NATIONAL INCOME (NI)

DEFINITIONS OF NIMoney 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

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

Y= C+I

households

firms

Expenditure, C

Income, Y

HOUSEHOLDS

FIRMS

Households’ expenditure on g & s

Firms produce g & s

Supply of labour and other factor servicesFirms paid wages, rent, interest and profit to

households

A 2-sector closed economy circular flow model

Financial institution

savinginvestment

From the figure:a.All income received by households will entirely be

spend on consumption and saving.b.All goods & services produced by firms will entirely be

purchased in the market.c.Meaning that

Total Income= Total Output= Total Expenditured.Neglected the role of government in the economy. e.In real world international trade also take a big role in

economy.f. Y=C+I

C=consumptions made by householdsI = Investment made by firms

A 3-sector circular flow income

Government

FirmsHouseholdsFinancial

Institutions

Net Taxes Net Taxes

Investment

Expenditure on g & s

savingsinvestme

nt

Firms paid wages, rent, interest & profit to households

From the figure

a.Households will only spent a portion of their income on consumption of g & s produced by firms.

b.Balance from the income will be saved in financial institutions which later shall be used by firms for future investment.

c.Households and firms sectors are obliged to pay personal income tax and corporate income tax according to government

d.Government impose tax that will become an income source to government and expend them on g & s produced by firms.

e.Firms now will supply g & s not only to households sector but also government sectors.

f. This will be considered in NI.

g. 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 afterdeducting 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 increaseaggregate expenditure.

Y=C+I+GC=Consumptions made by householdsI = Investment made by firmsG= Government Expenditure made by government.

A 4-sector circular flow of income

Government

Foreign Sector

Households FirmsFinancial

Institutions

Net Taxes

Expenditure on g & s

Firms paid wages, rent, interest & profit to households

savings

Investment

investment

Net export

Net Taxes

Export Revenue

Export Revenue

Expenditure on Import

Expenditure on Import

From the figurea.Circular flow of open economyb.Apart from 3 sectors also consider foreign sector that involves

imports and exports component in an economy.c. Import(M)=purchases of g & s from abroad for local or domestic

consumptions by households, firms and government.d.Export(X)=sales of g & s by local or domestic sectors to abroad

or oversea.e.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 & sproduced to abroad and overseas.

3. Government involves either directly or indirectly with foreignsector. 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 thespending ability in an economy thus a rise in aggregateexpenditure.

f. 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.

g.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 NIThere are 3 methods to calculate NI1.Income Approach- It requires us to add up all the total

income received by all economic agents that are wages, interest, rent and profit.

2.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.

1.Expenditure Approach- 4 components in calculating NI that is [C,I,G, (X-M)]

Approaches in NY AccountingApproach

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 • Change in stocks

GDP Value

• fc • mp • mp

Uses of NI

To measure and compare standard of livingTo compare economic performance over timeComparison between two or more countryAnalyze 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 NIi) 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 ProfitDisposable 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