National Income

The meaning of national income is the aggregate income of the economy. Calculating
it is a challenging task as a lot of numbers have to be added up. It is a rather complex
accounting process and takes a lot of time. What would we know if we knew a
country's national income? Well, we would gain a better understanding of quite a few
things, such as the following:

Gauging the overall size of the economy;

Assessing the overall productivity of the economy;

Identifying the phases of the economic cycle;

Evaluating the 'health' of the economy.

As you can probably tell, calculating national income is an important task. But who is
responsible for it? In the US, it is the Bureau of Economic Analysis and the report on
national income they regularly publish is called the National Income and Products
Accounts (NIPA). Various income sources combined make up a country's national
income, often called the gross national income (GNI).

National income is the sum of all the income made in the economy on an aggregate
level. It is an essential measure of economic performance.

A nation’s income is a fundamental indicator of its economic structure. For example,

if you are an investor who wants to expand your company's horizons within the
international market, you would emphasize the national income of the country you are
going to invest in.

Therefore, a country’s national income accounting is critical for its development and
planning from international and national perspectives. Calculating a nation’s income
is an effort that requires rigorous work.

How is national income calculated?

There are three methods for calculating the income of any economy:

The income approach;

The expenditure approach;

The value-added approach.

The income approach

The income approach tries to sum up all the incomes earned in the economy. The
provision of goods and services generates cash flows, termed income. There must be a
corresponding payment for all the output generated in an economy. Calculation of
imports is not necessary in this case as foreign purchases are automatically accounted
for in this approach. The income approach totals incomes across several categories:
employees' wages, proprietors' income, corporate profits, rent, interest, and taxes on
production and imports.

The income approach formula is as follows:

GDP=Total Wages + Total Profits +Total Interest + Total Rent + Proprietors

income + Taxes

The expenditure approach

The logic behind the expenditure approach is that someone else's income is someone
else's expenditure. By summing up all the expenses in the economy, we can arrive at
the exact figure, at least in theory, as in the income approach.

Intermediate goods, however, should be excluded from the calculation using this
approach to avoid double counting. The expenditure approach, therefore, considers all
the spending on final goods and services produced in an economy. Expenditures
across four major categories are considered. These categories are consumer spending,
business investment, government spending, and net exports, which are exports minus
imports.

The expenditure approach formula is as follows:

GDP=C + I + G + NX

Where:

C = Consumer Spending

I = Business Investment

G = Government Spending

NX = Net Exports (Exports - Imports)

The value-added approach

Recall that the expenditure approach ignored the intermediate values of the goods and
services and only considered the final value? Well, the value-added approach does the
opposite. It adds all the additional values created at each step of the production
process. However, if each value-added step is calculated correctly, the total sum
should equal the product's final value. This means that, at least in theory, the value-
added approach should arrive at the same figure as the expenditure approach.
The value-added approach formula is as follows:

Value-Added=Sale Price−Cost of Intermediate Goods and Services

GDP=Sum of Value-Added for All Products and Services in the Economy

The three ways of calculating national income provide a theoretical backbone for
accounting for a country's economic performance. The reasoning behind the three
methods suggests that, in theory, the estimated federal income should be equivalent,
whatever approach is used. In practice, though, the three approaches arrive at different
figures due to the difficulties in measurement and a massive amount of data.

Measuring national income in several different ways helps to reconcile the accounting
differences and understand why they arise. Understanding these measurement
methods helps to find the driving factors behind national income creation and,
therefore, economic growth of a country.

Measurement of National Income

The measurement of national income is a complex task, without a doubt. There are
few ways to measure a nation’s income, but they are more or less similar to each
other. We call these measurement tools national income metrics.

As showwn above, there is a continuous flow of money as spending, expenses,

profits, income, and revenue. This flow happens due to goods, services, and factors of
production. Understanding this flow helps us to gauge the size and structure of the
economy. These are the things that contribute to a nation’s income.
 For example, if you are buying a good, you would transfer your money to final goods
markets. After that, firms will take it as revenue. Similarly to this, to keep their
production, firms will rent or acquire things from factor markets like labor and
capital. Since households are providing the labor, the money will go through a
circular movement.
National income is measured from these circular movements. For example, GDP
equals the total amount spent by households on the final goods.

 The most commonly used approaches to measuring national income are as

follows:
o Gross Domestic Product (GDP)
o Gross National Product (GNP)
o Net National Product (GNI)

Gross Domestic Product

In the contemporary world, we most often use Gross Domestic Product (GDP) as a
measurement of a nation’s income. No matter what your background is, it is highly
likely that you have come across this term at least once in your life. In a closed
economy, GDP measures the total income of every agent and the total expenditure
made by every agent.
Gross Domestic Product (GDP) is the market value of all final goods and services
produced within a country’s borders in a given period of time.
In light of this knowledge, we say that the gross domestic product (Y) is the sum of
the total investments (I), total consumption (C), government purchases (G), and net
exports (NX), which is the difference between exports (X) and imports (M).
Therefore, we can denote a nation's income with an equation as follows.

Y=C+I+G+NX
Gross National Product
Gross national product (GNP) is another metric that economists use to evaluate a
nation’s income. It is different from GDP with some minor points. Unlike GDP, the
gross national product doesn’t limit a nation’s income to its borders. Therefore,
citizens of a country can contribute to the country’s gross national product while
producing abroad.
Gross national product (GNP) is a metric to evaluate the total market value of goods
and services made by a country’s citizens regardless of the country’s borders.
GNP can be found with a few additions and subtractions to GDP. For calculating the
GNP, we aggregate GDP with any other output produced by the citizens of the
country outside of the country’s borders, and we subtract all output made by the
foreign citizens within a country’s borders. Thus, we can arrive to the GNP equation
from the GDP equation in the following way:
Net National Product
All of the national income metrics are rather similar, and obviously, net national
product (NNP) is not an exception. NNP is more similar to GNP than to GDP. NNP
also takes any output outside a country’s borders into account. In addition to that, it
subtracts the cost of depreciation from GNP.
Net national product (NNP) is the total amount of output produced by a country’s
citizens minus the cost of depreciation.
We can denote the net national product of a country with the following equation: