PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved ...

All Rights ReservedPRINCIPLES OF ECONOMICS Third Edition

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 11– 1



CHAPTER 2

NATIONAL INCOME

ACCOUNTING



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.



IMPORTANT CONCEPTS IN

NATIONAL INCOME

Gross Domestic Product (GDP)

Gross National Product (GNP)

Net National Product (NNP)

Market Price and Factor Cost

National Product at Current Price

National Product at Fixed Price

National Income

Personal Income

Disposable Personal Income

Per Capita Income



GDP (GROSS DOMESTIC

PRODUCT)

GDP is the total money value of the all final

goods and services produced within a country

in a given time period.

GDP produced by the factor of production

(e,c,l,l)

Owned by local citizens or by citizens of other

nation



GDP (GROSS DOMESTIC

PRODUCT)



GNP (GROSS NATIONAL

PRODUCT)

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

GNP produced by the factor of production

(e,c,l,l)

Owned by local citizens wher they located



GNP (GROSS NATIONAL

PRODUCT)



RELATIONSHIP BETWEEN GDP

& GNP

Is due to the Net Factor Income from Abroad

(nFIfA)

nFIfA = Factor Income from Abroad (FIfA) –

Factor Income paid Abroad (FIpA)




& GNP

Factor Income from Abroad (FIfA) - payment

received by citizens of the nation that are located

abroad




& GNP

Factor Income paid Abroad (FIpA) – payment

made to foreign citizens within the nation




& GNP

GDP = GNP – Factor Income from broad

(FIfA) – Factor Income paid Abroad (FIpA)

GNP = GDP + Net Factor Income from Abroad

(nFIfA)



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.

NNP = GNP - Depreciation



QUESTION AND ANSWER

GDP is the total final _______________created

by the factors of productions owned by

___________________

GNP is the total final _______________created

by the factors of production owned by

______________



GNP or GDP ????

Factor Income paid Abroad or Factor

Income from broad ???

Petronas makes a production in Viettnam

Apples makes a production in Malaysia

QUESTION AND ANSWER



QUESTION AND ANSWER

Formula GDP ?

Formula GNP ?

Formula NNP ?



MARKET PRICE AND FACTOR

COST

MARKET PRICE (MP)

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

GDPmp, GNPmp, NNPmp



MARKET PRICE AND FACTOR

COST

FACTOR COST (FC)

Factor cost is the real prices that isearned by the producers or sellers

GDPfc, GNPfc, NNPfc



Market Price vs Factor Cost

Factor Cost = RM500

Indirect Taxes = RM100

Market Price ???



Market Price vs Factor Cost

Factor Cost = RM500

Subsidies = RM 50

Market Price ???



Market Price

GDP mp = GNP fc – NFIfA + Indirect Taxes –

Subsidies

GNP mp = GDP fc + NFIfA + Indirect Taxes –

Subsidies

NNP mp = NNP fc + Indirect Taxes – Subsidies

NNP mp = GNP mp - Depreciation



Factor Cost

GDP fc = GNP mp – NFIfA + Subsidies –

Indirect taxes

GNP fc = GDP mp + NFIfA + Subsidies –

Indirect taxes

NNP fc = GNP fc – Depreciation

NNP fc = NNP mp + Subsidies – Indirect taxes



QUESTION AND ANSWER

Market price refers to the price of product and

service that paid by_________________

Factor cost refers to the cost paid by

____________ because of consumption the

factors of production such as ___________,

___________, _____________ and

_____________



QUESTION AND ANSWER

Formula of :

– GDP mp?

– GDP fc?

– GNP mp?

– GNP fc?

– NNP mp?

– NNP fc?



National Product at Current

Price

Value of national product and service calculated

according to prices at the respective year

TWO factors affect national product at current

price

– Total physical production

– Changes in price

Y0 , GDP 0, GNP o, NNP 0



National Product at Fixed

Price

Value of national production/income calculated

according to a fixed price at a reference year

Y1 , GDP 1, GNP 1, NNP 1



Current Price vs Fixed Price

Y Fixed Price = IP0 /IP1 x Y current price

GDP Fixed Price = IP0 /IP1 x GDP current price

GNP Fixed Price = IP0 /IP1 x GNP current price

NNP Fixed Price = IP0 /IP1 x NNP current price



National Income

Net National Product at factor cost (NNP fc)

Including

– Wages

– Salaries

– Rent

– Net interest

– Corporate profit

– Private income



National Income

National Income mp = NI fc + Indirect Taxes –

Subsidies

National Income fc = NI mp - Indirect Taxes +

Subsidies

Net National Income = Gross National Income –

Depreciation

National Income = Personal Income + Transfer of

payments – Interest in consumer loan - Interest in

government loan + Corporate profit taxes +

Undistributed corporate profit + EPF Contribution



Personal Income

Personal income is the income that is

actually received by individuals and

households in a nation during a year.

