NATIONAL INCOME

PREPARED BY:
MS. SHALIZA AMIRA BINTI SARIF

FOR:
CBA 102- PRINCIPLES OF ECONOMIC
SPP 1
 DEFINITION
 The aggregate income of the country earned
by the national through the production of
goods and services for a certain period of time,
usually a year.

 The general term referring to the annual output

in terms of goods and services produced
during a particular period of time, usually a
year. (Lim Chong Yah)
METHODS OF CALCULATING
NATIONAL INCOME

 INCOME APPROACH
 OUTPUT / PRODUCT

APPROACH
 EXPENDITURE APPROACH
 INCOME APPROACH
 This approach looks at the flow of economic
activities from the income point of view.
 The components are:
 Wages and salaries of all employees in every
sector.
 Interest and dividends from shares.
 Rent including inputed rent.
 Profits, example- undistributed profits.
 Income of self-employed workers such as hawkers.
The way calculation of income approach:-
Wages and salaries (including compensation for employees)
+ Interest and dividends
+ Rent
+ Profits (including undistributed profits and income from self-
employment/proprietor’s income)
= Gross domestic income at market price (GDImp)
_ Income paid abroad
+ Income received from abroad
= Gross national income at market price (GNImp)
+ Subsidies
_ Indirect taxes or taxes on expenditure
= Gross national income at factor cost (GNIfc)
_ Depreciation or capital consumption
= Net national income at factor cost (NNIfc)
= National Income
OUTPUT / PRODUCT APPROACH

 The aggregate of all goods and services from

the 3 sectors.
 The components are:
 Primary sectors- agricultural, mining, fishing.
 Secondary sectors- industrial sectors.
 Tertiary sectors- service sector.
The way calculation of output approach:-
The total value of final goods and services from the 3 economic
sectors:-
+ Primary sector
+ Secondary sector
+ Tertiary sector
= Gross domestic product at market price (GDPmp)
_ Income paid abroad
+ Income received from abroad
= Gross national product at market price (GNPmp)
+ Subsidies
_ Indirect taxes or taxes on expenditure
= Gross national product at factor cost (GNPfc)
_ Depreciation or capital consumption
= Net national product at factor cost (NNPfc)
= National Income
 EXPENDITURE APPROACH
 The components are:
 Households expenditure or consumer expenditure
 Producers expenditure or gross investment such
as:-
 New construction such as housing, factories, etc.
 Equipment like machinery tools, etc.

 Changes in business stocks or inventories, example

goods produced but unsold.

 Government expenditure on goods and services,
excluding transfer payments.
The way calculation of expenditure approach:-
Expenditure include household, producer and government:-
+ Consumption
+ Investment
+ Government spending
= Total Domestic expenditure at market price
+ Exports
= Total final expenditure at market price
_ Imports
= Gross domestic expenditure at market price (GDEmp)
_ Income paid abroad
+ Income received from abroad
= Gross national expenditure at market price (GNEmp)
+ Subsidies
_ Indirect taxes or taxes on expenditure
= Gross national expenditure at factor cost (GNEfc)
_ Depreciation or capital consumption
= Net national expenditure at factor cost (NNEfc)
= National Income
 PROBLEMS IN CALCULATING
NATIONAL INCOME
a. Problem of expertise
- The shortage of professional in most developing countries is a major
problem. To estimate national income accurately, the services of
statisticians, analysts, programmers, researches and others. These
professionals will be able to present the national income data with the
minimum technical and human errors.

b. Lack of sophisticated machinery

- Developing countries like Indonesia, India and Peru face the problem of
technical know-how and even technical equipment. They need the latest
and most advanced computers to compute the massive volume of data.

c. Problem of false information

- Businessman and other self-employed people usually underestimate their
earning primarily to evade paying high taxes. This would of course lower
the national income figures of the country. Perhaps stringent rules and
punishment on taxes evaders should be implemented.
Cont….
d. Problem of estimation
- Depreciation- machinery can be considered obsolete and loses its value.
But the question is how obsolete is obsolete? The estimation of
depreciation for every country is differ.
- Imputed rent- owner-occupied houses have a value in terms of rent. Some
owner may overestimate and some may underestimate their imputed rent.
This will result in a distorted of the actual national income of the country.

e. Problem of measuring quality

- In national income accounting we are not merely interested in the quantity
of physical goods and services only, quality is of equal importance. The
problem that arises is how to measure the quality. Can prices of goods and
services reflect accurately the quality of product? There is no absolute
indicator of quality.
 COMPARISON NATIONAL INCOME
OVER PERIOD
a. General price level
- The increase in national income could be due to the general price level,
example the rate of inflation in the country. In other words, there is an
increase in money GNP and not real GNP. This definitely does not reflect
the actual increase in physical goods and services in the country. We are
more interested in real GNP.

