Principle of Macroeconomics

PRINCIPLE OF
MACROECONOMICS

NATIONAL INCOME ACCOUNTING

FARAH AZUA BINTI OTHMAN

JABATAN PERDAGANGAN
POLITEKNIK SEBERANG PERAI

1

PRINCIPLE OF
MACROECONOMICS

NATIONAL INCOME ACCOUNTING

FARAH AZUA OTHMAN

2021

JABATAN PERDAGANGAN
POLITEKNIK SEBERANG PERAI

©All rights reserved. No part of this publication may be translated or reproduced in any retrieval
system, or transmitted in any form or by any means, electronic, mechanical, recording, or
otherwise, without prior permission in writing from Politeknik Seberang Perai.

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All rights reserved

No part of this publication may be translated or reproduced in any retrieval system, or transmitted
in any form or by any means, electronic, mechanical, recording, or otherwise, without prior
permission in writing from Politeknik Seberang Perai.

Published by

Politeknik Seberang Perai
Jalan Permatang Pauh, 13500 Permatang Pauh

Pulau Pinang

Tel : 04-538 3322 Fax : 04-538 9266
Email : [email protected] Website : www.psp.edu.my
FB : politeknikseberangperai Ig : politeknikseberangperai

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Synopsis

Principle of Macroeconomics is a ebook published and distributed for internal reference use
of the Commerce Department at Politeknik Seberang Perai for semester two students taking
the DPB20033 Macroeconomics course. It is prepared in parallel with the latest polytechnic
syllabus that is contain 7 topics. But for this ebook series, it is containing ONLY one topic
in Macroeconomics courses which is about National Income Accounting. This topic is very
difficult to understand than another topic because it is about calculating the national
income. This ebook was created to help students understand a few fundamental concepts,
calculation and included some exercises and tutorial; at first, it discusses the basic concept
in calculating National Income. The second is about to understanding the method that our
country used in calculating National Income and the last subtopic is about problem in
calculating National Income and the uses of national income data.

Key Features
• Presents the topics in an accessible manner using simple English and suitable tables,
figures, and illustrations.
• Addition to appropriate work training in line with the standard of final semester
examination questions at the polytechnic level.
• Includes worked examples to enhance student’s understanding of the topic.

Hopefully this publication can enhance students to understand better as it contains interesting
concise summaries and calculation work paths that students can follow easily and effectively.

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Table of Content

NATIONAL INCOME ACCOUNTING Pages

1.0 THE CONCEPTS OF NATIONAL INCOME 6
6
1.1 National Income 6
1.2 Gross Domestic Product 8
1.3 Gross National Product 9
1.4 Market price and Factor Cost 9
1.5 Net National Product 10
1.6 Personal Income 10
1.7 Disposable Personal Income 10
1.8 Per Capita Income
14
2.0 APPROACH IN CALCULATING NATIONAL INCOME 17
21
2.1 Expenditure Approach
2.2 Product Approach 27
2.3 Income Approach
29
3.0 PROBLEMS OF CALCULATING NATIONAL INCOME
29
4.0 PROBLEM OF COMPARISON OF NATIONAL INCOME BETWEEN COUNTRIES 30

5.0 PROBLEM OF COMPARISON OF NATIONAL INCOME BETWEEN TIMES

6.0 THE USES OF NATIONAL INCAME DATA

5

NATIONAL INCOME ACCOUNTING
COURSE LEARNING OUTCOME:

After reading this chapter, students should be able to:

✓ Understand the concepts of National Income

✓ Calculate the 3 methods /approaches in calculating National income

o Expenditure Approach
o Product Approach
o Income Approach

✓ Calculate Personal Income and Disposable Income
✓ Calculate Per capita Income
✓ Explain the problems in calculating National income
✓ Explain the problem of comparison of National Income between countries and times
✓ Explain the uses of National Income Data

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NATIONAL INCOME ACCOUNTING

1.0 THE CONCEPTS IN CALCULATING NATIONAL INCOME

Before we learn about how to calculate the national income, firstly the students must understand
the concept in calculating National Income.

