Measuring National Products: Gross Domestic Products (GDP):

Measuring GDP:The Aggregate Expenditure (AE) approachThe production approachThe income approach

Nominal Vs Real GDP Limitation of GDP concepts

2

Circular Flow in economy

Firms

Government

Bank

Households

Y

S

Transfer payments

Taxes (Tx)

I

G

C

Foreign sector

XM

1

2

3

44-sector economy:

Y = C + I + G + (X – M)

Measuring GDP:1. Aggregate Expenditure (AE) Approach: measure GDP by adding all the aggregate spending for final goods and services by all economic sectors. GDP = C + I + G + (X – M)(Using aggregate expenditure (AE) data to measure GDP and GNP)

2. Production Approach: measure GDP by adding the value of all final goods and services produced by all economic sectors.(Using GDP data by sector and Pie chart to measure GDP by Production Approach, and to show that GDP by AE approach = GDP by production approach).

3. The income approach: measures GDP by adding all the incomes earned by households in exchange for the factors of production during a period of time.GDP = compensation of employees + rents + corporate profits + net interest + indirect taxes minus subsidies + proprietors’ income.

Notes: Malaysia is not using the income approach as another alternative in calculating GDP. Therefore, no data is available.

• National Income & product accounts = data collected and published by government describing the various components of national income and output in the economy.

• GDP: a measure of the production of goods and services in a country in a given year, no matter by whom they are produced.

• GNP: a measure of the production of goods and services by citizens of a country, no matter where in the world they reside. – Nominal GDP = GDP measured based on the current prices (actual

value of GDP)– Real GDP= GDP measured based on the prices existing in a

selected base year.

National Income Measures:GDP = C + I + G + (X – M)(GDP = Gross Domestic Product)GNP = GDP + Net Factor income from abroad(GNP = Gross National Product)NNP = GNP – Depreciation(NNP = Net National Product = National Income)Personal Income = NNP – Corporate Profit – SOCSO & EPF + Transfer Payment + Dividend.Disposable income (Yd) = Personal income –Personal Taxes

Limitations of the GDP concept:Some serious problems arise when we try to use GDP as a measure of welfare/ well-being.1.Nonmarket Transactions: most of nonmarket household production are not counted in GDP. Household production refers to goods & services people produce for themselves, such as child caring, cleaning the house, preparing the family meals, and do-it-yourself home repair & services.2.Distribution of output: GDP tells us nothing about:

• The distribution of output among individuals in a society

• What kind of output are being produced (consumer goods or military goods)

3. GDP & social welfare:• If crime level went down, society would be better off. But it is not reflected in GDP.• An increase in leisure means an increase in social welfare. But an increase in leisure leads to a decrease in GDP because less time is spent on producing output.•GDP seldom reflects social costs, such as water, air & noise pollution created in the production process.

4. Underground economy: GDP does not include unreported criminal activity, such as illegal gambling, prostitution, loan-sharking, and illegal drugs.

Government Budget

• Government budget: a document, which lists all the things the government plans to spend money on and all the sources of government revenues.

• Budget policy: budget deficit/ budget surplus/ balance budget: refer Federal Government Budget pie chart