b. Income distribution
- Even though national income may have increased, the increase may only
have been enjoyed by a few individuals or perhaps only a certain class in
the society. We can conclude that the standard of living of the common
people has not improved.
Cont….
c. Quality of goods and services
- In addition to the quality of the goods and services for consumers, the
quality must also maintained if not upgrade. Goods of inferior quality do
not constitute a ‘better quality of life’. Higher national income must also
ensure higher craftsmanship and quality must be attained at all times.

d. Population
- The increase in national income may be absorbed by the increase in
population as is the case in China, India, Indonesia and Pakistan. In terms
of per capita income, these countries have not made major improvement
to
their standard of living.
 COMPARISON NATIONAL INCOME
OVER COUNTRY
a. National income concept
- There are two methods in terms of national income accounting. First there
is the Anglo Saxon approach where all goods and services are computed
while the other method, called the Soviet approach, only includes goods
without services. The former method is followed by most capitalistic
societies and those practicing mixed economies like Malaysia and
Singapore, while the latter method is adopted by the communist states.

b. Different treatment of items.

- Some countries include transfers payment such as pensions, scholarship,
etc in the computation of national income. The objective is to inflate the
figures so that it will project a better picture of the country concerned.
- Some countries exclude government activities such as defense, free
education etc.

c. Different units of currency

- Each country using different units of currency, for example the pound
sterling is the strongest of all the currencies in terms of par value. To solve
this problem, a standard currency is used and in most cases, it is the US
dollar (US$).
Cont….
d. Statistic
- Generally poor countries have more formidable task in computing national income
figures than the developed countries. They have to face problem like- lack of
expertise and professional in the field of statistical research, shortage of
sophisticated machinery like advanced computers and lack of understanding of the
importance or the need to co-operate when data is collected.

e. Other factors
- Income distribution. For example, countries like the Middle East, Indonesia and
India have greater income inequality while in Singapore, USA, UK, Malaysia
there
is greater income inequality.
- Working hours and working conditions. UK and USA have five-day week and
better working condition.
- Government expenditure. For instance, India on space research, Korea on nuclear
power etc.
 FACTORS THAT INFLUENCE
NATIONAL INCOME
a. Land
- In economies, the concept ‘land’ encompasses a wide range of activities
which include mining, fishery, agricltural activities etc. Land would also
mean the geographical location of the country, her harbour, climatic
conditions and other natural resources.

b. Labour
- Labour refers to both skilled as well as the unskilled labour, including
professional. Countries with a high proportion of educated labour force
would benefit as the skill level is high. The level of productivity will also
effect the size of national income.

c. Capital
- This factor wouild refer to the development of money and capital markets
in a country. If the banking system and other financial institution are well
established, then capital will be mobile and easily available to the
businessman. Business expansion would ultimately cause the economy to
expand and this will accelerate economic growth.
Cont….
d. Entreprenuership
- An entreprenuer is different from the other three factors of production
because he is involved in risk-taking, both insurable and non-insurable.
The more enterprising the entreprenuer is, the more profits he will reap.

e. Politcal stability
- This is a very vital factor in determining the size of national income and
standard of living. War-torn countries and those facing insurgency and
civil disturbances will not be able to fully concentrate their scarce
resources on economic activities. Their limited factors of production are
channelled to the production of military.
 THE USES OF NATIONAL INCOME
STATISTIC
 To measure standard of living.
- It refers the availability of goods and services in the country together with
other facilities. Leisure time also considered part of standard of living.
Those country with very low national income like Indonesia, Myanmar
would normally also have low living standard.

 Sectorial contributions.
- There are 3 sectors in the economy- primary, secondary and tertiary.
- By analyzing the contribution of each sector, we will able to know which
sector makes the most contribution to nation’s economic growth.

 Expenditure pattern
- Consist 3 components: household, producers expenditure and government
expenditure.
- The expenditure pattern can also reveal the type of economic system the
country practicing. For example, if government does most of the spending,
then we can draw the conclusion that it is a centrally planned economy.
Cont….
 Balance of payment
- Defined as the sum total of payments and receipt that a country earns as a
result of international trading with the rest of the world. If income paid
abroad is far greater than income receive from abroad, there will be an
outflow of currency from the country and this will lead disequilibrium in
the balance of payments.

 National Planning
- The government will formulate the five year plan, ten year plan,
development plan, sectorial activities plan and others based on national
income statistic.
- The government will have to forecast future developments on the basis of
present economic performance.