ECONOMICS

(ECO 415)
MEASURING GROSS DOMESTIC
OUTPUT AND NATIONAL INCOME
ACCOUNTING
Ms. Tai Nyuk Chin

DEFINITION OF NATIONAL INCOME

(NI)
National income can be defined as the total
income received by all economic agents in the
economy based on the goods and services
produced in the economy, in a certain period of
time.
These economic agents perform the activities that
contribute to the production of total output in the
economy.

GROSS DOMESTIC PRODUCT (GDP)

i. GROSS DOMESTIC PRODUCT (GDP)
. GDP is the total money value of all final goods and
services produced within a country in a given time period.
. GDP excludes goods and services produced by Malaysian
citizens working overseas but includes goods and services
produced by foreign workers in Malaysia.
. It also excludes intermediate goods and only the value of
final goods are counted.

GROSS NATIONAL PRODUCT (GNP)

ii. GROSS NATIONAL PRODUCT (GNP)
. GNP is the total market value of all final goods and
services produced by the residents of a country during a
given period of time.
. GNP is simply the total income by citizens of the country
regardless where they are.
GNP = GDP + (factor income received from abroad factor income
paid to abroad)
@
GNP = GDP + Net factor income from abroad
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NATIONAL INCOME (NI)

CALCULATING: 3 APPROACHES
i. PRODUCT/OUTPUT APPROACH
. Under this approach, NI is measured by net value of all final goods
and services produced by a nation during a year.
. In Malaysia there are three sectors contributing to the GDP:
a. Primary sector : Mining and quarrying, agriculture,
fishing and forestry.
b. Secondary sector : Manufacturing and construction.
c. Tertiary sector : Electricity, gas and water, wholesale
and retail trade, finance, insurance and banking,
real
estate and business services, transport,
storage and
communication, govt. services and
other services.

GDP = Final products produced by all economic sectors

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NATIONAL INCOME (NI)

CALCULATING: 3 APPROACHES
ii. EXPENDITURE APPROACH
. NI is obtained by adding all the expenditure on goods and
services in a year.
. National expenditure is made up of four economic sectors:
a. Personal consumption, C (expenditure made by household).
b. Investment, I (expenditure made by firms).
c. Government spending, G (expenditure made by federal, state
and local government).
d. Net exports (X-M).

GDP = C + I + G + (X-M)
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NATIONAL INCOME (NI)

CALCULATING: 3 APPROACHES
iii. INCOME APPROACH
. NI is measured by summing up all the various types of income
paid (rewards) to firms and households.
. In Income approach all the figures are in factor cost because
only earnings are calculated.
. Major income component includes:
a. Wages and salaries (Income received by labor).
b. Net interest/dividend (Income received by contributing
capital).
c. Rent (Income received by contributing land).
d. Profits (Income received by entrepreneur).
GDP = Wages + salaries + rent + profit + dividend/interest
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USES OF NATIONAL INCOME DATA

1. To measure the economic growth over time
. A country is said to experience a satisfactory rate of economic growth
if there is an increase in the real GNP over the years.
. It is measured as;
Real GNP1 Real GNP0
Growth rate =

X 100

Real GNP0

. If there is a positive economic growth, it means there is an increase in

the amount of goods and services in the country and thus, individuals
can enjoy more goods and services.
. This indicates the increasing in societies standard of living as well as
countrys development.
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USES OF NATIONAL INCOME DATA

2. Standard of living comparison
. Standard of living reflects the individuals welfare since it
shows how much of the goods and services that can be
consumed by each individual in a country.
. The more goods that they can be consumed, the higher
their standard of living is and thus, the better their life will
be.
. Standard of living can be measured as follows;
PCI =

GNP
Population

= average income per person per year

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USES OF NATIONAL INCOME DATA

3. To determine the distribution of income in the
economy
. The NI data will shows the income earned by different
groups of people.
. The distribution of income between the rich and the poor
people in a country should be equal.
. When the distribution of income is not equal, it means that
there is a vast difference in the average income earned by
individuals in the economy.
. The income received by higher income group should not
exceed the average income earned by lower income group
by a large difference.
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USES OF NATIONAL INCOME DATA

4. To assist the government in the planning
. It is noted that the NI data provides the amount of goods
and services produced in the country.
. Thus, this will assist the government in determining which
sectors in the economy that contributes more to the
economic growth.
. Then, the government can decide which sector shall need
adjustment and assistance.
. This is why NI data is very useful to the government in
planning for economic development to ensure a continuous
economic growth.
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PROBLEMS IN MEASURING NI
1. Problem of Double Counting
. Will occur when both values of final goods and
intermediate goods are included.
. To avoid this problem, only the value of final goods or the
added value of each stage of production of goods must be
counted.
. Can occur as well when transfer payment is included using
income approach.

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PROBLEMS IN MEASURING NI
2. Unpaid activities
. There are lots of productive works done in economy but
are not paid.
. E.g. Neighbor helping repair car, friends helping in
babysitting.
. The problem also will exist when some payment are made
using other goods and not money
. E.g. A friend paying the service price of babysitting by
giving clothes/food, etc.

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PROBLEMS IN MEASURING NI
3. Lack of data
. Ni can be misleading as there are not enough information or
record regarding the economic activities.]
. Illegal activities, such as selling smuggled cigars, liquor, etc
are not recorded in the sellers document as it is illegal
activities.
. Besides, some productive goods produced are for personal
consumption
. E.g. Farmer will consume some of the rice/vegetables they
produced.

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PROBLEMS IN MEASURING NI
4. Estimation of depreciation
. Depreciation of machines used in the production process is
difficult to estimate.
. If the figure of depreciation is overestimated, the NI figure
will be understated.
. To avoid the problem, most policy makers prefer to use the
GNI figure instead of net NI figure.

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NOMINAL NI VS REAL NI
Nominal NI is NI figure which is measured based on
standard/current prices of one year.
Means that Nominal NI affected by the changes in the general price
level/inflation rate that occurred over the years.
Real NI is measured by deflating the value of nominal NI according
to the base year.
The nature of prices of goods and services is that it tends to change
over times and these changes can misleading NI values as we did not
know whether there are any real increase in the quantity of national
output or not.
Nominal NI x 100
Real NI

Price Index
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NOMINAL NI VS REAL NI

Note that the Q of national output had not change from 1995-2000.
Nominal NI denotes the increasing in NI over the 5 years. However, we can see clearly that the
national output had not change at all.
Therefore, it is better to take Real NI value to see the real situation of economy as it is not affected by
any changes in prices over years.
Real NI value is as well more accurate data to reflects the real economic performance compared to
Nominal NI.

ITEMS
Q of National
Output (Unit)
Price (RM)
Price Index
a) Nominal NI
b) Real NI

YEAR 1995

YEAR 2000

7000

7000

1.00
100
7000
Nominal NI x 100 = 7000
100

1.2
120
8400
Nominal NI x 100 = 7000
120
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GROWTH RATE AND PER CAPITA

INCOME
i. Growth Rate
. One of the uses of NI data is to measure economic growth.
. One nation is said to experience a satisfactory rate of economic
growth if there is an increase in real GNP.
Real GNP1 Real GNP0
Growth rate =

X 100
Real GNP0

ii. Per capita Income (PCI)

. Measures the average income per person per year
. Reflects the standard of living/welfare of individual

PCI =

GNP
Population
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END OF CHAPTER 7
DOMO ARIGATO!!
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