Macroeconomic Chapter 2

CHAPTER 2
MEASURING NATIONAL INCOME

AND OUTPUT
(GDP and GNP)
1
What is
income?
2
■ Income is the money earned or
paid as a reward for the resources
owned.
■ For example:
A worker may earn income in the
form of monthly payment.
This is a microeconomics
concept.
3
Instead,
What is
National
Income?
4
■ National Income is a macroeconomic
concept.
■ is an aggregate or total income
earned by all individuals or economic
elements (all factors) in a country as a
whole.
5
■ Tucker, defined national income
as:
total income earned by resources owners,
that is:
rents, wages, interest and profit.
6
National Income
■ is defined as:
the total market value of all final
goods and services produced by a
country for a particular period of time,
usually a year.
McConnell and Brue
7
■National Income:
is the total amount of money
that factors of production earned
during a year.
This includes mainly payments of:
wages (L),
rents (Land),
And interest (capital)
and profits (entrepreneurs).
8
NATIONAL INCOME
= NATIONAL PRODUCT
= NATIONAL EXPENDITURE
(NI = NP =NE)
9
NI is also NP.
NI = National Product (NP)
■ The national product refers to the
value of output produced by an
economy during the course of a year.
Or
NI = NP = National Expenditure
❑refers to the value of money spent on
goods and services in the economy in a
year.
10
Circular Flow of Income
Model:
(Circular flow of income and expenditure Model)
The basic circular flow model provides
a general picture of the interactions in
terms of :
income, output and expenditure
among all sectors in an economy.
11
The 2-sector circular flow
of national income and expenditure
DD on goods & services
Physical flow
HOUSEHOLDS SS goods & services

FIRMS
With the assumption of no saving,

Total Income = Total Expenditure = Total Output.
Money flow
Expenditure,
C
Physical flow

FIRMS
Income,Y
With the assumption of
Wages,
no saving, Total Income Rent,
= Total Expenditure = Interest, Factor payments
Total Output. Profit
Assumptions in a
2 – sector Circular Flow model
■ All income received by households from
the factor services provided to the firms.
■ This income will entirely be spend on
consumption.
■ The households will entirely purchase all
goods and services produced by firms.
■ Therefore,
total income = total expenditure = total
output
14
Model with saving
■ We include the banks or financial

intermediaries into the model.
■ At equilibrium;
S=I
15
Money flow
Expenditure,
C
Physical flow
S I
Financial Institutions

FIRMS
Income,Y
Y = C+ S
Wages,
Y=C+I
rent,
interest, Factor payment
profit
Circular Flow of Income
Economic Models
3 types:
Close economy:
■ A 2-sector model of circular flow
- Comprises of ‘Households’ and ‘Firms’
sectors
- Comprises of ‘Households’ , ‘Firms’ and
‘Government’ sectors
Open Economy:
- Comprises of ‘Households’, ‘Firms’,
‘Government’ and ‘Foreign’ sectors
17
The 3 sector circular flow of national income and expenditure
Net Taxes
Net Taxes
G. Expenditure G. Expenditure
GOVERNMENT
Expenditure,
S C I
HOUSEHOLDS FIRMS
Y = C+I+G 18
Income, Y
The 3 sector circular flow of national income and expenditure
Expenditure, C
GOVERNMENT
Net Taxes Net Taxes
G. Expenditure
G. Expenditure
HOUSEHOLDS FIRMS
Y = C+I+G 19
Income, Y
Assumptions in a 3–sector
Circular Flow model
■ C: households spent only a portion of
their income on consumption. Part of it
as savings and for paying taxes.
■ I : Investors are getting loans for capital
investment
■ G: Government expenditure will be made
based on tax revenue collected.
■ t : tax revenue (t) will be collected (from
households and firms
20
The 4-sector circular flow of national income and expenditure
Net Taxes
Net Taxes
G. Expenditure G. Expenditure
GOVERNMENT
Expenditure,
C
HOUSEHOLDS FIRMS
Income,Y
Y = C+I+G+(X-M)
FOREIGNERS
Assumptions in a 4 –sector
Circular Flow model
■ Households consume both local and imported
goods.
■ Households supply resources to both
domestic and foreign markets.
■ Firms purchased capital goods and engaged
foreign workers from abroad
■ Firms also exports goods and services
produced to abroad or overseas.
■ Government involves either directly or
indirectly with foreign sector. They may import
as well as exports goods and services to
abroad. 22
Lets have a
5 minutes break
23
Methods of Measuring
National Income
NI can be measured using 3
common approach:
a) Income approach (not to be
tested in final examination)
b) Output approach
c) Expenditure approach
Irrespective of which approach
used in calculating NI, will give us
the same value. 24
i) INCOME APPROACH
■ National Income is the total money values of
all incomes received by productive persons
and enterprises in the country during the
year.
▪ is the total income of all factors of production
including;
❑ the income of self-employed person,
❑ wage of labours,
❑ interest on capital and
❑ rent on land (L,L,K,E)
▪ but do not include payments receive from non-
productive activities such as transfer payments.
25
Income Approach
The components of this approach include: RM
Wages and salaries 400
Interest and dividends 300
Rent and imputed rent 500
Profits: distributed and undistributed profits, 600
income of self-employed 200
(from citizens and non-citizens)
= Gross Domestic Income …………………………????
26
Income Approach
income of self-employed (proprietors
income) 200
= Gross Domestic Income (at factor cost) …. 20 000
− Income paid abroad (100)
+ Income received from abroad 200
= Gross National Income (at factor cost) … 20 100
27
Income Approach
income of self-employed (proprietors
income) 200
= Gross Domestic Income (at factor cost) …. 20 000
= Gross National Income (at factor cost) … 20 100
− Depreciation or capital consumption (200)
= Net National Income………………. 19 900
28
(OR NATIONAL INCOME)

