Details

(RM) Million

Household consumption expenditure (C)

(+) 3000

Private and public investment expenditure (I)

(+) 450

Government expenditure (G)

(+) 400

Changes in inventory

(+) 150

Exports of goods and services (X) Imports of goods and services (M) Net exports (X-M)

700 500 (700 - 500) (+) 200

GDP at market price (

4200

Factor income from abroad Factor income paid abroad Net factor income from abroad

900 800 (900-800) (+) 100

GNP at market price (

4300

Indirect taxes

(-)

(400)

Subsidies

(+) 250

GNP at factor cost (

4150

Depreciation

(-)

(150)

NNP at factor cost (

) / National income

4000

Table 3.2 Calculation of added value Product Product value (RM) Added value (RM)

Logs

8000

8000-0

=8000

Sawn logs

10 000

10 000-8000

=2000

Lumber

16 000

16 000-10 000

=6000

Furniture

22 000

22 000-16 000

=6000

Total added value 5 In a logging activity, the value of logs is equal to the total factor income paid to factors of production to produce the logs, i.e. RM8000. 6 When logs are processed into sawn logs, many other factors of production must be used. The total payment to these factors of production is RM2000 (RM10 000 RM8000). This means that the added value to produce sawn logs is RM12 000. 7 Sawn logs will then be processed into timber. This process will create an added value of RM6000 (RM16 000 RM10 000). Finally, timber is processed into furniture, which is a final good to be used by consumers. This process also creates an added value ofRM600 (RM22 000 RM16 000).

22 000

8 The total added value is equal to the value of the final good (furniture), i.e.RM22 000. 9 The total added value for all goods and services produced in an economy is equal to the total value of final goods in the economy. 10 If the added value method is not used in the calculation of national income using the product method, the value of intermediate goods will be included in the calculation of the value of final goods, thus causing the national product to be overvalued. Therefore, the added value method is used to prevent double counting in the calculation of national product (national income). 11 Using the product method, economic sectors are divided into the following three main sectors: (a) Agriculture and mining sector; covering agriculture, forestry, fishery, and farming, as well as mining and quarrying. (b) Industrial sector; covering factories, construction, and utility supply such as electricity, gas and water. (c) Services sector; covering transportation, communication, trading, hotel and restaurant, financial insurance, property, government services, and other services. 12 The total value of final goods and services created by the economic sectors is equal to the gross domestic product at market price ( ).

13 The GDP at factor cost ( adding subsidies to the .

) is calculated by subtracting indirect taxes and

+ Subsidies Indirect taxes 14 The gross national product (GNP) is calculated by differentiating the products produced by factors of production owned by citizens of the country that are located abroad from the products produced by factors of production owned by foreign citizens that are located within this country. Therefore, = + Factor income from abroad Factor income paid abroad ) or national income is generated . Depreciation

15 The net national product at factor cost ( when depreciation is subtracted from the =

16 An example of calculation of national income through the product method is shown in Table 3.3

Table 3.3 Calculation of national income using the product method Economic sectors 1 2 3 4 5 6 7 8 9 10 Agriculture, fishery, livestock, and forestry Mining and quarrying Industries Construction Utilities Transportation, storage and communications Trade and commerce, hotels and restaurants Finance, insurance, and real estate Government services Other services GDP at market price ( ) 11 Factor income from abroad Factor income paid abroad Net factor from abroad GNP at market price ( ) 12 13 Indirecttaxes Subsidies GNP at factor cost ( ) 14 Depreciation NNP at factor cost ( ) / National income (-) (-) 700 600 (700 600) (+) 100 5710 (250)
(RM) Million

(+) 1800 (+) 800

(+) 2000 (+) (+) 500 90

(+) 100 (+) (+) (+) (+) 110 80 60 70 5610

(+) 100 5560 (70) 5490

Income (Factor Cost) Method 1 Using the income method, the income of factors of production consists of: (a) Rent (from land) (b) Wages and salaries (from labour) (c) Interest (from capital) (d) Profit (from entrepreneurs). 2 In the calculation of national income using the income method, the income of factors of production consists of: (a) Wages and salaries (b) Net interest (Gross interest Interest on consumer loans Interest on government loans) (c) Rent (d) Private corporate income (e) Corporate profit. 3 National income is generated from the total income of factors of production. 4 Interest from consumer and government loans must be subtracted from national income, because both these forms of interest are not considered to be income for capital used for national production.

5 Interest on consumer loans is charged on consumer loans for the purchase of goods such as houses and cars (not for purposes of investment). 6 Interest on government loans is charged to governments that borrow money to finance national expenditure, such as expenditure on defence and security. 7 Income from transfer payments is not included in the calculation of national income because this income is not income from productive factors. Examples of transfer payments are pensions to retirees, scholarships for students, and unemployment allowances. 8 An example of calculation of national income using the income method is depicted in Table 3.4. Table 3.4 Calculation of national income using the income method Items 1 2 Salaries and wages Net interest Gross interest Interest on consumer loans (-) Interest on government loans(-) 3 4 Rent Private corporate income 500 50 120 (+) (+) (+) 330 90 350 (+) (RM) Millions 3000

Corporate profit Dividends Undistributed profit Corporate income tax 150 200 170 ) / National (+) 520 4290

NNP at factor cost ( income