Calculating National Income

In order to determine the quality of life and standard of living of a country, the government must measure the
total of all economic activity in the country. This important measure is referred to as the ‘National Income’.
National Income is any additions to the wealth of a country for a specific period (usually a year). The concepts
discussed below will be necessary in calculating the national income:

 Gross Domestic Product (GDP) – the total money value of the goods and services produced within a
country.

 Gross National Product (GNP) - the total money value of the goods and services produced both
locally and abroad by companies that are owned by local individuals/the government. This income
from abroad is called Net Factor / Property Income from abroad. This figure can be a negative figure
if the foreign branch sends less of the money it earns back to its home country.

 Net Property Income (NPI) – the difference between income earned by Jamaicans and Jamaican
Income abroad and income earned by foreigners and foreign investment here.

 National Income (NI)/Net National Product (NNP) - is the total money value of all goods and
services produced by a country within a one year, after deducting depreciation/expenses.

Therefore

 GDP + Net Property Income = GNP

 GNP – Capital Consumption ( Depreciation) = National Income ( Net National Product)

The Circular Flow of Income

Terms to note:

 Depreciation: the reduction in the value of an asset over time.

 Net income from abroad: Exports minus imports (X-M)
 Transfer income: incomes earned in the previous year but are now redistributed to persons. E.g.
pensions and grants to students. These incomes are not the result of present production. They should
not be included in present NI calculations as this will result in double counting.

Calculating National Income

The National Income can be calculated using three (3) main methods:
1. Income Method
2. Expenditure Method
3. Output/Product Method
N.B. Whichever method is used will result in the same figure as each method is measuring the same thing
(how much goods and services are produced by the country).

1. 1. Income Method – this method totals all income earned by/within the country, within a year. Eg.
Personal income, profits of firms, rent, etc.

Formula: Income from Employment + Profits + Rents + Net Factor Income from Abroad (X-M) = GNP –
Depreciation = NI
To improve the accuracy of this measure:

 Deduct transfer income

 Add income from government activities
The government obtains the figures used in this formula from income tax returns data and some of the figures
are estimated. In addition, a large portion of the country’s Gross National Product (GNP) is not accounted for
because there are several persons who neglect to pay taxes (such as: baby sitters, taxi drivers, car repairmen and
people who sell on the road side). Since some figures have to be estimated, NI figures are never truly accurate.
The government has to apply certain methods to ensure that the figures used in the formula are not added twice
(double counting).

2. Expenditure Method
1. This method involves totaling the amount spent by consumers, businesses and the government within a
year. (By calculating all that was spent by a country, one can determine how much was earned.) Spending
by consumers(C), government (G) and investment on goods used to produce future goods (I), Net exports
difference between export and imports (X-M).

Formula: C + G + I + (X-M) – Taxes + Subsidies = GNP – Depreciation = National Income

Figures used in this formula are obtained from the census of distribution which records the value of sales and
the census of production which records the value of investment goods produced and addition to stock. Some of
the figures are also estimated.

3. Output Method – the total of all goods and services produced in the country, whether by the government or
private individuals. In this method, one can use the final costs of finished products as the costs to be added to
arrive at the total output, or one can choose to add the cost of adding value to raw material at each stage of
production until the finished product is completed.

Formula: Total Domestic Product or GDP + Net Factor Income from Abroad = GNP – Depreciation = NI
C+G+I + (X-M) – Depreciation = National Income

An example

In an imaginary country called Cocoland, there are six individuals and a private sector that produces raisins and
bread.

a. Ran, the fearless leader who is responsible for running the country.
b. Lester who produces flour
c. Angela who produces bread
d. Clive, who works for Lester
e. Peter, who works for Angela
f. Sophie, a skilled multi-tasker who works for the government providing all public services to the citizens of
Cocoland.

The output method:

During the year $5000 worth of flour and $8 500 worth of bread are produced and $11 500 worth of services are
supplied by the government. Angela bought all the flour from Lester to produce bread.
Output
 $ $

Government (G) 11 500

Flour (I) 5 000

Value-added by Angela

Output (bread) (I) 8 500

Less input (flour) 5 000 3 500

National Income 20 000

Note: to avoid double counting of flour only the value added in making the bread is included in calculations.

The income method:

 Clive, Peter and Sophie earn a total of $7 500 after taxes for working for their employers. They pay
$350 in taxes to the government.
 Lester earns a profit of $3 150 selling flour while Angela’s profit is $3 500.
 Both Lester and Angela had to rent land and other factors at a total cost of $5 000.
 Sophie received a grant $500 from the government to continue her studies.
 Ran earned $1 000 by providing health services to residents.

Income

$ $

Income from employment 7 500

Add direct taxes 350 7 850

Profit:

Lester 3 150

Angela 3 500 6 650

Rent 5 000

Income from government services 1 000

20 500

Less transfer income: student grant (500)

National Income 20 000

The expenditure method

 Peter, Clive, Lester and Angela together spent $7 000 on bread and flour.
  Lester invested $2 500 in new stock building.
 Angela invested $1 500 in new equipment.
 Sophie bought a house valued at $2 700.
 Ran spends $3 500 providing services such as healthcare to citizens of Cocoland.
 Residents of Cocoland imported $2 600 worth of goods and exported goods valued at $5 900.
 Government provided subsidies of $500 to Lester and Angela.
 Angela old equipment depreciated by $ 1 000 for the year

Expenditure

$ $

Consumption 7 000

Investment:

Stock building 2 500

Equipment 1 500

Residential investment 2 700 6 700

Government 3 500

Net Export:

Export 5 900

Less Import 2 600 3 300

Subsidies 500

Less depreciation 1 000

National Income 20 000