1.1 NATIONAL INCOME (NI @ Y)

National Income is the total value of all final goods and services produced during a year
by a resident in a country. National Income (NI @ Y) also known as Net National Product
at factor cost(NNPfc). Only the value of all final goods and services will be calculated in
National Income to avoid the problem of double counting. However, it is sometimes
difficult to determine for a certain goods either it is final goods or intermediate goods.
For example, flour.

1.2 Gross Domestic Product (GDP)

Is the total value of all final goods and services produced by local citizen and foreign
worker produced in a country during a year but GDP excludes the value for final goods
and services produced by local citizens working overseas. For example, In Malaysia, all
the value of final goods and services produces by Malaysian citizens and foreign workers
like from Bangladesh and Nepal will be calculated in National Income.
There are two types of GDP:
1.2.1 Gross Domestic Product at factor cost (GDPfc)
1.2.2 Gross Domestic Product at market price (GDPmp)

1.3 Gross National Product (GNP)

Is the total value of all final goods and services produced by the residents of a country
working in a local country and working overseas but excludes the value of final goods
and services produced by foreign workers working in a country. In Malaysia, only the
money value for all final goods and services produces by Malaysian citizens who are
working in Malaysia and Malaysian citizens who are working in oversea will be calculated
in National Income.

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There are two types of GNP:
1.3.1 Gross National Product at factor cost (GDPfc)
1.3.2 Gross National Product at market price (GDPmp)

The differences between GDP and GNP is Net factor Income receive from abroad
(Nfifa) @ factor income receive from abroad (local citizen working overseas) – factor
income paid to abroad (foreign worker working in a country).

GNP = GDP + - net factor income from abroad (nfifa)
= GDP +- (factor income received from abroad - factor income paid abroad)
= GDP +- (fira – fipa)

To understand more about GDP and GNP, figure 1 below shows about differences between
this concept.

Figure 1: The Differences between GNP and GDP

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1.4 Market Price and Factor Cost
1.4.1 Market price

Market price is referred to the current price in the market through the forces of
demand and supply. Market prices are the actual prices paid by customers includes
indirect tax and excludes subsidies given to producers. Relationship between indirect
tax and subsidies is negative or inverse relationship. For example, if government
increase indirect tax, it is means that government will reduce subsidies for final goods
and services.

1.4.2 Factor cost

Factor cost is referred to the real prices earned by producers or sellers before
government impose direct taxes or subsidies. Normally the value of goods in
market price is more than the value of goods in factor cost.

The differences between GDPmp and GDPfc is direct tax and subsidies.

GDPmp = GDPfc + indirect tax - subsidies
GDPfc = GDPmp – indirext tax + subsidies

GNPmp = GNPfc + indirect tax – subsidies
GNPfc = GNPfc = GNPmp – inrect tax +subsidies

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1.5 Net National Product (NNP)

Net National Product (NNP) is the net total money value of all final goods and services
produced by a nation during a year.
To calculate NNPfc, GNPfc is minus the value of capital consumption or depreciation
during a year.
There are two types of NNP:
1.5.1 Net National Product at factor cost (NNPfc) @ National Income.
1.5.2 Net National Product at market price (NNPmp)

NNPfc @ National Income (Y) = GNPfc – depreciation

1.6 Personal Income (PI)

Personal Income is the income that is receive by all an individuals and households in an
economy in a year. For example, if the total employed for country X is 20 million. It is mean
that the value of personal income for country X is the total sum income for 20 million
people. Personal income can be used for 3 purposes which is to spent/buy goods and
services, used to pay taxes and for saving.
From National Income data, Personal Income can be calculating by deduct this following item:
1.6.1 Corporate/company income taxes
A part of company/corporate profits that are paid to the government. It is not including in
calculating personal income because it is not own by individuals.
1.6.2 Retained earnings/Undistributed profits
It is also a part of company profits retained by company and not distributed among
shareholder. This profit usually used to expand the business, rolling capital or for
precaution purposes. It is not a part of an individual income.
1.6.3 Social security contributions (SOCSO) and Employees Provident Fund (EPF)
A percentage contribution of the worker’s income to provident funds or pension funds. Itis
not a part of an individual income because worker’s only get these funds after they
retired/pension. Contribution to SOCSO means that payment of benefits to workers and/or
their dependents when tragedy strikes. It is not a part of current personal income.
1.6.4 Insurance premium – This is a certain percentage of income that used to pay
insurance. Contribution to the insurance means that payment of benefits to workers or
to theirs dependent when tragedy strikes. It is means that insurances are not a part of
current personal income.

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Personal Income can be derive from national income by adding this following item:
1.6.5 Transfer payment
The government gives social security benefits to the person who are disable to work
productive such as handicap/disable person, old age pensions or unemployment
allowance. Transfer payment must add into national income because it is a part of
individual income.
1.6.6 Interest on consumer and government loans
Consumer interest is interest charged on consumer credit accounts such as personal loans,
automobile loans and credit card debt. It is a part of individual income. Interest on government
loans also a part of individual income because personal income consists of income received,
regardless of whether the income is generated from contributions to national production or not.

1.7 Disposable Income (DPI)
Disposable personal income also known as disposable income is the amount of money that
an individual or household has to spend/purchase goods and services and for saving
purpose which is after personal/individual income taxes have been deducted. It means that
disposable income is netincome.

Disposable Income (DPI) = Personal Income (PI) – Personal/individual Income Taxes

1.8 Per capita Income
Per capita Income refers to the average income per head of population.

Per capita Income = National Income (NI)
Total Population

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Figure 2: Formula to compute Personal Income (PI), Disposable Personal Income (DPI) and
Percapita Income from National Income data.

EXAMPLE 1

The following table below shows an economy’s national income data in a year 2020 for country M.

Total population for country M is 3.4 million.

ITEMS RM (Million)

National Income 9660.6

Employment Provident Fund 2480.2

Company Profit 4648.4

Transfer Payment 490.4
Interest on government loans 808.9

Interest on consumer loans 655.5

Company income taxes 3300.0

Social security contribution (SOCSO) 1080.8
Retained earning 848.4
Personal income taxes 1843.0

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Based on the above information,

a) Compute Personal Income (PI)
b) Calculate Disposable Personal Income (DPI)
c) Calculate Per capita income

Answer

a) ITEMS RM (Million)
9660.6
National Income 490.4
Transfer Payment 808.9
655.5
Interest on government loans (2480.2)
(3300.0)
Interest on consumer loans
(1080.8)
Employment Provident Fund
Company income taxes (848.4)

SOCSO 3606.0

Retained earnings

Personal Income (PI)

b) RM Million
3906
ITEMS (1843)
Personal Income (PI) 2063
Personal income taxes
Disposable Personal Income (DPI) RM(million)
9660.6 m
c) 3.4 m
2,841.35
ITEMS

National income
Total population

Per Capita Income

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2.0 Methods of measuring national income

There are 3 methods of measuring national income because national income is capable of being
viewed from 3 dimensions which is total output/production, income or expenditure. The total
national income calculated must be the same if using any method. For example, National Income for
country A is 100 billion.

INCOME = PRODUCTION/OUPUT = EXPENDITURE
100 billion = 100 billion = 100 billion

National income can be calculated by using 3 approaches/methods below:
i) Expenditure approach
(C + I + G + Nx (X-M) = GDPmp
ii) Production approach
(primary +secondary + tertiary sector economics) = GDPmp
iii) Income approach
(Salaries + Wages + rent + net interest + company/corporate profit) = NNPfc @ NI

In Malaysia, only the production /output (value added) and expenditure approach/method are used
in the calculation of national income. For example, Malaysia's economy as reflected by the GDPat
purchaser's prices or market prices was estimated at RM540 billion in 2005 by two approaches i.e.
the production and expenditure approach as shown in Table A below:

Sources: Department of Statistics, Malaysia.

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2.1 EXPENDITURE APPROACH

Calculating National income using expenditure approach by adding all the expenses from buying
goods and services in a country during a year. This includes:
2.1.1. Public Consumption Expenditure by the government sector on final goods and services. (G)
2.1.2. Private Consumption Expenditure by the private sector on final goods and services. (C)
2.1.3. Formation of Public Gross Fixed Capital (Public Investment) by the government sector on

machinery and equipment. (I)
2.1.4. Private Gross Fixed Capital Formation (Private Investment) by the private sector on machinery

and equipment. (I)
2.1.5. Changes in Inventory (Value of unsold stockpiles) (∆i)
2.1.6. Net Export (Xn) = Export - Import

