CHAPTER

CHAPTER 88

MEASURING
MEASURINGGROSS
GROSS
DOMESTIC
DOMESTICOUTPUT
OUTPUT
AND
AND
NATIONAL
NATIONALINCOME
INCOME
ACCOUNTING
ACCOUNTING
 Topic
Topic Learning
LearningOutcomes
Outcomes

At the end of this topic, student should

be able to explain:

1. The circular flow of income diagram

2. The three methods of national income
accounting.
3. The various concepts of national income.
4. The uses and problems of national income
statistics.
 National income

 The total market value of all final goods and services

produced by the country’s citizens during a given
time period, normally for one year.

 National income accounts are used to determine the

current performance of the economy.
 Circular-flow diagram

 A visual model of the economy that illustrates how

households and businesses interact through markets
for products and markets for resources.
 Economic sectors:
the household sector: buyers (consumers)
the business or firm sector: sellers
(producers/firms)
government sector
foreign or the international sector.
 The household sector

 Households are centers for consumption and

ultimately own all wealth, including resources that
they make available to businesses or government in
exchange for income.
 Labor (both mental and physical) is the principal asset
of most households
 Households interact with business firms in two ways:
They supply economic resources (land, labor,
capital, & entrepreneurial ability) to businesses in
exchange for income in factor markets
They use their incomes (wages, rent, interest , &
profits) to buy goods and services produced and
sold by business firms in product markets.
The firm sector

 A business firm is privately owned and operated,

for-profit center for production.
 Firms prompt households to provide specific resources
with incentives in the forms of wage rates paid for
specific labor skills, rental rates for land, or rates of
return on capital.
 The firm sector produces output using the resources
supplied by the households sector.
 They receive revenue from selling these goods and
services
 The government sector

 Government directly provides some goods and

services (e.g., public schools), and less directly
influences the production and consumption of other
goods via taxes and regulations (e.g., tobacco).
 Taxes are the primary sources of government
revenue.
 The foreign sector

 The basic macroeconomic sector that includes

everyone and everything outside the political
boundaries of the domestic economy.
 This includes households, businesses, and
governments in other countries.
 Exports are expenditures by foreigners on
domestically produced goods
 Imports are expenditures on goods produced by
other countries.
CIRCULAR-FLOW DIAGRAM in a simple economy
 National income identity

 national income = national product = national

expenditure
 Thus, national income may be viewed as:
the total output produced by nationally owned
economic resources during a year (output
approach)
the sum of wages, interest, rent, and profits
earned by economic resources engaged in
producing the national output (income
approach)
money spent to purchase the national output
(expenditure approach)
 Gross Domestic Product (GDP)

 The total market value of all final goods and services

produced by factors of production located within a
country.
 Excludes output produced abroad by domestically
owned factors of production
 Final goods and services are output produced for
final use
 Excludes intermediate goods
 Intermediate goods are goods produced by one firm
for use in further processing by another firm
 GDP is concerned only with new/current production
 Old output (2nd hand) is not counted in current GDP
because it was already counted when it was
produced.
 Gross
GrossNational
NationalProduct
Product(GNP)
(GNP)

 Measures the production of goods and services by

factors of production owned by a country’s citizens,
regardless of where the output is produced.
 Value of output produced by foreign workers working
in Malaysia is counted GDP, but not in GNP
 Value of output produced in other countries by
Malaysian working abroad is counted in GNP, but not
in GDP
 Approaches
Approachesto
tocalculate
calculateGDP
GDP
 Expenditure Approach
A method of computing GDP that measures the total
amount spent on final goods and services during a given
period.
 Income Approach
A method of computing GDP that measures the income
(wages, interest, rents and profits) received by all
factors of production in producing goods and services.
 Product / Output approach
A method of computing GDP that measures the value of
all final goods and services produced by economic
sectors, such as manufacturing, construction, mining
and quarrying, agriculture, etc.
 Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

There are four main categories of expenditure:

1. Personal consumption expenditure ( C ), household

spending on consumer goods.
2. Gross private domestic investment (I); spending by
firms and households on new capital; that is plant,
equipment, inventory and new residential structure.
3. Government consumption and gross investment (G)
4. Net exports (EX – IM); net spending by the rest of the
world or exports (EX) minus IM

GDP = C + I + G + (EX – IM)

GDP = C + I + G + (EX – IM)
Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

Personal consumption expenditure ( C )

Expenditures by consumers on goods and services

Durable goods; goods that last a relatively long time

such as cars and household appliances.

