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CHAPTER 2 NATIONAL INCOME ACCOUNTING

2.1 Introduction

(a) National income statistics e.g., (GNP), (GDP), (NNP),

(NDP) and (NI) are which describe the performance of an

economy.

(b) They are used as measures of all produced goods and sericesealuated at prices.

(c) Three !ey points in this definition "

(i) #urrently produced

It is astock / flow concept which measures the alue of output per period of

time (usually a year).

mar!et transaction of second hand cars, old housesshould / should notbe

counted in the GDP.

(ii) $inal goods and serices

Intermediate goods are not counted in GDP to aoid

Ta!e a noodle ma!ing factory as an e%ample, the alue of wheat and flour (

goods)should / should notbe added to the alue of noodle ( goods) in

calculating the GDP.

(iii) &aluated at mar!et prices

GDP is measured in dollar terms at mar!et alue.

'll , and selfproided goods and serices are e%cluded from the

GDP.

Exercise 1

tudy the following case and identify which items should be included in the calculation

of GDP.

*n +arys birthday, her mother ba!ed a ca!e which worth -/0 if sold in the mar!et.

+arys mother had spent -1/ on buying eggs, -0 on flour and -20 on cream. 'nd a

friend of +ary bought counterfeit #Ds at -00 from a haw!er as birthday gift.

1

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2.2 Circular Flow of Inco! "#.1$%

3ouseholds

real flow

$irms money flow

a. c.

b. d.

4y definition, mar!et alue of all outputs 5 5

2.$ A##roac&!' of M!a'ur!!nt of National Inco! "#.2(%

(1) &%penditure approach

GDP 5

Remarks :

(i) Buying flats are treated as instead of expenditure.

(ii) Change in stock is treated as expenditure.

(iii) Buying stocks and shares are / are not investment.(i) overnment expenditure is valued at rather than at market prices.

() !ransfer payments are included / excluded.

() *utput 6 alueadded approach

(2) Income approach

NI 5

Remarks :

(i) "nterest income from holding government #onds should / should not #e included.

(ii) $ capital gain is / is not an income.

(iii) %" is e&ual to %%' / %' at .

( )rom %" to personal income *'"+ and disposa#le personal income *,'"+ *p.1-+

'" %"

,'" '"

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2.) R!lat!d M!a'ur!' of National Inco! Accountin*

(1) GDP and GNP (p.17)

GDP measures the alue of all goods and serices produced by

in a gien year.

The factors of production may be supplied by residents or nonresidents.

GNP measures the total earned by from engaging in production in a gien

year.

It does not matter where residents carry out their production.

( Resident production units :

!hey are production units which maintain a centre of in the economic

territory of the country or region.

)or organi0ation resident production units refer to those which normally

and in the economic territory of a region.

( Residents :

"t refers to those who in the economic territory.

!he residents of a region may or may not have the right of a#ode in a region.

)oreign employees working in 23 on long term contracts *more than 1 year+ are

/ are not regarded as the residents of 23.

GNP 5 GDP 8

Exercise 4

GNP 9 GDP, if the net income from abroad is .

GNP : GDP, if the net income from abroad is .

GNP 5 GDP, if the net income from abroad is .

() NNP

NNP 5 GNP

(2) GNP at mar!et prices (GNPm) and at factor cost (GNPf) (p.1;)

GNPf 5 GNPm

NI 5NNP at

5 GNPm

(

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GNP) (p.1=)

Implicit GNP deflator 5 GNP (>) 6 GNP (?) % 100

reflect the oerall price leel (P)

(i. e., >6? % 100 5 P? 5 >6P % 100? 5 > % 1006P where 100 is the price

inde% of the base year and P is the current oerall price inde% and is !nown as

implicit GNP deflator.)

(/) GNP per capita

GNP per capita 5 GNP 6

Exercise 5

1=7= 1==0 1==1

't current mar!et prices

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If national income is largely concentrated in the hands of a few people, the liing

standard of the maEority is still .

(;) #omposition of output may be distorted

'erage standard of liing will not be high (at present) if a large part of the GNP

consists goods for or6and large part of goernment e%penditure is on .

(@) Prices change oer time

'n increase in GNP at current mar!et prices may not necessary imply a rise in real

GNP (which reflects the liing standard). +aybe it is only the result of a rise in the

.

(7) &%change rate fluctuates oertime

The fluctuation in affects the accuracy of conerting statistics into one

single currency for cross country comparison.

/