Consumption/Private Spending/household expenditures (C) RM Million RM Million
+ Government Spending/Public expenditure (G) xx
+ Private & Public/Gross Investment (I) xx xx
xx xx
@ Net investment
+ Depreciation xx xx
+ Change In Stock/Inventory (I) xx xx
+/-Net Export
@ Export
- Import

Gross Domestic Product at market price (GDPmp) XXX

+/- Net factor income received from abroad (Nfifa) xx
@ factor income received from abroad (fira) xx
– factor income paid abroad (fipa) xx

Gross National Product at market price (GNPmp) XXX

- Indirect Tax xx
+ subsidies xx
Gross National Product at factor cost (GNPfc) XXX

- Depreciation xx
Net National Product at factor cost (NNPfc) XXX
@ National Income

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EXAMPLE 2

The following table shows the value of economic activities of a country K in 2019.

Items RM Million
Consumption expenditure 8500
Depreciation 2200
Net factor income from abroad 4850
Net Interest 2800
Imports 3880
Exports 5200
Public investment 7200
Government expenditure 4350
Subsidies 1140
Indirect taxes 1200
Personal income tax 1300
Transfer payment 1500

From the data, calculate the value of

a) Gross Domestic Product at market price (GDPmp)

b) Gross Domestic Product at factor cost (GDPfc)

c) Gross National Product at factor cost (GNPfc)

d) National Income (NI)

Answer:

a) Gross Domestic Product at market price (GDPmp)

Items 5200 RM Million
Consumption expenditure 3880 8500
Government expenditure GDPmp 4350
Public investment 7200
Net Export 1320

Exports 21370
Imports

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b) Gross Domestic Product at factor cost (GDPfc)

Items RM Million
GDPmp 21370
- Indirect taxes 1200
+ Subsidies 1140
21310
GDPfc

c) Gross National Product at factor cost (GNPfc)

Items RM Million
GDPfc 21310
+ Net factor income from abroad 4850
26160
GNPfc

d) National Income (NI)

Items RM Million
GNPfc 26160
- Depreciation 2200
23960
GNPfc

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2.2 PRODUCTION / VALUE ADDED/OUTPUT APPROACH

According to the production method, national income is calculate by adding all the value of final goods
and services produced by various economic sectors in a country in a given time of period, usually
withina year or quarter.

To avoid the problem of double counting, national income is calculate by adding the value added
created by economic sectors. Value -added is an increase in the value (value in money value) of each
stage of the production process in a particular economic activity.

Here, the value of output stands for the market value of goods produced by an enterprise during a
financial year. Intermediate consumption stands for the value of non-factor inputs like the value of
raw materials. Here is an example to clarify this point further, a baker buys flour worth RM100 from
a millerand then converts that flour into bread worth RM120.

• Here, flour is an intermediate good valued at RM100, and its value is regard as
‘intermediateconsumption’.

• Bread, an output product valued RM120, is regarded as ‘value of output’.
• Therefore, the difference of RM20 is the ‘value-added’ and it is the net value added to

the
economy by the baker.

Here is a more comprehensive example of this method explained in this following table.

Producers Stages of Production Selling Price Cost Price Value Added
Farmers Wheat 80 0 80
Millers Flour 100 80 20
Baker Bread 120 100 20
300 180 120
Total

The value added method includes the contribution of each stage of production into the
calculation.Thus, it eliminates the possibility of double counting.

There are 3 economic sectors:

Primary sector/ Secondary sector/ Tertiary sector/

Main economic sector Industrial sector Service sector

• Mining & quarrying •Manufacturing • Transportation, storage
• Agriculture •Construction • Communication
• Forestry •Utilities (electricity, gas & • Wholesale, retail, hotel, restaurant
• Fisheries water) • Finance, insurance & real estate
• Government Services
• Other services

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Economics sector RM Millionxxx
Mining & Quarrying xx
+ Agriculture, Forestry, & fisheries xx
+ Manufacturing xx
+ Construction xx
+ Electricity ,Gas and Water xx
+ Wholesale, retail, hotel & restaurant xx
+ Transportation, storage & communication xx
+ Finance, insurance & real estate xx
+ Government services xx
+ Other services
XXX
Gross Domestic Product at market price (GDPmp)
xx
+/- Net factor income received from abroad xx
@ (factor income received from abroad xx
– factor income paid abroad)
XXX
Gross National Product at market price (GNPmp)
xx
- Indirect Tax xx
+subsidies xx
Gross National Product at factor cost (GNPfc)
Xx
- Depreciation
XXX
Net National Product at factor cost (NNPfc)
@ National Income

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EXAMPLE 3

The following table below shows an economy’s national income data in a year 2018 for country AZ.