Let’s try out one exercise here.
Exercise 1:
Given in the following table is the national income
data for country ABC for the year 2000.
Based on the data given calculate:
i)Gross Domestic Income (GDP)
ii)Net Domestic Income
iii)Gross National Income (GNP)
iv)National Income.
Table: Data for country ABC
ITEMS RM (millions)
rent 2 050
wages and salaries 900
interest 1120
distributed profit (unretained profit) 3 200
undistributed profit (retained profit) 2 150
proprietors’ income 810
depreciation of capital 800
net factor income from abroad 710 29
(NFIFA)
Answers
i. Gross Domestic Income (GDP)
=2050 + 900 + 1120 + 3200 + 2150+ 810
=10230
ii. Net Domestic Income
= GDI – depreciation
= 10230 – 800
= 9430
iii. Gross National Income (GNP)
= GDI + NFIFA
= 10230 + 710 = 10940
iv. National Income
= GNI – depreciation
= 10940 – 800 = 10140
30
Important facts to
remember;
■ i) TRANSFER PAYMENT
■ ii) DOMESTIC VS NATIONAL
INCOME
■ iii) DISPOSABLE INCOME
■ iv) PERSONAL INCOME VS
DISPOSABLE PERSONAL INCOME
31
“Transfer Payment”
⮚ It refers to the income received without

any direct contribution to the production of
goods and services.
▪ is simply transferred from one group or people to
another; without the recipients adding any value
to volume of production of goods and services in
the country.
32
e.g; Transfer Payments
■ Pensions
■ Welfare benefits/ Welfare payments
■ Scholarships
■ Unemployment allowances
■ Zakat
■ Allowances to housewife
■ Interest on national debt
33
Domestic vs National Income
■ Total Domestic Income is the total income
earned within a territorial or geographic
boundary.
■ It includes income earned by its citizens as
well as its non-citizens i.e. foreign workers
residing or working in the country.
• while,
Total National Income is the total income earned
by citizens of the country irrespective whether
the citizens reside / working in the country or
outside the country (abroad), and it will
exclude all income earned by foreign workers
in the country.
34
GDP and GNP
■ GDP = Gross Domestic Product, is the
value of all final goods and services
produced by all sectors of the economy
the citizens or foreign sectors within a
country.
■ GNP = Gross National Product, is the
value of all final goods and services
produced by all citizens of a country
(within a country or abroad).
35
The concept of disposable
income
- deducting the tax (t) portion paid to
government.
- called as:
disposable income (Yd).
Yd = Y – t.
while disposable NI = NI – t
and disposable PI = PI – t
.
36
Personal Income vs Disposable
Personal Income
■ Personal Income is the gross receipt of income
regardless of its source.
- it can come from productive and non-productive sources of
transfer payment. And, minus the contribution to Employees
Provident Fund (EPF) and contribution to SOCSO and the
Business Tax.
PI = NI + TP – EPF – SOCSO - BT
▪ Disposable income is the income receipt after
deducting the income tax.
DPI = PI – Income Tax
37
Question to Ponder: Q1
1. Refer to the following national income data for country XYZ
for the year 2014 calculate:
i. Gross Domestic Income
ii. Gross National Income
iii. National Income
iv. Personal Income
v. Disposable Personal Income
ITEMS RM (millions)
wages and salaries 1 060
Rent 870
Interest 880
distributed profit 1 200
proprietor’s income 780
Depreciation 210
undistributed profit 150
transfer payment 90
social security contribution 80
personal income tax 130
net factor income from abroad 70
38
ANSWERS Q1:
i ) Gross domestic income

