TOPIC 2

NATIONAL INCOME
ACCOUNTING
NATIONAL INCOME

 National income (NI) can be defined as the total income

received by all economic agents in the economy based on the
goods and services produced in the economy in a certain
period of time

 Economic agents perform the activities that contribute to the

production of total output in the economy
 NI a ccounting takes into account the value of final products.
Value of intermediate goods should not be included to avoid
double counting
 NI only takes into account the value of goods and services
that are produce in the present year (second hand item not
included)
 NI does not include transfer payment eg: housewife receive
allowance from husband scholarship receive by students -
they had receive some money but not regarded as income
since no productive goods or services had been produce by
them
 NI is the received due to only productive economic activities
 It is measured in monetary value using 3 different approach
(product approach, output approach and income approach).
 All the three approach will result in the same total value of
goods and services in the certain period known as Gross
Domestic Product.
SECTORS IN ECONOMY

There are 4 sectors in economy:

1. Household (HH)
2. Firm (F)
3. Government (G)
4. Foreign sector (FS)
The Circular Flow of Income

- A model built to simplify the economic interaction

between four economic sectors in economy
- Four (4) economic sectors involve in this flow
namely household, firms, government and foreign
sector.
- Circular flow of income can be divided into 3:
▪ Circular flow in 2 sector economy
▪ Circular flow in 3 sector economy
▪ Circular flow in 4 sector economy

▪
 2 Sector Economy

 This economy known as closed economy /

simple economy

 It consists of:
1. Household
2. Firm
Case 1: two sector economy
(the simple economy)
(land,labor,capital, enterpreneur)

Factor

(rent, wages, profit, interest)

(Y)

HOUSEHOLD FIRMS

Payment of G&S (C)

Product
Saving Investment (I)
(S) Good &Services

Financial Institution
✓ Household will supply the factors of production (land, labor,
capital and entrepreneur) to the firms for production of goods
and services
✓ By using combinations of all factors of production, firms will
produce goods and services and sell to the households.
✓ When the firm used all the factors of production received from
household, the firm will pay to the household in form of reward
for services (rent, wages, interest and profit)
✓ Household will buy goods and services produced by firms. So,
money will flow back to the firms. Thus, the firms will use back
this money as a cost to produce back goods and services.
*Household will not spend all income received.
*Household will have the saving in financial institutions.
*That money will be loaned out to the firm for their
investments.
Income = Expenditure + Saving
Y= C+S
Saving is a leakage- saving reduce the amount of national
income (NI)
Investment is an injection- investment raised the amount of
NI
 3 Sector Economy

2. Firms
3 sector economy known as closed economy
The economy consist of :
1. Household
2. Firms
3. Government
Case 2: three sector economy
Factor

Government Government
spending (G)
spending (G)
Household Firm
GOVERNMENT
Taxes (T) Taxes (T)

Product
✓ Government intervene in the market using government
expenditure and taxes:
1. Government collect taxes from firms and households as
government revenue
2. government purchase goods and services from firms and
provide incentives to the firm in form of subsidies
2. Firms
3. Government spending on household in the form of wages,
interest and transfer payment

✓ Government expenditure (G) is an injection- G raised the

national income by expenditure on G&S, transfer payment,
welfare program, public investment and others

✓ Taxation (T) represents leakage- Taxes will reduce our disposable

income and thus reduced national income
 4 Sector Economy

▪ 4 economy sector known as open economy

2. Firms
▪ 4 sector economy consists of household, Firms,
Government and Foreign sector
 import Foreign Sector export
Case 2: three sector economy
Factor Market

Government Government
expenditure (G)
expenditure (G)

Household FIRM
GOVERNMENT
Taxes (T) Taxes (T)

Product Market
With foreign sector we have import (M) and export (X)
 Through export, there will be money inflow and it
will raise the national income. So, export is an
2. Firms
injections

 While Import is a leakage since when we import

goods and services from other country, there will be
money outflow.
CONCEPTS OF NATIONAL INCOME

Gross Domestic Product (GDP)

National Income at Factor Cost (NI)

Gross National Product (GNP)

Personal Income

Market Price & Factor Cost

Disposable Personal Income (DPI)
Net National Product (NNP)
 Gross Domestic Product (GDP)

▪ GDP is total money value of all final goods and services

produced within a country in a given time period.