Productive / non productive



DISPOSABLE PERSONAL

INCOME (DPI)

DPI is the part of the personal

income that is left after the payment

of personal direct taxes.



GROSS DOMESTIC PRODUCT (GDP)

GDP is the total money value of the all final goods and servicesproduced within a country in a given time period.

GROSS NATIONAL PRODUCT (GNP)

GNP is the total market value of all final goods and services producedby a country’s residence in a given time period.

CONCEPT OF NATIONAL INCOME

GNP = GDP + net factor income from abroad



MARKET PRICE (MP)

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

FACTOR COST (FC)

Factor cost is the real prices that is earned by the producers or sellers.


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

OR

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



NET NATIONAL PRODUCT (NNP)

NNP is GNP minus the value of capital consumption ordepreciation during the year. NNP is also referred asNational Income at market prices.

NATIONAL INCOME (NI)

National income at factor cost (NI) is defined as the total of all income payments made to factor of production.


NI = GNPFC–Depreciation value

OR

NI = NNPMP + Subsidies–Indirect Taxes



PERSONAL INCOME (PI)

Personal income is the income that is actually received by individuals and households in a nation during a year.

DISPOSABLE PERSONAL INCOME (DPI)

DPI is the part of the personal income that is left after thepayment of personal direct taxes.


DPI = PI – Personal income tax



QUESTION AND ANSWER

________________is the flow of goods and

services that can be obtained by a nation for a

certain period.

____________is the total market value of all final

__________ and_____________produced by

factors production within a country in a given

period.

____________is the total market value of all final

__________ and_____________produced by

country’s residents in a given period.



__________refers to real prices that are earned

by the producers or sellers.

_______________refers to the current price in

the market through the forces of demand and

supply

QUESTION AND ANSWER



EXPENDITURE APPROACH

PRODUCT APPROACH

INCOME APPROACH

METHODS OF CALCULATING NI



1. EXPENDITURE APPROACH

Consumption (C)

Go

vern

men

t S

pen

din

g (

G)

Net E

xp

orts

(X –

M)

Investment (I)

Expenditures are made up by four

economic sectors such as:



Disposable personal income = Personal income –Personal income tax

Personal income = NI+ Transfer payments –Corporate income taxes – Retained earnings –

Social security contributions – Insurance premium

National Income = GNP (FC) – Depreciation

GNP (FC) = GNP (MP) - Indirect tax + Subsidy

GNP (MP) = GDP (MP) + Net factor Income abroad

GDP (MP) = C + I + G + (X – M)

Formulas in calculating the national income using

Expenditure approach



ANI Calculated from

Expenditure Approach



2. INCOME APPROACH

Wages and Salaries

Inte

rest

an

d d

ivid

en

d

Rent

Income approach will measure the

national income by adding together all

the incomes.

Pro

fit






National Income = GNP - Depreciation

GNP= GDP + Net factor income abroad

GDP = Wages + Salaries + Rent + Profit + Dividend + Interest Formulas in calculating the

national income using Income approach



NI Calculated from Income

Approach



3. PRODUCT APPROACH

Primary Sector

Tertia

ry S

ecto

r

Secondary Sector

NI is measured by net value of all final

goods and services produced by a nation

during a year.






National Income = GNP (FC) - Depreciation

GNP (FC) = GNP (MP) - Indirect tax + Subsidy

GNP (MP)= GDP (MP) + Net factor Income abroad

GDP (MP) = All final products

Formulas in calculating the national income using Product approach



NI Calculated from Product

Approach



USES OF NI

To measure

standard of living

To assist in

national planning

To identify sectoral

contribution

Public sector National

Expenditure

To compare

over time

Distribution of Income

To compare wealth

between countries

To measure the rate

of growth of the

country



Problem of multi

occupations

Problem of false

information

PROBLEMS OF CALCULATING NI

Problems of non-

monetized sector

Problem of

illiteracy Problem of

expertise

Problem of less

sophisticated machinery

Problem of

double counting



REAL INCOME, PER CAPITA

INCOME AND GROWTH RATE

REAL INCOMEReal GNP = Base year index x Current Nominal GNP

Current price index

GROWTH RATE

g = Real GNP year 1 – Real GNP year 0 x 100

Real GNP year 0

PER CAPITA INCOME

Per capita income = National Income

Population

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