= wages + rent + interest + Dis Profit + proprietors’
income + Undis. Profit
= 1060 + 870 + 880 + 1200 + 780 + 150
= 4940
i i) Gross national income
= GDI + NFIFA
= 5010
iii) National income
= GNI – depreciation
= 5010 – 210
= 4800
iv) Personal Income
= NI – undistributed profit + transfer payment – social contribution
= 4800 – 150 + 90 – 80
= 4660
v) Disposable Personal Income

= PI – personal income tax
= 4660 – 130
= 4530
39
Second Approach:
PRODUCT / OUTPUT APPROACH
40
ii) OUTPUT APPROACH
■ also known as Product Approach.
■ National Income = GNP is equivalent
to the money value of all goods and
services produced by all sectors in
the country during a year.
41
The concept of Market Price
and Factor Cost
■ In most cases, Market Price (MP) > Factor cost
(FC)
Market Price = FC + indirect taxes – subsidies
OR
Factor Cost = MP – indirect taxes + subsidies

42
Output Approach
The components are:
The total value of final goods and services in the
sectors in economy(3 sectors)
RM
= Gross Domestic Product at market price 19900
(GDP at mp)
− Indirect taxes (300)
+ Subsidies 400
= Gross Domestic Product at factor cost 20 000
(GDP at fc)
= Gross National Product at factor cost 20 100
(GNP at fc)
− Depreciation/capital consumption (200)
= Net National Product at factor cost 19 900
43
(NNP at fc OR NATIONAL INCOME)
Exercise 2:
Consider the following table for national income account
of a country PQR. Calculate for:
i) Gross Domestic Product at market prices (GDPmp)

