NATIONAL INCOME (NI)

DEFINITIONS OF NI Money value of all g & s produced during a particular period of time, usually a year. The sum of all personal incomes received from economic activities – Hanson Total income earned by resources owners such as rents, wages, interest & profit – Tucker Total value of final outputs which comprises of g & s produced by a country for a particular period of time, usually a year - Economist

Cont… A popular measurement for an economic perfomance is Gross Domestic Product (GDP) Gross Domestic Product (GDP) = the market value of all final goods and services produced in a nation during a period of time, usually a year. Gross National Product (GNP) = the market value of all final goods and services produced by nation’s residents, no matter where they are located and includes also the factor payment receives from oversea.

2.2 Circular Flow of Income and Expenditure Two sector economy -firms and households Three sector economy -firms, household, government Four sector economy firms, household, government and foreign market

A 2-sector circular flow of income and expenditure Expenditure, C Y= C+I households firms Income, Y Households’ expenditure on g & s Firms produce g & s investment FIRMS HOUSEHOLDS saving Financial institution Supply of labour and other factor services Firms paid wages, rent, interest and profit to households A 2-sector closed economy circular flow model

From the figure: All income received by households will entirely be spend on consumption and saving. All goods & services produced by firms will entirely be purchased in the market. Meaning that Total Income= Total Output= Total Expenditure Neglected the role of government in the economy. In real world international trade also take a big role in economy. Y=C+I C=consumptions made by households I = Investment made by firms

A 3-sector circular flow income Net Taxes Net Taxes Government Expenditure on Resources Expenditure on g & s Investment Expenditure on g & s Financial Institutions investment savings Households Firms Firms paid wages, rent, interest & profit to households

From the figure Households will only spent a portion of their income on consumption of g & s produced by firms. Balance from the income will be saved in financial institutions which later shall be used by firms for future investment. Households and firms sectors are obliged to pay personal income tax and corporate income tax according to government Government impose tax that will become an income source to government and expend them on g & s produced by firms. Firms now will supply g & s not only to households sector but also government sectors. This will be considered in NI.

1. Saving (S) from households = investment (I) made by firms (S=I) Assuming: 1. Saving (S) from households = investment (I) made by firms (S=I) 2. Income (Y) that can be spent by households will now be lesser after deducting the tax portion (t) paid to government. Y after deducting t now called as disposable income (Yd). (Yd=Y-t) 3. The concept of leakages and injection are introduced here that is S and t are forms of leakages as it reduces households ability to spent in an economy, thus reduce aggregate expenditure. G and I are forms of injections withdrawals as it increase aggregate expenditure. Y=C+I+G C=Consumptions made by households I = Investment made by firms G= Government Expenditure made by government.

A 4-sector circular flow of income Net Taxes Net Taxes Government Expenditure on Resources Expenditure on g & s Expenditure on g & s Net export investment Households savings Financial Institutions Investment Firms Firms paid wages, rent, interest & profit to households Export Revenue Export Revenue Foreign Sector Expenditure on Import Expenditure on Import

Circular flow of open economy From the figure Circular flow of open economy Apart from 3 sectors also consider foreign sector that involves imports and exports component in an economy. Import(M)=purchases of g & s from abroad for local or domestic consumptions by households, firms and government. Export(X)=sales of g & s by local or domestic sectors to abroad or oversea. Important points : 1. Households supply resources and consume on imports goods 2. Firms purchased capital goods and engaged foreign workers from abroad to help produce more new g & s. Firms also export g & s produced to abroad and overseas. 3. Government involves either directly or indirectly with foreign sector. They may imports as well exports g & s to abroad.

4. The concepts of leakages & injections are expanded. Leakages components are now comprises of S, t, and M. It reduces the spending ability in an economy thus a fall in aggregate expenditure. Injections component are I, G, and X. It increases the spending ability in an economy thus a rise in aggregate expenditure. The spending that been made from all sectors will become their earnings of income. Money earned by the factors of production will be spent out on g & s produced in the economy. Aggregate expenditure is the total spending on C, I, G and foreigners on net export (X-M) Y=C+I+G+(X-M)

METHODS OF CALCULATING NI There are 3 methods to calculate NI Income Approach- It requires us to add up all the total income received by all economic agents that are wages, interest, rent and profit. Product (Output) Approach- The total value of all output produced in the economy such as manufacturing, construction, mining, quarrying, agriculture and so on. This is considered as National Product/Output. - Exclude the value of intermediate goods to avoid the problem of double counting. Expenditure Approach- 4 components in calculating NI that is [C,I,G, (X-M)]

Approaches in NY Accounting Income Output Expenditure Defn from Y point of view Y received by productive person & enterprises from the output point of view value added of g & s (final outputs) from the spending point of view by private & public sector Item w – include fringe benefits, pension plans (net) interest & div earning on share Rent on property – include royalty Profit of firms Y of self employed Agriculture, forestry, fishing Mining & quarrying Manufacturing Construction Electric, gas, water Transportation, storage & communication Trade @ services Finance, insurance, property NX Change in stocks C : HH & govt I : new construction, new equipment, ∆ in stock G : exclude transfer payment NX : for both g & s GDP Value fc mp

Uses of NI To measure and compare standard of living To compare economic performance over time Comparison between two or more country Analyze the contribution made by each sectors -by analyzing the contribution of each sector, we will be able to know which sector makes the most contribution to the country’s economic growth. To assist the government’s economic planning

Problems in measuring or calculating NI Illiteracy – the case of poor countries which make collection of data difficult. Being uneducated, they fail to give accurate value of their home produced goods. ii) Shortage of expertise in developing countries makes analysis of data unreliable. iii) Inaccessibility. This causes the collection of data in remote areas impossible. National income is underestimated, iv) False information – People will usually underestimate their earning to evade paying high taxes. This will result in underestimation of national income.

Concepts of Real and Nominal Income and Growth Rate Nominal income – actual wage or salary that one earns currently. The Nominal GDP measures the value of all goods and services produced expressed in current prices. i.e: Nominal GDP of Malaysia for year 2001 is RM334.6b Real income- has been deducted the reduction in the purchasing power that the wage or salary has in the market. Real GDP measures the value of all goods and services produced expressed in the price of some base year. Real GDP of Malaysia in the year 2001 is RM210.5b GNP deflator: (CPI1/CPI0) Growth Rate- GDP or GNP based on real income. It’s a percentage change in the quantity of goods and services produced from one year to another. Econ growth = (GDP1 – GDP0 / GDP0) *100 Real economic growth = (nominal GNP x CPI0 / CPI1) or (nominal GNP/GNP deflator)

The Concept of Personal, Disposable &Per Capita Income Personal Income is the income that actually received by individuals and household in an economy in a year. PI=NI+TP-BT-SOCSO-EPF-KWSP-Undistributed Profit Disposable Income is from the personal income remaining after the payment of personal income tax. DI=PI-Income Tax Total personal income divided by the number of people in unit of currency per year Measuring wealth of the population of a nation. Per Capita Income= NI Population