All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 1

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 2 TOPIC 2 NATIONAL INCOME ACCOUNTING

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 3 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.

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 4 GROSS DOMESTIC PRODUCT (GDP) GDP is the total money value of the all final goods and services produced within a country in a given time period. GROSS NATIONAL PRODUCT (GNP) GNP is the total market value of all final goods and services produced by a country’s residence in a given time period. CONCEPT OF NATIONAL INCOME

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 5 MARKET PRICE (MP) Market price refers to the current price in the market through the forces of demand and supply. Market prices are the actual price paid by the consumers. FACTOR COST (FC) Factor cost is the real prices that is earned by the producers or sellers. CONCEPT OF NATIONAL INCOME

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 6 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. NATIONAL INCOME (NI) National income at factor cost (NI) is defined as the total of all income payments made to factor of production. CONCEPT OF NATIONAL INCOME

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 7 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 the payment of personal direct taxes. CONCEPT OF NATIONAL INCOME

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 8 EXPENDITURE APPROACH PRODUCT APPROACH INCOME APPROACH

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 9 1. EXPENDITURE APPROACH Consumption (C) Government Spending (G) Net Exports (X – M) Investment (I) Expenditures are made up by four economic sectors such as:

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 10 Disposable personal income = Personal income – Personal income tax Personal income = National Income + 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

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 11 ANI Calculated from Expenditure Approach

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – INCOME APPROACH Wages and Salaries Interest and dividend Rent Income approach will measure the national income by adding together all the incomes. Profit

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 13 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 - Depreciation GNP= GDP + Net factor income abroad GDP = Wages + Salaries + Rent + Profit + Dividend + Interest Formulas in calculating the national income using Income approach

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 14 NI Calculated from Income Approach

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – PRODUCT APPROACH Primary Sector Tertiary Sector Secondary Sector NI is measured by net value of all final goods and services produced by a nation during a year.

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 16 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) = All final products Formulas in calculating the national income using Product approach

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 17 NI Calculated from Product Approach

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 18 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

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 19 Problem of multi occupations Problem of false information Problems of non- monetized sector Problem of illiteracy Problem of expertise Problem of expertise Problem of less sophisticated machinery Problem of double counting

All Rights Reserved PRINCIPLES OF ECONOMICS Third Edition © Oxford Fajar Sdn. Bhd. ( T), – 20 REAL INCOME, PER CAPITA INCOME AND GROWTH RATE REAL INCOME Real GNP = Base year index x Current Nominal GNP Current price index REAL INCOME Real 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 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 PER CAPITA INCOME Per capita income = National Income Population