using the product approach.
ii) Gross National Product at factor cost (GNPfc)
iii) National Income (NI)
ITEMS RM (million)
Government services 10,200
Mining and Quarrying 21,000
Finance, insurance and other services 19,600
Manufacturing 48,000
Wholesale and retail trade 20,200
Agriculture, forestry and fishing 18,000
Transport, storage and communication 29,400
Construction 97,000
Electricity, gas and water 27,000
Consumption tax 25,000
Net factor income from abroad 48,500
Depreciation 30,000
Subsidies 880
44
Table: Data for country PQR
Answers to Exercise 2:
i) GDPmp
= G. Services + mining + finance + manufacturing +
wholesales + agriculture + transport +
construction + electricity.
= 10,200 + 21,000 + 19,600 + 48,000 + 20,200 +
18,000 + 29,400 + 97,000 + 27 000
= 290, 400 million.
ii) GNPfc = GDPmp + NFIFA – consumption tax +
subsidies
= 290,400 + 48,500 – 25000 + 880
= 314,780 million
iii)NI = NNI = GNPfc – depreciation
= 314,780 – 30,000
= 284,780 million.
45
iii) EXPENDITURE
APPROACH
4 components included here:
a) Household or consumer expenditure on
consumption goods, (C).
b) Firm or producer expenditure of capital
goods. Also known as gross investment/
change in stock/ changr in inventory (I).
c) Government expenditure on goods and
services, excluding transfer payment (G).
d) Expenditure on exports and imports (X – M).
Y = C + I + G + (X – M) 46
Expenditure Approach
The components include;
Consumption (C) + Investment (I) + Government
expenditure (G) + Export (X) – Import (M)
RM
= Gross Domestic Product at market price 19900
(GDP at mp)
− Indirect taxes (300)
+ Subsidies 400
= Gross Domestic Product at factor cost 20 000
(GDP at fc)
= Gross National Product at factor cost 20 100
(GNP at fc)
− Depreciation/capital consumption (200)
= Net National Product at factor cost 19 900
47
(NNP at fc OR NATIONAL INCOME)
Exercise 3:
ITEMS RM(MILLION)
Government expenditure 40500
Private consumption 12500
Public investment 20100
Gross Investment 52000
Change in stock 1000
Goods and services exported 15000
Goods and services imported 18550
Net factor payments abroad 35000
Expenditure taxes 10000
Subsidies 13500
Depreciation allowances 5000
Income taxes 800
Transfer Payment 120
Employees Provident Fund (EPF) 200
Business Profit Taxes 300
The following table shows the value of economic items in a country for year 2016:
Based on the above table, calculate:
i. GDP at market price
ii. GNP at factor cost
iii. GNP at market price
iv. National Income
v. Personal Income 48
vi. Disposable Personal Income
Exercise 3:
■ From the table, to calculate:
a) GDP at market price = G + C + G + I + stock + X – M
= 40500 + 12500 + 20100 + 52000 + 1000 +
15000 – 18550 = 122550
b) GNP at factor cost = GDPmp – exp tax + subsidies +NFPA
= 122550 -10000 + 13500 + 35000 = 161050m
c) GNP at market price = GDPmp + NFPA
= 122550 + 35000 = 157550m
■ or: GNP at market price = GNPfc + exp tax – subsidies
= 161050 + 10000 – 13500 = 157550m.
d) National Income = GNPfc – capital depreciation
= 161050 – 5000 = 156050m.
e) Personal Income = NI + Transfer Payment – EPF – BPT
= 156050 + 120 – 200 – 300
= 155670
f) Disposable Personal Income = PI – Income Taxes
= 155670 – 800 = 154870m. 49
QTP Q3. Fill in the blanks with appropriate answers.
ITEMS RM (millions)
Consumption expenditure 11,200
Investment spending 8,790
Government expenditures 10,150
Export 7,800
Import 8,250
Gross Domestic Product at market price …..(i)……
……(ii)…… 2,780
Subsidy 3,150
Gross Domestic Product at factor cost …..(iii)……
Income received from abroad 5,420
Income paid abroad 6,150
Gross National Product at factor cost ….(iv)…..
…….(v)…… 1,180
National Income ……(vi)…….
Undistributed profit 800
Corporate income tax 1,200
Social security contribution 2,350
Transfer payment 900 50
Personal Income ……(vii)…….
Q3. Fill in the blanks with appropriate answers.
ITEMS RM (millions)
Consumption expenditure 11,200
Investment spending 8,790
Government expenditures 10,150
Export 7,800
Import - (8,250)
Gross Domestic Product at market price (i) 29690
(ii) expenditure tax - (2,780)
Subsidy 3,150
Gross Domestic Product at factor cost (iii) 30060
Gross National Product at factor cost (iv) 29330
(v) depreciation of capital 1,180
National Income (vi) 28150
Undistributed profit - (800)
Corporate income tax - (1,200)
Social security contribution - (2,350)
Transfer payment 900
51
Personal Income (vii) 24700
Few things to remember:
1) To change from market price to factor
cost: minus indirect tax plus subsidies.
DIRECT TAXES INDIRECT TAXES

Personal Income Tax Tax on Expenditure
Business/ Corporate Tax Tax on Consumption
Profit Tax Custom duties
Export Tax
Import Tax
Tariff
Services Tax
52
2)To change from Domestic to National
value:
± Net Property Income From Abroad
(NPIFA).
GNPmp = GDPmp ± NPIFA.
= GDPmp - Property Income Paid
Abroad + Property Income
Received from Abroad.
GNPfc = GDPfc ± NPIFA 53
3) To change from Gross Investment to
Net Investment value:
minus capital consumption.
54
4) To change from NI to Personal
Income (PI):
plus transfer payment and any
social or unemployment benefits,
and
minus any social contribution (EPF,
SOCSO) , corporate income taxes
and undistributed profit.
55
5) To change from Personal Income to
Disposable Income:
(minus income tax)
56
Lets Try More Exercises
57
Q2. Calculate:
i) GDP at market prices using the product (output) approach.
ii) GNP at factor cost
iii) National Income
ITEMS RM (million)
Consumption 11,800
Government services 9,200
Mining and Quarrying 8,000
Finance, insurance and other services 9,600
Rent 23,000
Subsidies 790
Wholesale and retail trade 11,200
Transport, storage and communication 6,400
Construction 3,800
Profit 4,800
Electricity, gas and water 1,900
Tax on expenditure 15,000
Net Factor income from abroad 8,250 58
Depreciation of capital 23,000