ITEMS RM (Billion)
25.0
Constructions 5.2
2.5
Finance, insurance, real estate and business services 1.5
4.0
Utilities 30.4
0.2
Indirect taxes 1.8
13.0
Manufacturing 0.7
18.6
Mining and quarrying 4.0
1.6
Subsidies

Depreciation

Transportation, wholesales, and communications

Government services

Agriculture, fishery, and forestry

Net factor income received from abroad

Other services

Based on the above information, Calculate the National Income (NNPfc) for country AZ.

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Answer:

ITEMS RM (Billion)
25.0
Constructions 5.2
2.5
+ Finance, insurance, real estate, and business services 4.0
30.4
+ Utilities 13.0
0.7
+ Manufacturing 18.6
1.6
+ Mining and quarrying 101.0
4.0
+ Transportation, wholesales, and communications 105.0
1.5
+ Government services 0.2

+ Agriculture, fishery, and forestry 103.7
1.8
+ Other services
101.9
Gross Domestic Product at market price (GDPmp)

+ Net factor income received from abroad

Gross National Product at market price (GNPmp)

- Indirect taxes

+ Subsidies

Gross National Product at factor cost (GNPfc)

-Depreciation

National Income (NNPfc)

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2.3 INCOME APPROACH

To calculate national income using income approach by adding all income received/reward from
factorsof production (land, labor, capital, and entrepreneur) in a country during a year. Reward
from land is rent, rewards for labor is wages or salaries, rewards from capital is interest and
reward for entrepreneur or ownership is profit.

Components of income includes:

i) Compensation of employees - This is the reward or compensation paid to employees for
rendering productive services. It includes wages and salaries, Employer’s contribution to
social securityschemes, housing allowance, bonus, allowance, house rent allowance, leave
travelling allowance etc.

ii) Operating surplus - It includes rent, profit and interest. Profit includes corporate tax, dividend
and undistributed profit.

iii) Mixed income of self employed - Income of own account workers like farmers, doctors,
barbers etc, and unincorporated enterprises like small shopkeepers, repair shops retail
traders etc, is known as mixed income.

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EXAMPLE 4

The following table below shows an economy’s national income data in a year 2020 for country M.

ITEMS RM (Million)
Company Profit 4648.4
Interest on government loans 808.9
Interest on consumer loans 655.5
Company income taxes 3300.0
Retained earnings 848.4
Personal income taxes 1843.0
Salaries and wages 3561.0
Net Interest 535.6
Income from rental 915.6

Based on the above information, Calculate the National Income (NI) for country M.

Answer RM Million

ITEMS 3561.0
535.6
Salaries and wages 915.6
Net Interest
Income from rental 4648.4
Company profit
National Income 9660.6

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Figure 3: An optional path that can be used to find the value of national income
through expenditure and output methods

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TUTORIAL

1. The following table shows the national income data of a country Z in 2018 with the total

population of 45 million people.

Items (RM billion)
Private expenditure 60.5
Depreciation 8.0
Rent 8.6
Gross investment 20.1
Export 18.3
Government expenditure 44.8
Imports 15.1
Net factor income from abroad -2.5
Salaries and wages 60.0
Net interest 20.2
Subsidies 8.9
Private corporate income 15.4
Company profits 12.8
Indirect taxes 10.0
EPF contributions 15.0
Transfer payment 2.5
Undistributed company profit 5.0
Company income taxes 3.0
Interest on consumer and government loans 3.5
Personal income taxes 10.0

Based on the table above,

i) Calculate National income (NNPFC) of a country Z by using the expenditure approach.

ii) Calculate National income (NNPFC) of a country Z by using the income approach.

iii) Calculate Personal income.
iv) Calculate Disposable personal income.
v) Compute Per capita income.

