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THE GOODS MARKET

NATIONAL INCOME (NI) The flow of goods and services by a nation over a period of time, usually a year. The concept of NI: - Gross Domestic Product- Gross National Product- Market Price and Factor Cost- Net National Product (NNP)- etc..

Gross Domestic Product (GDP) Definition : TOTAL MONEY VALUE of the all FINAL GOODS and SERVICES PRODUCED in a country at a given time period. The output produced by foreign workers in Malaysia such as Indonesians and Nepalese will be included in the GDP.

Methods of Measuring National Income (NI) There are three methods to measure national income. Why? Because NI can be viewed from three dimensions which are: 1)total output, 2)total income, 3)total expenditure. INCOME = PRODUCT = EXPENDITURE The concept above gives the same result when we measure National Income.

Methods to Measure NI, cont..Income ApproachProduct ApproachExpenditure Approach

Expenditure Approach Under this method, national income is calculated by adding all the EXPENDITURE on Goods and Services in a year. National expenditure comes from FOUR (4) economic sectors, which are:-1. Personal Consumption (C)2. Investment (I)3. Government Spending (G)4. Net Exports (X M)

Expenditure Approach, cont.. Personal Consumption - It includes the purchase of goods and services produced by firms, individuals or households. - Personal consumption only includes spending that is incurred by individuals or households for their own personal use. - Examples : shoes, clothes, obtain legal advice, seek medical service

Expenditure Approach, cont.. Investment- The purchase of capital goods by firms to use in production and in changes in the firms inventories.- Inventories? refer to the stocks of raw materials, semi-finished products and unsold final products that are retained by the firms over a year.

Expenditure Approach, cont.. Government Spending- The expenditures made by federal, state and local governments for final goods and services. - The purchase of government goods and services includes the cost to provide national defense, construction of new buildings such as schools and hospitals and payment of salaries to public servants. - Transfer payment is NOT INCLUDED in government expenditure because it does not represent the purchase of goods and services, rather the transfer of income from government

Expenditure Approach, cont.. Net Exports- Difference between what a country EARNS by exporting goods and services to other countries (X) and what it PAYS for goods and services that are imported from other countries (M).- Simply say, Net Exports is the difference between the value of exports MINUS the value of imports.

Expenditure Approach, cont.. Under expenditure approach, Gross Domestic Product (GDP) is calculated by adding up all the four items of expenditure as follow:

GDP at market price = C + I + G + (X M)

GDP, cont.. How to measure GDP? through Market Price and also at Factor Cost. Market Price?Refers to current price in the market or the actual price paid by the consumers which include (plus) indirect taxes and excludes (minus) subsidies given to producers does not reflect real price Factor Cost?Refers to real prices that is earned by producers or sellers.

GDP, cont.. What is Indirect Taxes and Subsidies? Indirect Taxes certain amount being levied on goods such as excise duty, import duty, sales tax -- discourage the producers to produce more goods and services Subsidies Incentive given by the government to producers to encourage them producing more goods and services.

GDP, cont..*GDP at market price = C + I + G + (X M)

GDP at factor cost = GDP at market price indirect taxes + subsidies

Gross National Product (GNP) The total amount of income earned by nationals of the country regardless of where they are. Simply say, GNP can be defined as the SUM of gross domestic product (GDP) and the net factor INCOME FROM ABROAD (income received from abroad minus the income paid abroad)

GNP = GDP + (income received from abroad the income paid abroad)

Growth Rate The economic growth rate of a country can be measured as GDP or GNP based on real income / real GNP

Growth rate; the percentage (%) change in the quantity of goods and services produced from one year to another.

Growth Rate Formula

Growth Rate (g) = Real GNP this year Real GNP last year X 100%Real GNP last year

Real GNP = Base Year Price Index X Nominal GNPCurrent Year Price Index*Base year price index is equal to 100*

Lets test your understanding1. If real GDP for year 2003 is RM232, 359 million and RM248,954 million for year 2004. The growth rate from year 2003 to 2004 is?

2. If current price index is 160 while base year price index is 100 and the nominal GNP is RM10,000 million, then the real GNP is?

DETERMINATION OF EQUILIBRIUM OUTPUT

How to determine national income equlibrium?

Aggregate Demand Aggregate Supply Approach Leakage Injection Approach

Aggregate Demand (AD) Aggregate Supply (AS) Approach

AD or aggregate expenditure is the total demand for goods and services in the economy AS or aggregate output is the total quantity of goods and services produced in economy at any given time period.

Equilibrium occurs when AD equals to AS (AD = AS)

Overall Price IndexAggregate OutputASADEP*Y*

Leakage - Injection Approach Leakage is a withdrawal from the income-expenditure stream. It includes savings, taxes and imports. Injection is additional spending to the income-expenditure stream. It includes investment, government expenditure and exports. Equilibrium occurs when leakages are equal to injections.

Determinants of Equilibrium Equilibrium can be determined in : A two-sector economy (households and firms) A three-sector economy (households, firms and government) A four-sector economy (households, firms, government and foreign sector)

Equilibrium in Four-sector economy Equilibrium in four-sector economy is also considered an open economy whereas in a three-sector economy is a closed economy. Using AD AS ApproachIn 4-sector economy, AD is the SUM of household consumption (C), investment from the firm (I), government expenditure (G) and exports (X) minus imports (M).AD = C + I + G + (X-M)

Cont.. Aggregate Supply is the aggregate output (Y). So, AS = Y Equilibrium is achieved when AS = ADY= C + I + G + (X-M)

AD = C + I + G + (X-M)

Cont..ADNational Income, YY = AS = ADC + I + G + (X-M)45Equilibrium level occurs when AD or Aggregate Expenditure intersects the 45 degree line.

Using Leakage Injection ApproachIn 4-economy sector economy, savings, taxes and imports are leakages while investment, government expenditure and exports are injections into the spending stream. Equilibrium is achieved when leakages (S, T, M) equal to injections (I, G, X).

Leakage / InjectionNational IncomeS + T + MI + G + XY*A- LEquilibrium level occurs when I + G + X intersects S + T + M at Y*

Lets check your understandingGiven the following informationC = 200 + 0.75Yd (Yd is disposable income)I = 100G = 50T = 100X = 100M = 50

Find the equilibrium income using AS AD approach and Leakage Injection Approach.

THANK YOU