Income Approach
Given the information:
RM million
Total wages and salaries received 255,650
Total interest and dividends received 10,000
Total rent and imputed rent 80,880
Gross trading profits from companies 65,500
Total income of self-employed 33,700
Capital consumption 445
Find:
i) GDP at factor cost
ii) GNP at factor cost
iii) NI 59
Answer: Income Approach
RM million
Total wages and salaries received 255,650
Total interest and dividends received 10,000
Total rent and imputed rent 80,880
Gross trading profits from companies 65,500
Total income of self-employed 33,700
= GDI fc (GDP fc) 445,730
■ Less income paid abroad (54,345)
■ Add income received from abroad 76,680
= GNI fc (GNP fc) 468,065
■ Less Depreciation on capital consumption (445)
= NNI fc 467,620
60
Output Approach RM million
Mining and quarrying 6,700
Construction 15,550
Services 13,220
Net imports 3,000
Appreciation in stock 2,000
Indirect taxes 599
Subsidies 333
Depreciation of capital 1,545
Compute the value for: i) GDP at market price
ii) GNP at market price
iii) GNP at factor cost 61
iv) NI
Answer: Output Approach
Mining and quarrying 6,700
Construction 15,550
Services 13,220
Net exports 3,000
Appreciation in stock (2,000)
GDP mp 69,731
■ Less income paid abroad (15,432)
GNP mp 70,965
■ Less indirect taxes (599)
■ Add subsidies 333
GNP fc 70,699
■ Less depreciation (1,545)
NNP fc (NNI) 69,154
62
Expenditure Approach
RM million
Total consumer expenditure (C) 50,000
Gross investment (I) 20,000
Government expenditure (G) 18,500
Add exports (X) 9,000
Less imports (M) ( 8,565)
Change in stock 1,000
Net factor Income from abroad 250
Expenditure taxes 870
Subsidies 695
Capital consumption 2,750
Given the information above, calculate the values for:
i) GDP at market price
ii) GNP at market price
iii) GNP at factor cost
iv) NI 63
Answer: Expenditure Approach
RM million
Total consumer expenditure (C) 50,000
Gross investment (I) 20,000
Government expenditure (G) 18,500
Add exports (X) 9,000
Less imports (M) ( 8,565)
Change in stock 1,000
= GDE mp (GDP mp) 89,935
■ Less Income paid abroad (3,700)
= GNE mp (GNP mp) 90,185
■ Less Indirect taxes (870)
■ Add subsidies 695
= GNE fc (GNP fc) 90,010
■ Less Depreciation (2,750)
= NNI fc (NI) 87,260
64
THANK YOU
Have A Nice Day!
65
Uses of
National Income
66
Uses and Importance of National
Income
■ Useful in measuring the standard of living of a nation
through estimating per capita income of the nation.
67
Income
■ Time series comparison (year to year). Measuring growth of
the economy.
68
Income
the economy.
■ Comparison between two or more countries can be made.
69
Income
the economy.
■ Able to know and analyze the contribution made and
performance by each production sector in the economy and
thus taken ample step for rectification
70
Income
the economy.
■ Useful in measuring inequalities in the distribution of
income.
71
Income
the economy.
income.
■ Useful in revealing the expenditure pattern of a country.
72
Income
the economy.
income.
■ Useful in measuring the level and pattern of investment.
73
Income
the economy.
income.
■ Balance of payments pattern.
74
Income
the economy.
income.
■ Balance of payments pattern.
■ National income as an indicator of success or failure of
national planning.
75

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CHAPTER 2

MEASURING NATIONAL INCOME

DD on goods & services

HOUSEHOLDS SS goods & services

With the assumption of no saving,

HOUSEHOLDS SS goods & services

■ We include the banks or financial

HOUSEHOLDS SS goods & services

Net Taxes Net Taxes

(OR NATIONAL INCOME)

⮚ It refers to the income received without

DPI = PI – Income Tax

i ) Gross domestic income

v) Disposable Personal Income

PRODUCT / OUTPUT APPROACH

Market Price = FC + indirect taxes – subsidies

Factor Cost = MP – indirect taxes + subsidies

i) Gross Domestic Product at market prices (GDPmp)

DIRECT TAXES INDIRECT TAXES

Depreciation of capital 23,000

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