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Answer
i)

Item (RM Billion)
60.5
+ Private expenditure 44.8
20.1
+ Government expenditure 3.2

+ Gross investment 128.6
2.5
+ Net Export
126.1
+ Export 18.3 10.0
8.9
- Imports 15.1
125.0
GDPMP 8.0

- Net factor income from abroad 117.0

GNPMP 60.0
8.6
- Indirect taxes 20.2
15.4
+ Subsidies 12.8
117.0
GNPFC
117.0
- Depreciation 15.0
5.0
National Income @ NNPFC 3.0
2.5
ii) 3.5
Salaries and wages 100.0
Rent 10.0
Net interest
Private corporate income 100.0
Company profits 10.0
National Income (NI) 90.0

iii)
National Income (NI)
- EPF
- Undistributed company profit
- Company income taxes
+ Transfer payment
+ Interest on government and consumer loans
Personal Income (PI)
Personal income taxes

iv)
Personal Income (PI)
- Personal income taxes
Disposable Personal Income

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v) Per capita income = National Income
Total population

= 117,000,000,000 @ 117 billion
45,000,000@ 45 million

= RM 2,600

2. The following table shows the national income data in Country XOxo in year 2019.

ITEM RM (million)
Compensation of employees 9000
Taxes on corporate profit 4000
Dividends 6500
Undistributed profit 3800
Interest received on saving and fixed deposits 6550
Interest payment on personal loans 1650
Rental income 4820
Income from self-employment 5000
Employee Provident Fund (EPF) 4450

Calculate:
i. Net National Product at factor cost (NNPfc)
ii. Personal Income

Answer 9000
i. 5000
Compensation of employees 4820
+Income from self-employment 3800
+ Rental Income 4000
+ Undistributed profit 6500
+ Taxes on corporate profit 6550
+ Dividends 39,670
+ Interest received on saving and fixed deposits
Net National Product (NNPfc) 39,670
1650
ii. 4450
3800
Net National Product (NNPfc) 4000
+ Interest payment on personal loans
- Employee Provident Fund (EPF) 29,070
- Undistributed profit
- Taxes on corporate profit
Personal Income

27

3.0 Problem in Calculating National Income

DOUBLE COUNTING
ACCURACY OF INFORMATION
UNPAID ACTIVITIES
TRANSFER PAYMENT
ILLEGAL ACTIVITIES
DEPRECIATION

3.1 Double Counting

Double counting is an issue that is most prominent while determining national income. It refers
to thecounting the value of a good more than once. The problem of differentiating of certain
goods whetherit is intermediate or final goods is very complex and acute in the computation of
national income. For examples wheat flour. For a baker, wheat flour is the intermediate goods
that used to produce bread while for the consumer, wheat flour is the final goods. If the price of
bread has been calculate in the calculation of national income, and at the same time, the price
of flour also be calculate. Double counting occurs and the national income data inaccurate
information. That is why only final goods are be calculated in national income.

3.2 Accuracy of information and lack of reliable data

The calculation of national income becomes lack of reliable data if there are some workers do
not register their actual income. For example, workers who have two or more jobs at one time or
do multi-occupations not recorded in the national income data. Sometimes, the information
provided also is incomplete and inaccurate. It may not store systematically, and it is happen
especially in the underdeveloped and developing countries. For example, farmers do not keep
an actual income recordof the amount produced.

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3.3 Unpaid activities

Many activities productive are unpaid but not included in calculation of nation income. It is
because only income receives, or activities paid in money such as salary and wages are included
in the calculation of national income. Similarly, when a housewife cooks for the family, her
activity is not included in the GNP, but when she cooks in a restaurant and gets paid, her services
are included in GNP.

3.4 Transfer Payments

Transfer payments refer to those income payments that are not the result of any current
productive activity on the part of income receivers such as scholarships, disability allowance and
unemployment allowance. Certain types of governments expenditure also such as defense,
security, a social service is exclude from the calculation of national income. This will also result
inaccurate representation of thenation’s national income.

