National income in simplest terms refers to the wealth of a nation. The wealth of an economy is measured by the value of goods and services produced in the economy. It is the total monetary value of goods and services produced in a nation within a financial year. It may include payments made to all types of resources in the form of rent, wages, profits, and interests.
National income is a concept that comes under the purview of macroeconomics. It helps economists and policymakers in the preparation of budgets and various economic policies.
The key features of National Income are as follows:
National income is a macroeconomic concept. Macroeconomic studies focus on aggregate calculations and as national income is an aggregate measurement it is a macroeconomic concept.
National income considers the monetary value of goods and services. That is why it is a concept that deals with the monetary valuation of goods and services.
National income is measured over a certain period of time. Therefore, there is a factor of time attached to it. It is therefore a flow concept.
National income considers the net aggregate values of goods and services. It includes the value of goods and services produced in the same accounting year. It does not take into account the consumption of fixed capital and depreciation.
To avoid double counting, national income considers the value of only final goods. The value of intermediary goods is not considered in the measurement of national income.
National Income includes net factor income from abroad (NFIA). So, national income includes the net export value and net receipts.
The circular flow of national income refers to the continuous flow of national income and expenditure in a circular manner.
The circular flow of national income in a simple economy includes the following steps:
Households represent themselves as owners of factors of production. They are also the consumers of goods and services in the economy.
The business sector is the producer of goods and services and it sells them to the household sector.
The businesses make factor payments to the households.
The households make payments to businesses for goods and services
Therefore, one man’s income is another’s expense.
The common concepts of national income include GDP, GNP, NNP, and NI.
Gross Domestic Product (GDP)
GDP at market price is the money value of all goods and services that are produced within the domain of its borders with the available resources during a year. This includes production within the domestic territories.
$\mathrm{GDP=P×Q}$
where,
P = Price of goods and services
Q = Quantity of goods and services
There are four components of GDP; they are as follows:
Consumption
Investment
Government expenditure
Net foreign exports of a country
Hence,
GDP = C + I + G + (X−M)
where,
C = Consumption
I = Investment
G = Government expenditure
X = Export
M = Import
Gross National Product (GNP)
GNP = GDP + NFIA
or
GDP = C + I + G + (X−M) + NFIA
Where,
C = Consumption
I = Investment
G = Government expenditure
X = Export
NFIA = Net factor income from abroad.
NFIA = Net factor income from abroad.
Net National Product (NNP) at MP (Market Price)
This is the market price of the net output of final goods and services produced by an economy within a financial year and the net factor income from abroad.
NNP = GNP − Depreciation
or
NNP = C + I + G + (X−M) + NFIA + IT − Depreciation
where,
C = Consumption
I = Investment
G = Government expenditure
X = Export
M = import
NFIA = Net factor income from abroad.
IT = Indirect Taxes
National Income (NI)
This is also sometimes called the National Income at factor cost which means the total income earned by the contribution of factors of production which are land, labor, capital, and entrepreneurship. So, the total income achieved by factors of production in the form of rent, interest, wages, and profit is called National Income.
Symbolically or as per the formula
NI = NNP + Subsidies − InterestTaxes
or,
NNP = GNP − Depreciation + Subsidies − InterestTaxes
or,
NI = C + G + I +(X−M) + NFIA Depreciation + Subsidies − Indirect Taxes
Income Method
The income method of measurement of national income consists of the contribution of factors of production.
Rent: Rent is the money one has to pay for use of any land or place where the production facilities are created. Rent does not include payments for machinery and other equipment. Royalties offered for assets are also included in rent.
Compensation for labor: Salaries, wages, bonuses, allowances, and medical reimbursements are included in this category. Insurance, pension, and provident funds are also included in compensation for labor.
Interest in the capital: This includes an interest in loans taken by organizations. In economics, the interest includes only the part of interest for production units.
Profits: After the payment of taxes and dividends, the remaining amount is known as profit.
Mixed-Income: It is the income of independent workers and sole proprietorships.
So,
National Income = Rent + Compensation + Interest + Profit + Mixed income
Expenditure Method
National Income according to the expenditure method can be represented as
National Income = C (household consumption) + G (government expenditure) + I (investment expense) + NX (net exports)
Here,
household consumption of goods and services represents Consumption expenditure (C). It also includes the government’s expenditure on various goods and services to fulfil social welfare needs (G). Investment expenditure is the expenditure incurred by companies and production units for raising capital (I). and the net exports (NX) are the total exports minus total imports.
In the output method, a country’s national income can be calculated by the addition of the output of all the production firms in the economy. The national income is calculated in terms of final goods and services produced in an economy within a given period of time. The final goods are those which are either available for consumption or are a form of investment as a part of national wealth.
As is obvious, the measurement of national income is a key tool to derive the economic power of a nation. As it shows the strength of the economy, economists are always interested in hiking the national income by various methods.
However, without real income, no country can camouflage the books of account for the long term as an absence of real income hits the economy from all angles. That is why strengthening the national income parameter by economic means is the best option.
Q1. Which is the most common concept of national income?
Ans. Although there are other definitions, the concept of GDP or Gross Domestic Product is the most common concept of national income.
Q2. What are the three methods of calculating national income?
Ans. The three methods of calculating national income are the income method, expenditure method, and output method.
Q3. How can we calculate national income with the output method?
Ans. The country’s national income can be calculated by the addition of the output of all the production firms via the output method.
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