National Income Formula

Introduction: What is National Income?

National income is the total monetary value of products and services produced by a country in a given period of time. In other words, national income shows the income from all factors generated in a given production year. Therefore, by the term national income, we mean the total income of a country in a year.

The national income of a country can be calculated in three ways. The income method relies on the earnings generated through factors such as land and labor. The expenditure method is based on the government’s investments and consumptions. In contrast, the third method, also known as the value-added method is based on the value added to a product in its manufacturing process.

It is worthwhile to note that in calculating the national income, the income made abroad by national citizens is included while the revenue made by non-nationals in the domestic market is excluded from the calculation. Therefore, you must add the national citizen’s income to the equation and subtract the non-national or foreign citizens’ income from the equation.

Example: Household income distribution in Japan, 2014

National Income Formula

The formula for calculating national income is:

$$\mathrm{National\:Income\:=\:C\:+\:G\:+\:I\:+\:X\:+\:F\:-\:D}$$

Where,

C denotes the consumption

G denotes the government expenditure

I denotes the investments

X denotes the net exports (Exports subtracted by imports)

F denotes the national resident’s foreign production

D denotes the non-national resident’s domestic production.

Step-by-Step Calculation of National Income

Step 1: Calculation of Consumption of the Government

The first step in the calculation of national income is to estimate and measure the consumption of the government. The consumption of the government is the expenditure incurred by the government in procuring goods and services. It is denoted by C in the national income formula. A notable fact in calculating consumption is that care must be taken to include all goods and services in the economy. If any good or service is excluded in the calculation of consumption, the final value of national income may be faulty.

Step 2: Calculating the total expenditure

The next step in the process of calculating national income is to find the total expenditure of the government. For this, the costs involved in building infrastructure, capital expenditure of the government, and salaries paid to government employees in different organizations must be included. Like the calculation of consumption, the calculation of expenditure must include all elements that make up the expenditure of governments. In the case, one skips any particular expenditure item, the final outcome of finding the national income may be erroneous.

Step 3: Calculating total investments

In this step, all investments made by the government in various projects and services must be included. Total investments show the government’s investment in only domestic and not in foreign economies. Hence, the data for investment must be free from errors. In order to do that, the domestic investment data must be only taken, excluding the foreign investment data of the government.

Step 4: Determining the value of exports

The fourth step in the calculation of national income is to determine the value of the total exports of the country. This should include all the commodities and services that are exported from the nation to foreign economies. This is an important step in the equation because it shows the ultimate value of a nation’s economic prowess in terms of exports. The more the value of exports, the stronger is the nation in terms of economic prowess and national income.

Step 5: Determining the value of Imports

Imports are also an important factor in the calculation of the national income of a country. The imports of a nation in terms of goods and services must be calculated in detail in order to calculate the national income of the economy. Imports must be less than exports for a nation to be stronger in terms of economic progress. When the import is too high, the government needs to spend too much of its capital which hurts the national economy. Therefore, imports must be limited if the national income is required to be within bearable limits.

Step 6: Determination of domestic production by foreign nationals

The domestic production made by foreign producers is the next item that must be calculated in order to calculate the national income. Usually, this factor is deducted from the total sum of other factors in the equation; so, the value of this factor must be lower than the income of domestic citizens in foreign economies. If there are too many foreign producers in an economy, it is considered detrimental to the economic health of the nation.

Step 7: Determination of foreign production by domestic citizens

The seventh step in the process of calculation of national income is to determine the income of national citizens in foreign markets. This is important because if the income of national citizens in a foreign market is higher, it is a good sign for the economy. It is easy to see why. This is so because when the income of national citizens is higher, it means the income the country makes from other economies is more than the expenditure it makes in foreign economies. That is why it is an important factor in the calculation of national income.

Step 8: The final calculation of the national income

In this step, the values obtained in steps 1 to 4 are added while the values obtained in 5, and 6 are deducted while the value of step 7 is again added to the equation.

Note − In a nutshell, the national income contains both items of income and expenditure of the government. All the factors that constitute income are added while factors that make up the expenditures are subtracted to get the final value of the national income. In other words, the national income of a country is the representation of expenditures and incomes made by the government in a certain period of time. It is an indicator of the economic strength of the country.

Conclusion

The national income of a country is a very important indicator of the health of its economy. If the national income is good, the country is making enough economic progress while in the case it is not satisfactory, the condition of the economy is not doing good. Therefore, national income calculated via the national income formula is an indispensable tool to measure the strength of an economy.

FAQs

Qns 1. What is meant by national income?

Ans. National income is the total monetary value of products and services produced by a country in a given period of time. In other words, national income shows the income from all factors generated in a given production year. Therefore, by the term national income, we mean the total income of a country in a year.

Qns 2. What is the national income formula?

Ans. The formula for calculating national income is -

$$\mathrm{National\:Income\:=\:C\:+\:G\:+\:I\:+\:X\:+\:F\:-\:D}$$

Where,

C denotes the consumption

G denotes the government expenditure

I denotes the investments

X denotes the net exports (Exports subtracted by imports)

F denotes the national resident’s foreign production

D denotes the non-national resident’s domestic production.

Qns 3. Why should export be more than imports for the national income to be better?

Ans. In the calculation of national income, we consider net export which is exports minus imports. In this sense, if exports are more than imports, the net export will be positive which will increase the value of national income.