chapter 2-national income accounting(1)

By Abu Sufian Abu BakarNational Income Accounting*Chapter 2National Income Accounting

CH1-National Income Accounting-SV

By ABU SUFIANCH2-National Income Accounting*National Economic ObjectivesAttaining full employmentAttaining economic growthStabilizing the general price level

CH2-National Income Accounting

By ABU SUFIANCH2-National Income Accounting*National Income AccountingBy measuring national income of the economic territory of an economy, one can estimate how well his economy performs in achieving its national economic objectives.


The Circular Flow

By Mr. LAU san-fat/ver 2004CH1-National Income Accounting-SV*HouseholdFirms (productionFactor servicesGoodsInvestment(3)Personalconsumption(4)Savings(3)Imports(5)Exports(5)(2)GovernmentSpendingTaxes(2)GovernmentFinancial marketsOther countriesWages,rents,interest,profits(1)


By ABU SUFIANCH2-National Income Accounting*Stock ConceptA stock is any measurement at a particular point of time.Example: On 14th August 2014, Peters total wealth was $200,000.


By ABU SUFIANCH2-National Income Accounting*Flow ConceptA flow is any measurement that spreads over a certain period of time. Example: Peter earns $8,000 as his monthly income.


By ABU SUFIANCH2-National Income Accounting*Stock or Flow?

Peter earns an interest of $100 from his $100,000 saving in Bank for a month.FlowOn 31st August 2004, Welcomes total stock of goods in LP Estate was $1 million.StockA secondary school teacher earns $16,000 per month.FlowMSIAs GDP for the year of 2003 was $20,000 billions.Flow


By ABU SUFIANCH2-National Income Accounting*Intermediate Vs. Final GoodsIntermediate goods are goods and services produced for assisting further or other production.Final goods are goods for final use or consumption.A good can be an intermediate good or a final good, depending on how it is being used.


By ABU SUFIANCH2-National Income Accounting*Intermediate or Final Goods?

Flour bought by Golden Apple Cake shop.IntermediateLobster cooked by mom for celebrating your pass in Econ test.FinalFish steamed by the cook of a fish stall for his workers.FinalAn ice-cream you bought from McDonalds.Final


By ABU SUFIANCH2-National Income Accounting*Basic Circular Flow Model


By ABU SUFIANCH2-National Income Accounting*We consider the basic circular flow of a certain economy.Goods & ServicesFactors of Production$20$300$200Total market value of all final goods= $20 + $300 + $200= $520FirmsHouseholds


By ABU SUFIANCH1-National Income Accounting-SV*We consider the basic circular flow of a certain economy.Goods & ServicesFactors of Production$20$300$200Total market value of all final goods= $20 + $300 + $200= $520FirmsHouseholdsNational Product orNational Output


By ABU SUFIANCH2-National Income Accounting*Goods & ServicesFactors of ProductionReal Flow$20$300$200On the other hand, we consider the households total expenditure on these goods.FirmsHouseholds


By ABU SUFIANCH2-National Income Accounting*Goods & ServicesFactors of ProductionReal Flow$20$300$200On the other hand, we consider the households total expenditure on these goods.FirmsTotal Expenditure on these goods= $20 + $300 + $200= $520Households


By ABU SUFIANCH2-National Income Accounting*Goods & ServicesFactors of ProductionReal Flow$20$300$200Total Expenditure on these goods= $20 + $300 + $200= $520HouseholdsFirmsExpenditure on FinalGoods & ServicesOn the other hand, we consider the households total expenditure on these goods.National Expenditure


By ABU SUFIANCH2-National Income Accounting*Expenditure on FinalGoods & ServicesThose households who provide factors services in the production would receive income from the firms.Money FlowHouseholds total income= $200 + $50 + $150 + $120= $520Factor IncomeWagesInterestRentalIncomeProfit$200$50$150$120FirmsHouseholds


Those households who provide factors services in the production would receive income from the firms.FirmsBy ABU SUFIANCH2-National Income Accounting*Expenditure on FinalGoods & ServicesMoney FlowHouseholds total income= $200 + $50 + $150 + $120= $520Factor IncomeWagesInterestRentalIncomeProfit$200$50$150$120HouseholdsNational Income


By ABU SUFIANCH2-National Income Accounting*Expenditure on FinalGoods & ServicesReal FlowFactor IncomeWagesInterestRentalIncomeProfit$200$50$150$120Money FlowGoods & ServicesFactors of Production$20$300$200FirmsHouseholds


By ABU SUFIANCH2-National Income Accounting*Expenditure on FinalGoods & ServicesReal FlowFactor IncomeWagesInterestRentalIncomeProfit$200$50$150$120Money FlowGoods & ServicesFactors of Production$20$300$200FirmsHouseholdsThe total market values of final goods & servicesThe total expenditures onthe final goods & servicesThe total income of the householdsFrom the above analysis, we find that:


