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National Income

Updated on January 30, 2024
Article byPriya Choubey
Edited by
Reviewed byDheeraj Vaidya, CFA, FRM

What is National Income?

National income is the total value of all economic activities carried out in production capacities owned and run by a nation’s residents. It is measured by aggregating monetary values of final goods and services produced during that financial year.

It ascertains the economic performance, wealth, and growth of a country. National income is studied under macroeconomics; gross domestic product (GDP) and gross national product (GNP) are the two major components. It is evaluated based on income, the addition of value, or expenditure.

Key Takeaways

• The national income (NI) is an aggregate value of the total production of goods and services by a nation’s residents pertaining to a particular accounting year.
• It facilitates standard of living comparisons between different nations. When we divide NI by a country’s total population, we get residents’ per capita income.
• It is represented by the following formula:
National Income = Consumption + Government Expenditure
+ Investments + Net Exports + Foreign Production by Nation’s Residents
– Domestic Production of the Country’s Non Residents

Concept of National Income Explained

The national income (NI) of a nation indicates its yearly economic growth. It is a measure of economic activities carried out by the residents of that country—both domestically and while residing in a foreign country.

For eg:
Source: National Income (wallstreetmojo.com)

The basic National Income formula used for its evaluation is as follows:

NI = C + G + I + X + F – D

Here,

• NI is the National Income.
• C is the Consumption.
• G is the Government Expenditure.
• I denotes Investment.
• X is Net Exports.
• F denotes Foreign Production by Nation’s Residents.
• D denotes Domestic Production of the Country’s Non-Residents.

Also, it can be measured using any of the following three methods:

1. Income Method:
National Income (NI) = Rent + Compensation + Interest + Profit + Mixed Income
2. Expenditure Method:
NI = Household Consumption + Government Expenditure + Investment Expense
+ Net Exports
NI = GDP – Depreciation – Indirect Taxes + Net Factor Income from Abroad

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In macroeconomics, NI is correlated with various other crucial money value measures, as discussed below:

For eg:
Source: National Income (wallstreetmojo.com)

#1 – Gross Domestic Product at Market Price (GDPMP)

GDPMP is the total value of a nation’s goods and services produced locally—during a given accounting year. It is evaluated as follows:

GDPMP = Net Domestic Product at FC (NDPFC) + Depreciation + Net Indirect Tax

#2 – Gross Domestic Product at Factor Cost (GDPFC)

It is the total value of domestic production minus net indirect taxes. It is represented as follows:

GDPFC = GDPMP – Net Indirect Tax

#3 – Net Domestic Product at Market Price (NDPMP)

The NDP MP is the value of total goods and services produced within the nation minus depreciation. It is computed as follows:

NDPMP = GDPMP – Depreciation

#4 – Net Domestic Product at Factor Cost (NDPFC)

The net domestic product at factor cost is the value acquired by deducting the net indirect tax and depreciation from the gross market value of domestic goods and services. It is denoted by the following formula:

NDPFC = GDPMP – Net Indirect tax – Depreciation

#5 – Gross National Product at Market Price (GNPMP)

The GNPMP is the value of overall goods or services manufactured by a nation’s residents. It is represented by:

GNPMP = NNPFC + Net Indirect Taxes + Depreciation

#6 – Gross National Product at Factor Cost (GDPFC)

It is computed by deducting net indirect tax from the aggregate value of all commodities produced by the residents of a country—during an accounting year. It is represented by:

GNPFC = GNPMP – Net Indirect Taxes

#7 – Net National Product at Market Price (PMP)

The NNPMP is the net value of the goods and services generated by production capacities that are owned by residents. It is computed by subtracting depreciation from the gross value. It is computed as follows:

NNPMP = GNPMP – Depreciation

#8 – Net National Product at Factor Cost (NNPFC)

The net national product at factor cost is the value of overall goods or services manufactured by a nation’s residents, excluding indirect taxes and depreciation. It is computed as follows:

NNPFC = GNPMP – Net Indirect Taxes – Depreciation

Example

In 2020, the gross national income of the US was \$21,286,637,000,000.000. In recent years the US reported the following figures:

Clearly, US’s gross national income has been on the rise in recent years.

(Source)

Importance

Governments consider NI crucial for the following reasons:

• Determines Per Capital Income: When we divide NI by a country’s total population, we get residents’ per capita income.
• Facilitates Budgeting: Governments plan their annual revenue and expenditure by considering NI.
• Comparison of Standard of Living: A government can perform internal and external comparisons—either using previous years’ NI data or by comparing NI of other countries. These comparisons reveal changes in a country’s standard of living.
• Identifies Inflation Gap: With the help of NI data, governments can also measure inflationary or deflationary gaps. Consequently, they can implement necessary policies. If expenditure is higher than total output, an inflationary gap is seen. In contrast, when expenditure is less than total output, a deflationary gap is seen.
• Aids in Defense Planning: It acts as a guideline for deciding defense and military expenditures.

What do you mean by national income?

NI is the sum of the monetary value of all the goods and services produced during a financial year—an aggregation of production units belonging to a country’s residents.

How is national income calculated?

There are three different methods of determining NI:
1. Income Method: ‘NI = Rent + Compensation + Interest + Profit + Mixed Income.’
2. Expenditure Method: ‘NI = C (household consumption) + G (government expenditure) + I (investment expense) + NX (net exports).’
3. Value Added or Product Method: ‘NI = GDP – Depreciation – Indirect Taxes
+ Overseas Net Factor Income.’

What are the four components of national income accounts?

Following are the four components of NI accounts:
1. Consumption
2. Government Spending
3. Investment
4. Net Exports

What are the limitations of national income?

The concept has the following drawbacks:
1. Its distribution doesn’t reflect the actual condition of the poor. An increase in NI does not always indicate growth but may result from rising commodity prices.
2. It may arise due to technological advancement. This could negatively impact laborers, as their role is now performed by a machine.
3. It doesn’t account for non-marketed goods or services.

This has been a guide to what is National Income. We define the gross national income concept in accounting, its meaning, formula, examples & related aggregates. You can learn more about it from the following articles –