✓ GDP includes Factor income paid abroad

(output produced by foreign workers in a country)

✓ GDP excludes factor income received abroad

(goods and services produced by the citizens working
overseas)
 Gross National Product (GNP)
▪ GNP is defined as the total market value of all final
goods and services produced by the residents of a
country during a given period of time.

✓ GNP excludes Factor income paid abroad

(income earned by foreign workers located in a
country).
✓ GNP includes Factor income received abroad
(the total amount of income earned by nationals of the
country regardless of where they are.
 FORMULA

GDP = GNP – factor income received abroad + factor

income paid abroad

GNP = GDP + factor income received abroad – factor

income paid abroad
 The difference between GDP and GNP
GDP
✓ measure output or income by
citizens and non citizens within a
country
✓Exclude income received by
citizens working overseas
✓ Include income received by
foreign workers located in a
country
Formula:
GDP = GNP – factor income received
abroad + factor income paid abroad
GNP
✓Measure output or income by
citizens only either inside country
or outside country
✓Include income received by
citizens working overseas
✓Exclude income received by
foreign workers located in a
country
Formula:
GNP = GDP - factor income paid abroad
+ factor income received abroad
 Net Factor Income Abroad (NFIA)

➢ Net factor income from abroad is the difference

between factor income received abroad and factor
income paid abroad
➢ Formula:
NFIA = Factor income received abroad –
factor income paid abroad

Therefore,
GNP=GDP+NFIA
GDP=GNP-NFIA
 Note: short form

Factor income received abroad = FIRA

Factor income paid abroad = FIPA
Net factor income abroad = NFIA
 Market Price & Factor Cost

▪ GDP can be measured at market price and factor

cost.
✓ Market price :-
i. refers to the current price in the market through
the forces of demand and supply (Includes indirect
taxes and exclude subsidies)
✓ Factor cost :-
i. the real price that earned by producers or sellers
(Includes subsidies and include indirect taxes)
Eg: GDP factor cost = GDP market price + subsidies - indirect taxes
 FORMULA

GDPmp = GDPfc + indirect taxes - subsidies

GDPfc = GDPmp + subsidies – indirect taxes

GNPfc = GNPmp + subsidies – indirect taxes

 Net National Product (NNP)

▪ The total money value of the net output of the final goods and
services produced by a nation during a year (after deducting
capital consumption and depreciation)
2. Firms
▪ NNP can be divided into 2:

1. NNPmp
▪ NNPmp also known as Nimp

Formula : NNPmp = GNPmp – depreciation

2. NNPfc
▪ NNPfc also known as Nifc
: NNPfc = =GNPfc - deprciation
 Personal Income

• Is the income that is actually received by

individuals and households in a nation during a
year
• The deductions made from national income are:
Corporate income taxes
Retained earnings/undistributed earnings
Social Security contributions -:EPF and SOCSO
Insurance premium
 Formula:

Personal Income (PI) = National Income

+Transfer payments
– undistributed profit - Corporate income taxes
▪ Transfer payment – gov’s social security benefit: unemployment allowance,
– old
Retained earning
age pensions, etc – Social security
contribution - EPF – Insurance premium
Disposable Personal Income
(DPI)

Part of PI that is left after deduction of

personal income tax to the government

DPI = Personal income (PI)

– personal income tax

NIK AZMA WAIL

 Methods of Measuring
National Income
Expenditure approach

3 Methods Product / Output approach

Income approach

NIK AZMA WAIL

 1. Expenditure Approach

➢ NI is obtained by adding all the expenditure on goods and

services by four economic sector in a year:

i. Expenditure made by Households (C)

(Purchases of good and services for their own personal use).
-Private consumption or Public consumption

ii. Expenditure made by Firm (I)

The purchase of capital goods by firms for use in production
and in changes in the firm’s inventories.
- Private investment or Public investment
-Changes in stock
-Changes in inventory
iii. Expenditure made by Government (G)
expenditure for final goods and services.

iv. Expenditure made by Foreign sector (X-M)

