1. NATIONAL INCOME (NI)

2. 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

3. 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.

4. 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

5. 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

6. 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

7. 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

8. 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.

9. 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.

10. 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

11. 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.

12. 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)

13. 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)]

14. 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
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

15. 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

16. 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.

17. 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)

18. 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