and Construction
• Tertiary: Electricity, Gas&Water, Wholesale&Retail Trade, Finance,
Insurance, Real Estate&Business Services, Transport,
Storage&Communication, Government Services and other services

Gross domestic product at market price (GDPmp)= All final

product by all economic sectors
 Product Approach
Plus Primary Sector
Plus Secondary Sector
Plus Tertiary Sector
Plus Import Taxes
Minus Bank Service Charge
Gross Domestic Product at market price
 Activity 2
Items RM(milli
Calculate the:
ons)
i. Gross Domestic
Government services 1000 Product at
Net factor income from 250 market price
abroad ii. Gross Domestic
Product at factor
Transfer payment 150 cost
Exports 1500 iii. Gross National
Mining & Quarrying 1800 Product at
factors cost
Manufacturing 1500
iv. National Income
Indirect business tax 400
Depreciation 100
Subsidies 150
 IncomeApproach
GDP: Income approach measures national
income by adding all the various types
of income paid to firms and households
in the form of wages for labour, rent for
land, interest for capital and profits to
entrepreneurs
All the figures are in factor cost because
only earning of factors of production
can be calculated.
 Income Approach
Plus Wages & salaries
Plus Rent
Plus Net interest
= gross interest – interest on Consumer loans –
interest on Government loans
Plus Corporate profit
= dividend+ undistributed profit + corporate
income tax
Plus Private corporate income
National Income
 Activity 3
Items RM(million
s)
Calculate the:
Wages & salaries 500 • National Income
Income from 100
rent, dividend & • Gross National Product
interest
• Gross Domestic Product
Profit 200
Transfer payment 100 • Personal Income
Corporate
income tax
80
• Disposable Income
Depreciation 50
Personal income 20
 Summary Measuring GDP/NI

Expenditure
Product Income
approach approach approach

= wages &
= sum all salaries + rent
=C+I+G+
values of G&S + interest +
X-M + Change
in different
in stocks
sectors
profits +
dividend
Calculating National Income
GNPmp = GDPmp + GNPfc = GNPmp –
net factor income indirect tax +
form abroad subsidies

NI = GNPfc - depreciation
NI = NNP
 To measure To assist in
country’s national
standard of economic
living planning

USES OF NATIONAL
INCOME DATA

To measure
total To show or
contribution of To measure the indicate the
economic rate of growth of success or
sector to total the country failure of
national
production government
policies
 To measure country’s • The value of Real GNP or Real GDP per capita is used as measuring yardstick.
• The NI data can compare the standard of living from time to time or people living in other
standard of living countries.

• Economic policy maker need the NI data to draft economic policies for the coming years.
To assist in national • Important guide that provides details about country’s economy performance and
economic planning planning purposes

To measure total contribution • Using product approach, contribution made by each economic sector towards the overall
of economic sector to total economic growth can be evaluated.
national production • Government can determine the sectors that are backbone of the country’s economy.

• Can be comparing the current national production data with the previous year data.
To measure the rate of growth • The information regarding the economic growth rate helps the government make
of the country comparisons with other countries.

To show or indicate the • Evaluate the effectiveness of an economic policy that has been implemented.
success or failure of • Allow the government to look at any economic problems that may arisen and find ways to
government policies solve the problems.
 Problem of Problem of
transfer unpaid
payment activities

Problem of false
information PROBLEMS/ Problem of
DIFFICULTIES OF Depreciation
CALCULATING
NATIONAL INCOME

Problems of
activities that are Problem of
illegal yet double counting
productive
 • Several types of governments expenditure are EXCLUDED from calculation of
Problem of transfer payment NI in certain countries such as defense, security and transfer payments.

• Many activities are unpaid for example a housewife not included in

Problem of unpaid activities calculation of NI.

• The inclusion of values of intermediate goods in the circulation of National

Problem of double counting Income will cause national production to be overvalued.

• Uses heavy machinery will experience depreciation due to damage,

Problem of Depreciation exhaustion and obsolescence. Cannot be value accurately.

• Difficult to obtain information about National Income from developing, less

developed or 3rd world countries.
Problem of false information • Difficult to evaluate the contribution of some economic activities. The value
of NI may be estimated value.

Problems of activities that are • Activities that are illegal yet productive are excluded from the calculation of
illegal yet productive NI in certain countries such gambling and prostitution.
Problem Of Comparison of National Income
Between Countries
Concept of Different Patterns of Unpaid
National treatments of income productive
income item distribution activities

General Price Foreign

Working Hours
Levels Exchange rates
Problem Of Comparison of National Income
Between Time Periods
General Price Quality of goods
Levels and services

Population Patterns of
composition and income
total population distribution