Also known as net exports (value of exports minus the
value of imports
 Formula
1. GDPmp = C + I+ G + (X-M)
2. GNPmp = GDPmp + net factor income abroad
3. GNPfc = GNPmp – indirect taxes + subsidies
4. National income (NI) = GNPfc – depreciation
5. Personal income (PI) = NI + transfer payments
– corporate income taxes – retained earning
– social security distribution (SOCSO) – insurance
premium – undistributed profit- EPF
6. Disposable personal income (DPI) = PI – personal
income tax
Example 1
COMPONENTS RM MILLION
Calculate:
1. Public Consumption 20 000
2. Private Consumption 30 500 a)GDPmp
3. Public Investment 10 600 b)GNPmp
4. Private Investment 15 000 c)GNPfc
d)NI
5. Change in Stock 150
e)PI
6. Goods and services exported 1 000 f)DPI
7. Goods and services imported 700
8. Net factor income abroad 100
9. Indirect taxes 200
10. Subsidies 500
11. Depreciation 50
12. Employees Provident Fund (EPF) 200
13.Tax on personal income 400
14. Transfer payment 100
15. Social Security Contribution (socso) 100
16. Retained earnings 10
17. Insurance Premium Payment 100
Calculate:

GDPmp = C + I + G + (X-M)
= 20,000 + 30,500 + 10,600 +15,000 + 150 + (1,000-700)
= 76,550

GNPmp = GDPmp + net factor income abroad

= 76,550 + 100
= 76,650

GNPfc = GNPmp + subsidy – indirect taxes

= 76,650 + 500 – 200
= 76,950

NI = GNPfc – depreciation
= 76,950 – 50 = 76900

PI = NI + transfer payment – SOCSO – retained earnings –Insurance

premium-EPF
= 76,900 + 100 – 200 – 100 – 100 – 10 = 76,590

DPI = PI – Personal income tax

= 76,950 – 400 = 76190
Example 2:
Items (RM millions)
Exports 500
Personal consumption expenditure 1400
Changes in stock -40
Indirect tax 30
Government expenditure 990
investment 1000
Personal income tax 80
Subsidies 30
Imports 400
Factors income paid abroad 80
depreciation 40
Factor income receive from abroad 90

Calculate:
1.GDPmp (3450)
2.GNPmp (3460)
3.GNPfc (3460)
4.National Income (3420)
2. Product/Output Approach
➢ NI is measured by adding up all final goods and
services produced by all economic sectors.

➢3 economic sectors contributing to the GDP:

1. Primary sector – mining and quarrying,

agriculture, forestry, fishing.
2. Secondary sector – manufacturing and
construction
3. Tertiary sector – electricity, gas and water;
wholesale and retail trade; finance, insurance,
real estate and business services, transport,
storage and other services,education,travel
Formula
1. GDPmp = Primary sector + Secondary sector +Tertiary
sector
2. GNPmp = GDPmp + net factor income abroad
3. GNPfc = GNPmp – indirect taxes + subsidies
4. National income (NI) = GNPfc – depreciation

5. Personal income (PI) = NI + transfer payments

– corporate income taxes –retained earning
– social security distribution – insurance premium
- undistributed profit-EPF
6. Disposable personal income (DPI) = PI – personal
income tax
 Example:
Items RM (million)
Government services 1000
Net factor income abroad 250
Transfer payments 150
Exports 1500
Calculate:
Mining and quarrying 1800
1. GDPmp
Manufacturing 1500 2. GDPfc
Indirect business tax 400 3. GNPfc
4. National income
Depreciation 100 5. PI
Subsidies 150 6. DPI

Private investment 5000

Electricity, gas and water 700
Banking and tourism 3000
SOCSO and EPF 1000
Income taxes 300
Solution:
1.GDPmp = government services + mining and quarrying +
manufacturing + electricity, gas and water banking and tourism
= 1000 + 1800 + 1500 + 700 + 3000 = RM8000m

2.GDPfc = GDPmp + subsidies – indirect taxes

= 8000 + 150 – 400 = RM7750m

3.GNPfc = GDPfc + net factor income abroad

= 7750 + 250 = RM8000m

4.NI = GNPfc –Depreciation

= 8000 – 100 = RM7900

PI?
DPI?
3. Income Approach
➢ NI is measured by adding all the various types of
income paid to firms and households.

