What’s it: National income is the aggregate income received by all suppliers of production factors used to produce output. It consists of employee compensation, rental income, interest income, profit, owner’s income, and taxes.
Another term for national income is a net domestic product (NDP).
Note: The concept of national income – which I am discussing, differs from gross national income (GNI). The first measures the income earned by domestic economic actors, whether it be foreigners or citizens. It is just another approach to calculating GDP.
Meanwhile, GNI represents the income earned by citizens, regardless of where they produce it, whether at home or abroad. That excludes the income of foreigners or foreign companies around you. This concept differs from the idea of GDP.
Why is national income important
National income is an indicator of a country’s wealth and standard of living. It represents the total income received by the household and business sector. When income increases, the economy is more prosperous, and so do both sectors.
The increase in income also plays a vital role in increasing national savings. Economists divide expenditure from income into two, consumption and savings. What portion is consumed or saved from each additional income depends on the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). So when income goes up, saving should also go up.
The saving rate affects the supply of loanable funds in the economy. A higher saving rate is vital to meeting the investment needs to increase the economy’s productive capacity.
Furthermore, an increase in income also affects aggregate demand. When households are more affluent, for example, they will spend more on goods and services.
You may need to divide the national income figures by the total population, i.e., national income per capita. It shows you a measure of well-being and growth over time. And, for comparisons between countries, you should adjust it for purchasing power parity (PPP) to eliminate the effects of exchange rate differences. Using this last statistic, you can find out the difference in the standard of living between countries.
The following are the reasons why national income is important:
- It is a measure of a country’s income and welfare. You can enjoy it at the national income figure per capita. However, the per capita figures are just aggregate figures and explain the distribution of income among citizens.
- It is useful for measuring the national saving rate and investment in the economy. You can divide national savings by national income to calculate the national saving rate. Remember, national saving equals national income minus consumption.
- Combined with labor force data, it is useful for assessing the rate and rate of productivity growth, i.e., income per worker.
- It is useful in developing economic policy, although having several weaknesses.
How to calculate it
National income represents the sum of all income obtained by factors of production to produce output.
National income = Employee compensation + Company profit before tax + Interest income + Owner income + Rent + Indirect business taxes less subsidies
- Employee compensation consists of wages and benefits. Examples of benefits are pension payments and health insurance.
- Profit before tax includes three components, namely dividends, retained earnings, and corporate taxes paid to the government.
- Interest income is the return on financial capital provided by the lender.
- Owner income (or proprietor’s income) refers to the income flows to the unincorporated business owner and farm operators to run their own business.
- Rent is a return on the rental of property and land.
- Indirect business taxes fewer subsidies. This is part of the national income that is paid directly to the government.
Components 1-5 represent the income earned by the household and business sector. Meanwhile, component 6 represents government revenue, after adjusting for subsidy payments, both to the business sector and the household sector.
Link national income to gross domestic product
National income and gross domestic product (GDP) are basically the same things. I mean, the aggregate income figures must equal aggregate output and aggregate expenditure. However, due to differences in calculation methods and inaccuracy of data sources, adding statistics bureau statistical discrepancy (statistical discrepancies) represents the difference.
Also, because GDP considers the depreciation (decline in value) of fixed assets, we must subtract it to get the national income figure.
National income = GDP – Capital consumption allowance – Discrepancy statistics
Capital consumption allowances, or consumption of fixed capital, is the minimum investment by businesses to maintain current productivity. This investment is equivalent to the depreciation of fixed assets due to wear, aging, and aging.
Linking national income with personal income
The personal income figures that I discuss here are aggregate figures, not personal income figures for each individual. Once again, we are currently discussing the concept of macroeconomics. So, the indicators we use are aggregate indicators, not individual indicators like in microeconomics.
Personal income represents the total income earned by the household. Since the national income figure still includes a business income component, we have to spend it to get the personal income formula.
Personal income = National income – Indirect business taxes – Corporate income taxes – Undistributed corporate profits + Transfer payments
- Indirect business taxes represent taxes included in the price of goods or services such as import duties and value-added taxes.
- Corporate income taxes refer to taxes on the profits earned by the company
- Undistributed corporate profits are also known as retained earnings
- Transfer payments are monetary payments by the government to the household sector
