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2 National Income
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain national income terms such as GDP, GNP and NNP;
2. Differentiate the three methods of calculating national income;
3. Assess four reasons for the significance of national income
accounting;
4. Recognise five problems regarding national income accounting;
and
5. Calculate the economic growth rate.
INTRODUCTION
This topic will start off with a discussion on economic activities as a whole,
focusing on the establishment of a total national income, and its relation to
aggregate consumption, aggregate investment and price levels. We will study the
information on our national income, which includes gross national product,
gross domestic product and other components. Such collation of information is
known as national income accounting.
Table 2.1: Definition of Nominal National Income and Real National Income
There are two factors that distinguish between market price and factor cost
which are as follows:
(a) Indirect taxes: Examples include road tax, service tax, import tax and export
tax.
The market price of a certain item differs from its factor cost. To obtain the factor
cost from market price, we need to make the following adjustments:
Therefore, in order to obtain the GDPfc, we need to subtract indirect taxes from
GDPmp and add subsidies.
Where:
Net income of factors from abroad = Total income earned by production factors
from abroad Total income earned by production factors to abroad
For example:
GNPfc = GDPmp Indirect Taxes + Subsidies + Net Factor Income from Abroad
(NFIFA)
For example, refer to Table 2.2, which shows the difference between national
GDP and GNP at market price from 1995 to 1999.
Table 2.2: Malaysias GDP and GNP at Market Price (1995 to 1999)
It can be seen that Malaysias GNP from 1995 to 1999 is less than its GDP. This
means that the total income earned by production factors to abroad was higher
than the total income earned by production factors from abroad (net factor
income payment to abroad is negative).
ACTIVITY 2.1
SELF-CHECK 2.1
To calculate a nations GDP at market price using the expenditure method, add
all four components of expenditure, that is:
Table 2.3 shows an example of how to calculate national income using the
expenditure method.
RM RM
Item
Million Million
ACTIVITY 2.2
Search the Internet to find out what the following means:
EXERCISE 2.1
Calculation Question
(a) Calculate the annual net factor payment from abroad at current
price from 1994 to1998.
(b) Explain what net factor payment from abroad means.
(c) Calculate the real GDP per capita from 1994 to 1998.
(d) Draw a graph to show the relationship between the real GDP per
capita and time.
(e) Define the direction of flow for Malaysias real GDP per capita
from 1994 to 1998 based on your answer to question (d).
When calculating the national income using this method, we should take into
consideration only the final output value. The value of intermediate products is
not taken into consideration in the calculation of GNP. Otherwise, there will be
double counting.
For example, the process of producing shirts involves several stages. First,
cotton is used, which is then processed into thread, and from thread to cloth. It is
only from cloth that a shirt can be produced. Since cotton, thread and cloth are
intermediate products, their values need not be taken into consideration in the
calculation of national output. Only the value of the shirt, which is the final
product, is taken into account.
ACTIVITY 2.3
What does value added mean? How and why do we need to consider
value added? Discuss these questions with your tutor and friends
during your tutorial.
Value Value
Type of Income
(RM Million) (RM Million)
Net interest
Profit of companies
ACTIVITY 2.4
2.4.5 Depreciation
It is quite difficult to define the extent of depreciation because there are no
complete records regarding depreciation in various fields of economic activities.
Depreciation, from a business stand point, may be defined differently because of
the various capital goods and depreciation calculation methods used. Each
method of calculating depreciation will give a different value.
SELF-CHECK 2.2
In these calculations, the national income and its components must be stated at a
fixed price, which means that the price of a product is based on a chosen year
Copyright Open University Malaysia (OUM)
24 TOPIC 2 CALCULATION OF NATIONAL INCOME
and not the current price. To calculate the economic growth rate, we will use this
formula:
For example, if the real GDP for year 2000 is RM14,000 million and the year
before is RM13,000 million, then the economic growth rate for 1999 is:
ACTIVITY 2.5
State the economic growth rate from 1995 to 2000. The lowest
economic growth rate was in the year ________. In your opinion,
what was the cause of the low economic growth rate during that
period?
EXERCISE 2.2
A. Consumption expenditure.
B. Government expenditure.
C. Depreciation.
D. Net exports.
4. Assume that the total market value of all final goods and services
produced in Malaysia in 1999 was RM15,000 million and the total
market value of all final goods and services sold was RM14,500
million. We can conclude that _____________.
The three methods used for calculating national income are expenditure,
production and income methods.