Updated July 26, 2023
National Income Formula (Table of Contents)
What is National Income Formula?
The term ‘national income’ refers to the total monetary value of all the final goods and services produced by a nation during a certain phase of a period (usually a year).
In other words, it is the sum of all the factor incomes generated during the production of a nation’s output. National income is one of the broad indicators of a nation’s economic activity. One can derive its formula by subtracting domestic production by non-national residents and imports from the sum of consumption, government expenditures, investments, exports, and foreign production by national residents.
The mathematical representation is as follows:
Examples of National Income Formula (With Excel Template)
Let’s take an example to understand the calculation of the National Income in a better manner.
National Income Formula – Example #1
The following information is available for the year ending on December 31, 2018. Calculate the national income of the nation during the year based on the given information:
Solution:
One calculates the National Income of the nation using the formula given below:
National Income = Consumption + Government Expenditures + Investments + Exports – Imports + Foreign Production by National Residents – Domestic Production by Non-National Residents
Here,
- National Income = $5 trillion + $7 trillion + $12 trillion + $4 trillion – $2 trillion + $0.5 trillion – $1.5 trillion
- National Income = $25 trillion
Thus, the national income stood at $25 trillion during the year.
National Income Formula: Example #2
Let us take the example of another country where we have its Gross Domestic Product (GDP), from which we have to calculate the country’s national income. The following information is available for last year. Calculate the national income of the country based on the given information.
Solution:
The National Income of the nation is calculated using the formula given below:
National Income = GDP + Foreign Production by National Residents – Domestic Production by Non-National Residents
Here,
- National Income = $3,000 billion + $900 billion – $600 billion
- National Income = $3,300 billion
Thus, the country managed a national income of $3,300 billion during the year.
Explanation
One can derive the formula for national income by using the following steps:
Step 1: First, figure out the monetary value of the nation’s consumption, which is the total value of consumer expenditure in purchasing goods and services.
Step 2: Next, figure out the investment made by the government within the country. It may include infrastructure, government employee salaries, and other capital investments.
Step 3: Then, figure out the total investments made within the country, including the capital investments.
Step 4: Next, determine the monetary value of all the goods and services produced. This includes both being produced within the country and exported to other foreign nations.
Step 5: Then, determine the monetary value of all the goods and services imported from other foreign countries.
Step 6: Figure out the value of foreign production by national residents. This includes all the goods and services produced by the national residents outside the country.
Step 7: Next, figure out the value of domestic production by non-national residents, which includes all the goods and services produced by foreign nationals within the country.
Step 8: Finally, the formula for national income can be derived by subtracting domestic production by non-national residents (step 7) and imports (step 5) from the sum of consumption (step 1), government expenditures (step 2), investments (step 3), exports (step 4), and foreign production by national residents (step 6), as shown below.
Relevance and Uses of National Income Formula
It is important to understand the concept of national income because economists use it as an alternative to compare a nation’s performance across different quarters of the year or the same quarters of different years. However, one must note that it includes the effect of inflation. As such, comparison across quarters or years warrants adjustments in terms of the inflation rate so that the national income is compared correctly. For instance, the national income would change, even if the output volume does not change, due to changes in price from one period to another.
The value of GDP and national income would be the same for a closed economy. However, no economy is closed in today’s world, and all nations are interconnected regarding trade and employment. As such, imports, exports, employment to foreign nationals, and incomes of expatriates constitute a significant part of the national income of any country.
National Income Formula Calculator
You can use the following National Income Calculator
| Consumption | |
| Government Expenditures | |
| Investments | |
| Exports | |
| Imports | |
| Foreign Production by National Residents | |
| Domestic Production by Non-National Residents | |
| National Income | |
| National Income = | Consumption + Government Expenditures + Investments + Exports - Imports + Foreign Production by National Residents - Domestic Production by Non-National Residents | |
| 0 + 0 + 0 + 0 - 0 + 0 - 0 = | 0 |
Recommended Articles
Our guide to National Income Formula includes a National Income Calculator with a downloadable Excel template. Here are some further articles to learn more:
