Formula to Calculate National Income
National Income Formula refers to the formula that is used in order to calculate value of total items manufactured in-country by its residents and income received by its residents and as per the formula, national income is calculated by adding together consumption, government expenditure, investments made within the country, its net exports i.e., exports minus imports, foreign production by resident of country and then subtracting the domestic production by residents of other country.
- C is the Consumption
- G is the government expenditure
- I is the Investments
- X is Net Exports (Exports less Imports)
- F is the National Resident’s Foreign Production
- D is the Non-National Resident’s Domestic Production
Step by Step Calculation Methods of National Income
The following are the methods to calculate national income using its formula.
- Step 1 – The first part is the consumption that needs to be identified and computed and that is nothing, but total expenditure incurred by the country’s government in the procurement of goods and services.
- Step 2 – Infrastructure, capital investments, government employee salary shall form part of total investments made by the government.
- Step 3 – Total investments made within the country also needs to figure out.
- Step 4 – Calculate the export value of goods and services that have been produced within the country.
- Step 5 –Imports Value needs to be calculated as well so this can be excluded for the calculation of national income.
- Step 6 – Next, find out the value of national production by foreign residents.
- Step 7 – Now figure out the value of foreign production by national residents.
- Step 8 – Now sum up all the values from step 1 to step 4 and deduct values computed in step 5 and step 6 and lastly add value arrived at step 7.
We are given the following hypothetical inputs in US$ trillion for economy XYZ. You are required to calculate the national income of the country XYZ.
- Consumption (C): $10
- Government Expenditure (G): $14
- Investments (I): $24
- Depreciation: $2
- Exports: $8
- Imports: $4
- Net Exports (X): $4
- Foreign Production by National Resident (F): $1
- Domestic Production by Non-Resident (D): $3
Therefore, the calculation of the national income is as follows,
- = $10 + $14 + $24 + ($8 – $4) + $1 – $3
National Income will be –
- = $50
Hence, the National Income of country XYZ is $50
Depreciation is not taken into consideration.
Country XYZ and PQR are the two countries wherein the world bank was confused about which country to be rank over the other. The GDP of the two countries was $6,000 billion approximately and therefore the bank decided to rank them on the basis of National Income. Following details were gathered:
|Particulars||Country V||Country Z|
|Government Expenditure (G)||600.00||700.00|
|Foreign Production by National Resident (F)||100.00||200.00|
|Domestic Production by Non-Resident (D)||300.00||100.00|
Based on the above information, you are required to do the calculation of National Income formula and rank which country would be superior to another?
In this example, we are not given all the inputs that are required to calculate National Income but there are certain inputs of National Income which if combined will form GDP which is nothing but summing up Consumption, Government Expenditure, Investments, Net Exports and we are given that and hence we shall use GDP as proxy for same and calculate the National Income.
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Therefore, the calculation of the national income for country XYZ is as follows,
- = (C + G + I + X ) + F – D
- = GDP + F – D
National Income for country XYZ will be –
- = 1,800
Therefore, the calculation of the national income for country PQR is as follows,
- = 2,000 + 200 – 100
National Income for country PQR will be –
- = 2,100
If the bank takes National Income as a decider to rank them then Country PQR will be rank above Country XYZ as Country XYZ has National Income higher by $300 billion.
FPI is considering investing in the country where the National Income of the country is a minimum of US$1,300 billion. Below are the three developing nations which they have shortlisted and are considering investing in:
|Particulars||Country M||Country N||Country O|
|Government Expenditure (G)||2800||2100||1680|
|Net Exports (X)||-6300||-6300||-5140|
|Foreign Production by National Resident (F)||200||150||120|
|Domestic Production by Non-Resident (D)||600||450||360|
All three countries highly import oriented countries.
FPI is looking to invest US$500 million. Based on National Income, you are required to determine where would FPI invest in?
Calculation of the national income for country M is as follows,
National Income for country M will be –
Similarly, we can calculate national income for country N & country O as shown below,
National Income for country N will be –
National Income for country O will be –
The Minimum National Income FPI wanted was 1,300 billion and only one country is matching that criteria which are country M and hence they might invest the entire amount of $500 million in country M.
National Income Calculator
You can use this national income calculator.
|National Income Formula||C + G + I + X + F - D|
|0 + 0 + 0 + 0 + 0 - 0 =||0|
Relevance and Uses
This is a broader version of the gross domestic product as it also includes foreign production by national residents and it excludes any domestic production by non-local residents. This metric is important and is widely used by economists to compare different countries whether yearly or quarterly.
However, the National Income equation includes the effect of inflation and hence while comparing across years or quarters shall warrant inflation adjustment so that the same can be compared in the proper manner. For example, the national income can change, even if the volume has not changed, but its due to price changes from period to period.
This has been a guide to the National Income Formula. Here we discuss the step by step methods to calculate national income using its formula along with practical examples, calculator and downloadable excel template. You can learn more about economics from the following articles –