➢The major income components are:

✓ wages & salaries
✓ interest & dividend
✓ rent of property
✓ profit - profit is divided into 2:
1. proprietor’s income (income from self
employment)
2. corporate profit (distributed profit,
undistributed profit & corporate tax)
Formula
1. GDPfc = wages+salaries+rent+interest & dividend +profit
2. GNPmp = GDPmp + net factor income abroad
3. GNPfc = GNPmp – indirect taxes + subsidies
4. National income (NI) = GNPfc – depreciation

5. Personal income (PI) = NI + transfer payments

– corporate income taxes –retained earning
– social security distribution – insurance premium
- undistributed profit-EPF
6. Disposable personal income (DPI) = PI – personal
income tax
 Items RM Million
Income from employment (+) 13 000
Income from self employment (+) 12 000
Income from rent, dividend and interest (+) 10 000
Companies Profit (+) 23 000
Factor income received from abroad (+) 20000
Factor income paid to abroad (-) 7000
Depreciation /Capital Consumption (-) 1 000
Transfer Payment (+) 1 000
Social Security Contribution (SOCSO) (-) 200
Corporate Tax (-) 800
Undistributed profit (-) 5 000
Personal Income Tax (-) 500

Calculate:
a) GDPfc
b) GNPfc
c) National Income
d) Personal Income
e) Disposable Income 43
Similar terms

1. Indirect tax= tax on expenditure = tax on consumption = indirect

business tax
2. Corporate tax = corporate business tax =corporate income tax = tax
on companies profit = business tax
3. Retained earnings= undistributed profit
4. Profit =corporate profit=business profit=companies profit
5. Income from self employment=proprietor’s income
6. Personal income tax=income tax
7. Depreciation = capital consumption= Consumption on Fixed Capital
Similar terms

8. Consumption (C) = Private Expenditure=household consumption

9. Government spending=government expenditure
10. Investment (I) = Change In Stock / Private Investment / Public
Investment=change in inventory
11. SOCSO = Social Security Contribution
12. EPF=employees provident fund
 Items $ (millions)
Finance and insurance 4750
Private expenditure 10000
Government expenditure 6000
Agriculture, forestry and fishing 11400
Mining and quarrying 4000
Communication 3700
Personal expenditure 650
Hotel and restaurant 6300
Manufacturing 12500
Capital consumption 1000
Business taxes 6250
Taxes on expenditure 7500
Net factor income received from abroad 3450
Subsidies 445
Personal income taxes 125
Social contribution 50
Employee provident funds 170
Transfer payment 700
Calculate:
1. Gross Domestic Product (GDP) at market price.
2. Gross National Product (GNP) at factor cost.
3. Net National Product at factor cost.
4. Personal income. 46
5. Disposable income.
 Real Income

▪ Real income@real GNP is GNP measured at

constant price or fixed price
▪ Nominal income@nominal GNP is GNP measured
at current prices.

Formula real income@real GNP:

Real GNP = Current nominal GNP x Base year price index

Current year price index

Note: Base year index always 100

47
 Continue…
▪ Eg:
Current price index = 160
Base year price index = 100
Nominal GNP = RM10,000

Real GNP = 100/160 x 10,000

= RM6,250 million

48
 Growth Rate
▪ Percentage change in the quantity of goods and services produced
from one year to another.

Growth rate (g) = Real GNP this year – Real GNP last year x100 Real GNP last
year

(this formula can also be used to calculate Real GDP)

Eg:
real GNP for year 2018 = RM232,539 million
real GNP for year 2019 = RM248,954 million
g = 248,954 – 232,539/232,539 x 100
= 7.14% 49
Uses of national income

1. Standard of living comparison

➢ Data from NI/GDP can be used in comparing standard of living in
different countries.
➢ Countries with a higher NI will have a higher standard of living.
➢ While countries that have low NI will have lower standard of living.