Nondurable goods; goods that are used up fairly

quickly such as food and clothing.

Services; the things we buy that do not involve the

production of physical things such as legal and medical
services and education
Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

Gross private investment (I) ; total investment in

capital - that is the purchase of new housing, plants,
equipment and inventory by the private sector.

Non residential investment; expenditures by firms for

machines, tools and so on.

Residential investment; expenditures by households

and firms on new houses and apartment building
 Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

Change in business inventories:

The amount by firm’s inventories change

during a period .

Inventories are the goods that firms produce

now but intend to sell later.

GDP = Final sales + change in business inventories

GDP = Final sales + change in business inventories
Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

Gross Investment versus Net Investment

Depreciation - the amount by which an asset’s value fall

in a given period

Gross investment - the total value of all newly produced

capital goods (plants, equipment, housing and
inventory) produced in a given period

Net investment = Gross Investment - depreciation

 Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

Government Consumption and Gross Investment (G);

expenditures by federal, state and local government for final
goods and services

Net Exports (EX – IM) – the difference between exports

(sales to foreigners of Malaysia produced goods and services
and imports (Malaysia purchases of goods and services
from abroad). The figure can be positive or negative.
 Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach
Items RM (Millions) RM (Millions)
Private expenditure (C) (+) 12 000

Public expenditure (C) (+) 40 000

Private investment (I) (+) 10 000

Change in stocks (I) (+/-) 600

Export of goods (+) 11 000

Import of goods (-) 8 500

Net Export (X – M) 2 500

Gross Domestic Product at market price (GDP mp) 65 100

Factor income received from abroad (+) 4 000

Factor income paid abroad (-) 3 000

Net factor income from abroad 1 000

Gross National Product at market price (GNP mp) 66 100

 Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach
Items RM (Millions) RM (Millions)
Indirect taxes (-) 500

Subsidies (+) 250

Gross National Product at factor cost (GNPfc) 65 850

Depreciation (-) 850

National Income 65 000

Transfer payments (+) 1 000

Social security contribution (-) 200

Retained earnings (-) 100

Corporate tax (-) 800

Personal income 64 900

Personal income tax (-) 400

Disposable personal income 64 500

Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

Market price; the current price in the market through

the forces of demand and supply.

Factor cost; the real price earned by producers or

sellers.

Indirect taxes minus subsidies;

Taxes such as sales taxes, custom duties and license
fees LESS subsidies that the government pays for which
it receives no goods or services in return.
Calculating
CalculatingGDP:
GDP:The
TheExpenditure
ExpenditureApproach
Approach

Net National product (NNP);

Gross national product minus depreciation; a nation’s
total product what is required to maintain the value of
its capital stock.

Disposable personal income;

Also called as after-tax income. Personal income minus
income taxes. The amount that households have to
spend or save.
Calculating
CalculatingGDP:
GDP:The
TheIncome
IncomeApproach
Approach
Items RM (Millions)
Income from employment (+) 13 000

Income from self-employment (+) 12 000

Income from rent, dividend and interest (+) 10 000

Companies profits (+) 23 000

Gross Domestic Product 58 000

Factor income received from abroad (+) 20 000

Factor income paid abroad (-) 7 000

Net factor income from abroad 13 000

Gross National Product 71 000

Calculating
CalculatingGDP:
GDP:The
TheIncome
IncomeApproach
Approach

Items RM (Millions)
Depreciation (-) 1 000

National Income 70 000

Transfer payments (+) 1 000

Social security contribution (-) 200

Undistributed profit (-) 5 000

Corporate tax (-) 800

Personal income 65 000

Personal income tax (-) 500

Disposable personal income 64 500

Calculating
CalculatingGDP:
GDP:The
TheIncome
IncomeApproach
Approach
Compensation of employees; includes wages, salaries
and various supplements, employer contribution to social
insurance and pension funds. For examples; paid to
households by firms and by the government.

Proprietors’ income; the income of unincorporated

business.

Rental income; the income received by property

owners in the form of rent

Corporate profits; the income of corporations

Net interest; the interest paid by business.

 Calculating
CalculatingGDP:
GDP:The
TheProduct
ProductApproach
Approach

 also called the Value-Added approach

 exclude the value of intermediate goods to avoid double
counting
 intermediate goods can be finished or semi-finished
goods.
 wheat flour is a finished good if it is sold to the final
consumers, but is an intermediate good if sold to a
bakery.
 only the value of bread and flour sold to consumers
should be taken into account,
 value of flour sold to & used by the bakery is not
counted
 second hand sales are excluded they reflect no current
production & lead to double counting
 Calculating
CalculatingGDP:
GDP:The
TheProduct
ProductApproach
Approach
Final Goods and Services:
• In calculating GDP, we can sum up the value added at each stage of production
or we can take the value of final sales. We do not use the value of total sales in
an economy to measure how much output has been produced.