3.5 Illegal activities

Some illegal activities such as gambling, and prostitution are productive activities. For certain
countries such as Malaysia, illegal activities are not considered include into our national income
data. However, in somecountries this activity is illegal and include into their national income
data. It means that our country have less national income

3.6 Depreciation

Difficulty calculating the depreciation of an item. Reducing depreciation of goods, accidental
damage, repairs, and replacement charges from state revenue is not an easy task. It requires a
high degree of judgment to assess the provision for depreciation and other charges. Depreciation
cannot be valued accurately. This will also result in an inaccurate estimation of national income.

29

4.0 PROBLEM IN COMPARISON OF NATIONAL INCOME BETWEEN COUNTRIES.

4.1 Differences in data collection
During calculating National Income, data collection problems tend to arise. For example, in
barter system, income from illegal activities and depreciation data are difficult to obtain.
Therefore, National Income data cannot be calculated accurately. Some developing countries
and less developed countries do not have accurate information about their economic activities.

4.2 Differences working hours
Certain countries like Japan practice longer working hours and less rest time will have a higher
per capita income compare with countries only practice normal working hours (8 hours per
day).

4.3 Differences the concept of national income.
Certain countries like Malaysia, illegal activities are not considered include into our national
income data. However, in some countries this activity is illegal and include into their national
income data. It means that our country has less national income.

4.4 Differences in General Price Levels and Cost of Living between countries.
For example, the price of petroleum in Singapore is more expensive than in Malaysia. This
indicates the high cost of living and spending in Singapore.

5.0 PROBLEM IN COMPARISON OF NATIONAL INCOME BETWEEN TIMES.

5.1 Problems of Pricing Goods
The price of goods tends to change from time to time or season and varies between places in
a country. Thus, it is difficult to determine the real price of goods to calculate the value of
output contributed by each sector in the economy. For example, the price of goods during the
festive season is high compared to other seasons which makes the calculation of national
income less accurate.

5.2 Different Quality of goods and services
It is difficult to comparing the quality of goods change over time. Our perceptions about quality
of goods are the higher the price of goods will have more quality. GDP does not measure quality

30

or nature of the product, which contributes to the satisfaction level of the consumers.

5.3 Different currencies.
One obvious difficulty in comparing national income among countries stems from the fact
that different countries use different currencies. The use of official exchange rates would not
provide an adequate comparison. At such an exchange rate, a burger in Mexico and in the U.S.
would have the same price in dollars.

6.0 THE USES OF NATIONAL INCOME DATA.

6.1. Able to measure the economic growth rate over time

The rate of economic growth can be measure by using the real value of the country's output.
By comparing real national income data between the current year and the previous year, the
rate of economic growth can be measure. If the rate of economic growth increases, this means
that the economic activity of the country is getting better. On the other hand, if the rate of
economic growth decreases, this means that the economic activity of the country declines.
Each country will strive to achieve a high rate of economic growth by implementing certain
policies.

6.2. To measure the performance of an economic sectors using product/output approach.

In the calculation of national income according to the output approach, the contribution of
each economic sector to Gross Domestic Product (GDP) can be measure. Based on the
contribution of each sector, the importance of each sector to the country's economic growth
can be determined. In addition, national income data can also show the growth rate of total
output of each sector from year to year, which is either increased or decreased compared to
the previous year.

6.3. As a guideline for government to create national income planning.

From calculating national income data, the government can implement the government policy
in forecasting and planning for the future economy to enhance economic growth. According
to the output method, the government can compare the contribution of economic sectors
from time to time.

31

6.4. To measure standard of living among countries and between time.
Per capita income data can be used to measure the living standards of the people.

Per capita income = National income / Total population

The higher the value of per capita income, the higher the standard of living of the people, on
the other hand, the lower the value of per capita income.

6.5. To indicate government policy is success or failure.
According to the output method, the government can compare the contribution of economic
sectors. Government can determine the importance of the economic sector to the
development of the country.
According to the output method, the output values of the first sector, second sector and third
sector can be calculate.

% of sectors = Value of output of each sector X 100
The output values of all sectors

Based on the percentage contribution of the sector can determine the performance and
importance of each sector to the development of the country.

Figure 4: The Uses Of National Income Data

To measure To indicate
standard of government
living among policy is success
countries or or failure
between time
To measure rate To measure the As a guideline using indicator
of economic performance of for government per capita
growth over an economic to create income.
time sectors using national
product economic
approach planning

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