By ABU SUFIANCH2-National Income Accounting*Expenditure on FinalGoods & ServicesReal FlowFactor IncomeWagesInterestRentalIncomeProfit$200$50$150$120Money FlowGoods & ServicesFactors of Production$20$300$200FirmsHouseholdsNational ProductNational ExpenditureNational IncomeThat is:


By ABU SUFIANCH2-National Income Accounting*National Output and National Output (NO) is the measure of total market value of all final goods & services.National Expenditure (NE) is the measure of total expenditure on final goods & services.National Income (NI) is the measure of households total income.NO NE NI


By ABU SUFIANCH2-National Income Accounting*Gross Domestic Product (GDP)Definition: GDP is an aggregate measure of the total value of production of all resident producing units within the economic territory of an economy in a specified period, usu. a quarter or a year.


By ABU SUFIANCH2-National Income Accounting*Resident Producing Unit (RPU)A resident producing unit maintains her centre of economic interests in the economic territory of an economy.A RPU therefore ordinarily operates in the economic territory.


By ABU SUFIANCH2-National Income Accounting*Resident Producing Unit or Not?A factory producing toys in CHANGLONYes!


By ABU SUFIANCH2-National Income Accounting*Resident Producing Unit or Not?An Citibank Corporation in MALAYSIAYes!An Citibank Corporation in SINGAPORENo!


By ABU SUFIANCH2-National Income Accounting*Gross National Product (GNP)Definition: GNP is a measure of the total income earned by residents of an economy from engaging in various economic activities, irrespective of whether the economic activities are carried out within the economic territory or outside.GNP is identical to Gross national income (GNI), which is a contemporary term.


By ABU SUFIANCH2-National Income Accounting*Residents of an EconomyResidents maintain their center of economic interests in an economy.Resident individuals refer to those who normally stay in the economic territory of the economy for at least 12 months or longer, or intend to do so, irrespective of their nationality.Resident organizations (or RPUs) refer to those which ordinarily operate in the economic territory.


By ABU SUFIANCH2-National Income Accounting*Residents or Not?

A foreign domestic helper working in JITRANoA branch of a foreign bank operating in KUALA LUMPURYesA solicitor coming to MALAYSIA to work on a short-term 3-month contract for a local companyNo


By ABU SUFIANCH2-National Income Accounting*GDP Versus GNP

GDPGNPValue of production(Factor) income earnedBy resident producing unitBy residentsFactors are owned by residents or non-residentsFactors are owned by residents onlyWithin the economic territoryWithin or outside the economic territory


By ABU SUFIANCH2-National Income Accounting*GDP Versus GNPGDP is more relevant for analysis related to production activities within the economy, e.g. employment, productivity, industrial output, investment in equipment & structure.GNP is useful for analyzing economic situations relating to income of residents, investment behavior, domestic demand & inflation.


By ABU SUFIANCH2-National Income Accounting*Being Included in GDP or GNP?

Mr. Chan is now living in ALOR SETAR. He has a toy factory here and earns RM2 million this year.MSIA GDPMr. Chan also has a garment factory in China and earns RM1.2 million this year.MSIA GNPA Filipino maid in JITRA usually gets a long-term contract of two years. She earns RM12,000 this year. MSIAGNPA retired old man who is a resident of MSIA and earns a rental income of $50 000 this year from his house in Australia.MSIA GNP


By ABU SUFIANCH2-National Income Accounting*From GDP to GNPGNP = GDP + (Factor income earned by residents from outside the economic territory Factor income earned by non-residents from within the economy) = GDP + Net factor income from abroad or External Factor Income Flows


By ABU SUFIANCH2-National Income Accounting*From GNP to GDPGDP = GNP (Factor income earned by residents from outside the economic territory Factor income earned by non-residents from within the economy) = GNP Net Factor Income from Abroad or Net External Factor Income Flows


By ABU SUFIANCH2-National Income Accounting*More About National Income StatisticsGDP at factor cost = GDP at market price indirect business taxes + subsidies


By ABU SUFIANCH2-National Income Accounting*


By ABU SUFIANCH2-National Income Accounting*More About National Income StatisticsGDP at factor cost = GDP at market price indirect business taxes + subsidiesGDP at market price = GDP at factor cost + indirect business taxes - subsidies GDP per capita = GDP/population sizeNet Domestic Product, NDP = GDP - depreciation


By ABU SUFIANCH2-National Income Accounting*More About National Income StatisticsNet National Product, NNP = GNP - depreciationNational Income, NI = W + I + R +


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(1): The Product or Output ApproachGDP is total market values of all final goods and services produced by the resident producing units of an economy within a specified period.Intermediate goods are excluded to avoid the problem of double counting.In reality, it is hard to distinguish between final and intermediate goods.thus, value-added method is adopted


By ABU SUFIANCH2-National Income Accounting*By Value Added ApproachGDP is an aggregate measure of the total value of net output of all resident producing units of a country or territory in a specified period.Net output is measured by value addedValue added = value of gross output value of intermediate consumptionIntermediate consumption is the value of goods & services used up during production.


