National income

National income is the total value a country’s final output of all new goods
and services produced in one year. Understanding how national income is
created is the starting point formacroeconomics.

The national income identity

This relationship is expressed in the national income identity, where the

amount received as national income is identical to the amount spent as
national expenditure, which is also identical to what is produced as
national output. Throughout macroeconomics the terms income, output and
expenditure are interchangeable.

See also: the circular flow of income

National income accounts

Since the 1940s, the UK government has gathered detailed records of

national income, though the collection of basic data goes back to the 17th
Century. The published national income accounts for the UK, called the
‘Blue Book’, measure all the economic activities that ‘add value’ to the
economy.

Adding value

National output, income and expenditure, are generated when there is an

exchange involving a monetary transaction. However, for an individual
economic transaction to be included in aggregate national income it must
involve the purchase of newly produced goods or services. In other words, it
must create a genuine addition to the ‘value’ of the scarce resources. For
example, a transaction that involves selling a second-hand good, and which
was new two years ago does not add to national income, though the original
production and purchase does. Transactions which do not add value are
calledtransfers, and include second-hand sales, gifts and welfare transfers
paid by the government, such as disability allowance and state pensions.
The creation of national income

The simplest way to think about national income is to consider what happens
when one product is manufactured and sold. Typically, goods are produced in
a number of 'stages', where raw materials are converted by firms at one stage,
then sold to firms at the next stage. Value is added at each, intermediate,
stage, and, at the finalstage, the product is given a retail selling price. The
retail price reflects the value added in terms of all the resources used in all the
previous stages of production.

Final output

In accounting terms, only the value of final output is recorded. To avoid the
problem of double counting, only the value of the final stage, the retail price,
is included, and not the value added in all the intermediate stages - the costs
of production, plus profits. In short, national income is the value of all the
final output of goods and services produced in one year.

Example

For example, consider the production of a motor car which has a retail price
of £25,000. This price includes £21,000 for all the costs of production
(£6,000 for components, £10,000 for assembly and £5,000 for marketing)
plus £4,000 for profit. To avoid double-counting, the national income
accounts only record the value of thefinal stage, which in this case is the
selling price of £25,000.
Personal income
In economics, personal income refers to an individual's total earnings
from wages, investment enterprises, and other ventures. It is the sum of all
the incomes actually received by all the individuals or household during a
given period. Personal income is that income which is actually received by
the individuals or households in a country during the year from all sources.

'Disposable Income'
Disposable income, also known as disposable personal income (DPI), is the amount of
money that households have available for spending and saving after income taxes have
been accounted for. Disposable personal income is often monitored as one of the many
key economic indicators used to gauge the overall state of the economy.