National income is defined as the total monetary value of all services and goods produced by a country over a given time period. In other words, it is the total of all factor income generated during a given production year.
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National income is a measure of a country's economic activity. It can be calculated using one of three methods: the income method, the value-added method, or the expenditure method.
The income method is primarily based on the earnings generated by production factors such as labour and land. The expenditure method is based on investment and consumption, whereas the value-added method is primarily concerned with the value added to a product during the manufacturing process.
National Income Formula
National income formula = C + G + I + X + F – D
Where,
The letter C denote the consumption.
The letter G denote the government expenditure.
The letter I denote the investments.
The letter X denote the net exports (Exports subtracted by imports).
The letter F denote the national resident’s foreign production.
The letter D denote the non-national resident’s domestic production.
Step by Step Calculation Methods of National Income Formula
The methods for calculating national income using its formula are as follows.
Step 1 – The first component that must be identified and computed is consumption, which is nothing more than the total expenditure incurred by the country's government in the procurement of goods and services.
Step 2 – Infrastructure, capital investments, and government employee salaries must all be included in the government's total investments.
Step 3 – Total investments made within the country must also be calculated.
Step 4 – Determine the export value of goods and services manufactured in the country.
Step 5 – The value of imports must also be calculated so that it can be excluded from the calculation of national income.
Step 6 – Next, determine the value of domestic production by foreign residents.
Step 7 – Determine the worth of foreign production by national residents.
Step 8 – Now add all of the values from steps 1 to 4, deduct the values computed in steps 5 and 6, and finally add the value obtained in step 7.
Example of National Income Formula
National Income formula equals GDP + Foreign Production by National Residents – Domestic Production by Non-National Residents.
National Income equals ＄3,000 billion + ＄900 billion – ＄600 billion.
National Income equals ＄3,300 billion.
National Income Formula Macroeconomics
Economists use national income accounting to assess a country's economic performance. To calculate GNP, we use two methods: the expenditure approach, which adds up all of the purchases citizens made in the previous year, and the income approach, which adds up all of the earnings citizens received in the previous year.
A country, like a business, needs to know how well it is performing economically. National income accounting provides statistics that show whether the economy is doing well or struggling. |