By ABU SUFIANCH2-National Income Accounting*By Value Added Approachvalue added = sales revenue - input costBy value added approach, GDP = summation of value added in ALL stages of production + indirect business taxes (IBT) subsidies (S)


By ABU SUFIANCH2-National Income Accounting*Stage 1: Growing wheat Input cost (wheat seeds) = $0.0 Sales revenue (wheat) = $2.0Value added = $(2.0 - 0.0)= $2.0


By ABU SUFIANCH2-National Income Accounting*Stage 2: Milling wheat Input cost (wheat) = $2.0 Sales revenue (flour) = $3.5Value added = $(3.5 - 2.0) = $1.5


By ABU SUFIANCH2-National Income Accounting*Stage 3: Baking bread Input cost (flour) = $3.5 Sales revenue (bread)= $6.0Value added = $(6.0 - 3.5) = $2.5


By ABU SUFIANCH2-National Income Accounting*Measuring GDP:Given: final good: bread ($6.0) Intermediate goods: wheat ($2.0) flour ($3.5) By Output Approach, GDP = $6.0 By Value Added Method GDP = $[(2.0 - 0.0) + (3.5 - 2.0) + (6.0 - 3.5)] = $6.0


By Abu SufianCH2-National Income Accounting*

SectorRM million1. Agriculture, livestock, forestry & fish 16,2302. Mining & quarrying8,9793. Manufacturing 39,8254. Construction5,3855. Electrical, gas & water 2,7976. Transportation, storage & communication8,8557. Wholesale & retail trade, hotel & restaurant14,7818. Financial, insure, real estate & business services 12,9389. Government services 11,45410. Other services 2,478 Minus : payment on bank services -8,503Add : Import taxes 5,090GDP at cost factor 120,30913. Factors earning from abroad (+) -6,714GNP at factor cost 113,595


By ABU SUFIANCH2-National Income Accounting*Items Being Excluded from GDP

ItemsReasonsNon-marketed or self-sustained productsNo market value involved


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(2): The Expenditure ApproachGDP = C + I + G + (X - M)while (C + I + G + X) = total final demand


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(2): The Expenditure Approachon C: only expenditure on consuming final products countedon I: I = gross domestic fixed capital formation + change in stocksgross domestic fixed capital formation = expenditure on land, buildings & construction, plant, machinery, equipment & related expenseschange in stocks = unsold goods (values of raw materials & work-in-progress)


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(2): The Expenditure Approachnet investment = gross investment depreciationWhy should the changes in inventories be included in GDP?


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(2): The Expenditure Approachon G: including payments to civil servants & expenditure on final products while excluding transfer paymentson X-M: net exports= net exports of goods + net exports of services= [domestic exports of goods + re-exports of goods imports of goods] + [exports of services imports of services]


By ABU SUFIANCH2-National Income Accounting*Why M is deducted from the total final demand?The value of imports has to be removed because EACH of the components of C, G, I & X has import contents (both direct and indirect import contents) but it is not possible to remove such. They are therefore removed collectively by the subtraction of M.Hence, GDP = C + G + I + X - M


NATIONAL INCOME ACCOUNT (EXPENDITURE APPROACH) By Abu SufianCH2-National Income Accounting*

SectorRM million1. Household consumption/C (+)2,5002. Government expenditure/G (+)3503. Gross investment/I (+)3504. Changes in inventory (+)1005. Export (+)6006. Import (-)500GDP (Market price)34007. Indirect taxes (-)3008. Subsidies (+)150GDP (cost factor)32509. Net factor earning from abroad (+)80010. Net factor earning to abroad (-)700GNP (cost factor)335011. Depreciation (-)50Net GNP (cost factor)3300



ItemsReasonsUnreported transactionsNo data is availableIllegal transactionsNo data is availableSecond-handed goodsNo current production involved



ItemsReasonsExpenditure on stocks, i.e. shares & bonds-no production involved-a mere transfer of ownershipExpenditure on welfare paymentsNo production involved


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(3): The Income ApproachBy income approach, GDP is calculated as the sum of incomes for the factors of production distributed by the resident producing units in a country or territory, as rewards to their production of goods and provision of services.In other words, GDP is the sum of factors income (arising from production) provided by the resident producing units in an economic territory in a specified period.