2. Economic performance over time

➢ NI also used to measure the economic performance by comparing NI
of one time period or another.
➢ mean that our country will compare economic performance in terms
of our economic growth.
➢ With NI data, it will tell us whether our economic performance is
growing, stagnant or declining

3. National Planning
➢NI statistics are very important tool for the government to formulate its
short term and long term economic planning.
➢To forecast future development based on current economic
performance.
➢To draft Malaysian Plan.
4. Sectoral contribution
➢ NI statistic enable us to identify the important sector by their
contributions to economic growth. Such as before 1980s: primary
sector especially agricultural sector is the most important sector
which is from rubber, palm oil & tin.
➢ While in 1980s: manufacturing sector becomes the most important
sector which is the highest contributor to economy.
➢ After 1980s: services sector becomes the major contributor to the
GDP in Malaysia

NIK AZMA WAIL

Problems in calculating national income

1. Problems of illiteracy
➢ Small producer in third world countries are illiterate ,unable to keep account of
their productive activities.
➢ Product that produced are self-consumption and not for the market – record are
not kept of their productive activity.

2. Problems of expertise
➢ Lack of professional such as statisticians, researches, programmers – major
problem in third world countries

3. Problems of less sophisticated machinery

➢ Non-availability of sophisticated machinery such as advanced computer or
program to compute national income.
5. Problem of double counting
➢ Possibilities of intermediate goods being included in the
national income more than once.
➢ The best way to avoid problem is calculate only the
value of all final goods and services.
THANK YOU

54
CHAPTER 2 (Cont.)
Part 2

Real income, nominal

income, economic growth
and percapita income
 Real Income

Real income is the value of GNP or GDP

measured in fixed price or constant price
Nominal income is the value of GNP or GDP
measured in current price
The value of nominal income include inflation
problem

2
 Real Income
Formula for Real income (Real GNP and Real
GDP):
Real GNP = Base year price index x nominal GNP
Current year price index

Real GDP = Base year price index x nominal GDP

Current year price index

Real income= Base year price index x national income

Current year price index

(*Note: Base year index always 100)

3
 Continue…
Eg:
Current price index = 160
Base year price index = 100
Nominal GNP = RM10,000

Real GNP = 100/160 x 10,000

= RM6,250 million

4
 Growth Rate

Economic growth can be described as an expeansion

in national output over a given period of time
The economic growth of a nation does not move
constantly, but will experience short terms ups and
down called business cycle
Growth can be measured as a GDP or GNP based
on real income

5
 Growth Rate
Formula:

Growth rate (g) = Real GNP this year – Real GNP last year x100
Real GNP last year

(this formula can also be used for Real GDP)

Eg:
real GNP for year 2018 = RM232,539 million
real GNP for year 2019 = RM248,954 million
growth rate = 248,954 – 232,539/232,539 x 100
= 7.14%
6
 Percapita Income

Percapita income refers to average income per head

of population
Often used to compare standard of living of a country

`Formula:

Percapita income = National Income

Population

or; = GDP
population 7
Uses of national income

1. Standard of living comparison

➢ Data from NI/GDP can be used in comparing standard of living in
different countries.
➢ Countries with a higher NI will have a higher standard of living.
➢ While countries that have low NI will have lower standard of living.

2. Economic performance over time

➢ NI also used to measure the economic performance by comparing NI
of one time period or another.
➢ mean that our country will compare economic performance in terms
of our economic growth.
➢ With NI data, it will tell us whether our economic performance is
growing, stagnant or declining

3. National Planning
➢NI statistics are very important tool for the government to formulate its
short term and long term economic planning.
➢To forecast future development based on current economic
performance.
➢To draft Malaysian Plan.
4. Sectoral contribution
➢ NI statistic enable us to identify the important sector by their
contributions to economic growth. Such as before 1980s:
primary sector especially agricultural sector is the most important
sector which is from rubber, palm oil & tin.
➢ While in 1980s: manufacturing sector becomes the most
important sector which is the highest contributor to economy.
➢ After 1980s: services sector becomes the major contributor to
the GDP in Malaysia

NIK AZMA WAIL

 Problems in calculating national income

1. Problems of illiteracy
➢ Small producer in third world countries are illiterate ,unable
to keep account of their productive activities.
➢ Product that produced are self-consumption and not for the
market – record are not kept of their productive activity.

2. Problems of expertise
➢ Lack of professional such as statisticians, researches,
programmers – major problem in third world countries

3. Problems of less sophisticated machinery

➢ Non-availability of sophisticated machinery such as
advanced computer or program to compute national income.
5. Problem of double counting
➢ Possibilities of intermediate goods being included in
the national income more than once.
➢ The best way to avoid problem is calculate only the
value of all final goods and services.
THANK YOU

12