TABLE 21.1 Value Added in the Production of a Gallon of Gasoline

(Hypothetical Numbers)

Stage Of Production Value Of Sales Value Added

(1) Oil drilling $3.00 $3.00

(2) Refining 3.30 0.30

(3) Shipping 3.60 0.30

(4) Retail sale 4.00 0.40

Total value added $4.00

Calculating
CalculatingGDP:
GDP:The
TheProduct
ProductApproach
Approach
Items RM (Millions)
Agriculture, forestry and fishing (+) 30 000

Mining and quarrying (+) 37 000

Manufacturing (+) 100 000

Construction (+) 13 000

Electricity, gas and water (+) 10 000

Transport, storage and communication (+) 22 000

Wholesale, retail, hotel and restaurant (+) 47 000

Finance, insurance and real estate (+) 40 000

Government services (+) 25 000

Other services (+) 20 000

Gross Domestic Product at market price (GDP mp) 344 000

Calculating
CalculatingGDP:
GDP:The
TheProduct
ProductApproach
Approach
Items RM (Millions)
Factor income received from abroad (+) 25 000

Factor income paid abroad (-) 18 000

Net factor income from abroad 7 000

Gross National Product at market price (GNPmp) 351 000

Indirect taxes (-) 500

Subsidies (+) 700

Gross National Product at factor cost (GNPfc) 351 200

Depreciation (-) 5 000

National Income 346 200

Transfer payments (+) 4 000

Social security contribution (-) 800

Retained earnings (-) 100

Corporate tax (-) 7 000

Personal income 342 300

Personal income tax (-) 800

Disposable personal income 341 500

 Uses of National Income Statistics

Measure of Economic Growth Rate

 % change in real GDP
 Compare growth performance over time
Compare Standard of Living Among Nations
 using per capita income of each nation (PCI)
 PCI = national income / population.
Assist in Government Planning
 strengths and weaknesses of an economy.
 the government can make planning for the future
Compare Economic Performance Among Nations
 Use economic growth rate or PCI
 Limitations of the GDP concept

The Externalities
 Water, air, noise pollution, toxic waste, etc reduce the
quality of life, these costs are not deducted from GDP,
thus our GDP is overestimated.

Composition and Distribution of Output

 GDP does not provide information whether the mix of the
goods and services is enriching or detrimental to the
society.
 GDP does not tell whether the output is well distributed or
not.
 If 80 per cent of the output goes to 10% of households,
society’s welfare may have not improved.
 Limitations of the GDP concept

GDP & social welfare

 Society is better off when crime decreases, but a
decrease in crime is not reflected in GDP
 An increase in leisure is an increase in social welfare,
but not counted in GDP
 Most economic activities (housework & childcare) are
not counted in GDP even though they amount to
real production

The underground Economy

 The part of economy in which transactions take
place and in which income are generated, but
unreported and thus not counted in GDP
 Limitations of the GDP concept

The Problem of Double-Counting

 intermediate products are traded a few times.
 the value of a complete car includes its tires. If we
count the value of the car will & the value of tires,
double counting has taken place
 GDP is overestimated.
 To avoid double counting, only count the value of
final goods and services
 Limitations of the GDP concept

Inadequate Information
 data could be incorrect and incomplete.
 unreported Illegal activities are not counted
 some productive goods and resources are used for
personal consumption are not counted
 individuals or organizations avoid paying taxes by
changing the value of their incomes.
 GDP are underestimated
Real income, per capita income and growth rate

Nominal GNP
Nominal GNP
GNP measured in current prices

Real Income
Real Income
Also called as real GNP is measured on a fixed price or
base year.
Base year price index
Real GNP = Current year price index X Nominal GNP
Real income, per capita income and growth rate

Per capita income

Per capita income

Per capita income refers to the average income per

head of population.

National Income
Per capita income =
Total population
 Real income, per capita income and growth rate

Growth rate
Growth rate

The economic growth rate of a country can be measured as a

GDP or GNP based on real income.
The growth rate is the percentage change in quantity of goods
and services produced from one year to another.

Growth rate = Real GNP this year – Real GNP last year X 100%
Real GNP last year

Real GNP1 – Real GNP0

= X 100%
Real GNP0
Thank
Thank You
You