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(3): The Income ApproachFactor incomes = compensation of employees (including wages, salaries & other employee benefits) + gross operating surplus of enterprises


By ABU SUFIANCH2-National Income Accounting*Measuring GDP(3): The Income ApproachBy income approach, GDP = compensation of employees + gross operating surplus of enterprises + indirect business taxes subsidies = W + I + R + + depreciation allowance + indirect business taxes subsidies



ItemsReasonsIncome from gifts, gambling & lucky drawNo production involved


By ABU SUFIANCH2-National Income Accounting*Comparison of the 3 ApproachesExpenditure Approach


By ABU SUFIANCH2-National Income Accounting*Comparison of the 3 ApproachesExpenditure ApproachGDPatfactorcostGDPatmarketprice


By ABU SUFIANCH2-National Income Accounting*GDP at Current Market PricesGDP at current market prices/Money GDP/Nominal GDP measures the market value of final goods and services at current market prices.Nominal GDP = P x Q


By ABU SUFIANCH2-National Income Accounting*GDP at Constant Market PricesGDP at constant market prices/Real GDP measures the market value of final goods and services at the prices of a particular chosen year called base year(with constant general price, i.e. P =1).Real GDP = P x Q = 1 x Q = Q = real output (in current year)Therefore, Real GDP = Real output = Real living standard


By ABU SUFIANCH2-National Income Accounting*Nominal GDP Vs. Real GDPAs nominal GDP = P x Q nominal GDP = P x Q or = P x Q or = P x QThus, nominal GDP real outputThus, nominal GDP real living standard


By ABU SUFIANCH2-National Income Accounting*Find Real GDP: by Implicit GDP DeflatorAs (price index of the base year/price index of the current year) = (real GDP/money GDP) and price index of the base year = 100implicit GDP deflator = (money GDP/real GDP)x100thus, implicit GDP deflator = price index of the current yearthus, real GDP = money GDP x (100/price index of the current year)


By ABU SUFIANCH2-National Income Accounting*Money GDP, Prices & Real GDP

If %money GDP > %Preal GDPIf %money GDP < %Preal GDPIf %money GDP = %Preal GDPIf %money GDP & %Preal GDP



If %money GDP & %Preal GDPIf %money GDP > %Preal GDPIf %money GDP < %Preal GDPIf %money GDP = %Preal GDP



If %money GDP > %real GDPPIf %money GDP < %real GDPPIf %money GDP = %real GDPPIf %money GDP & %real GDPP



If %money GDP & %real GDPPIf %money GDP > %real GDPPIf %money GDP < %real GDPPIf %money GDP & =%real GDPP


By ABU SUFIANCH2-National Income Accounting*The Growth Rate of GDPGDP growth rate = [(GDP of current period GDP of last period)/GDP of last period] x 100%Real GDP growth rate = [(real GDP of current period real GDP of last period)/real GDP of last period] x 100%


By ABU SUFIANCH2-National Income Accounting*Uses of National Income Statisticsas a measurement of living standardas a basis for international comparison of welfare or living standardas a basis for formulating government policiesas a basis for formulating business decisionsas an indicator of economic progress


By ABU SUFIANCH2-National Income Accounting*Limitations of National Income Statisticsnominal GDP neglects the effects of price changereal GDP is preferred


By ABU SUFIANCH2-National Income Accounting*Limitations of National Income Statisticsreal GDP neglects the effects of population sizereal GDP per capita is preferred


By ABU SUFIANCH2-National Income Accounting*Limitations of National Income Statisticsreal GDP per capita ignores the problem of income distributionuneven distribution of income implies the problem of widening income gap


By ABU SUFIANCH2-National Income Accounting*Limitations of National Income Statisticsreal GDP per capita ignores the effects of self-sustained products, non-marketed goods & unreported transactionsreal GDP per capita underestimates the real standard of living


By ABU SUFIANCH2-National Income Accounting*Limitations of National Income Statisticsreal GDP per capita ignores the desirable and undesirable effects of productionreal GDP per capita neglects the effects of composition of GDPlarger portion of consumer goods supports a higher present living standard while larger portion of capital goods implies a higher future living standard


By ABU SUFIANCH2-National Income Accounting*Factors Affecting National IncomeDemand-side Factors:consumption (C) demandinvestment (I) demandgovernment expenditure (G) demandnet exports (X-M) demand


By ABU SUFIANCH2-National Income Accounting*Factors Affecting National IncomeSupply-side Factors:labor productivityamount of capital (goods)amount of landlevel of entrepreneurshiplevel of technology


*****In-class Exercise 11: TB/P.22/Q 2.4

chapter 2-national income accounting(1)

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