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 period of a time 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 and the formula for it can be derived 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. Mathematically, it is represented as,
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 ended on December 31, 2018. Calculate the national income of the nation during the year based on the given information.
Solution:
National Income of Nation is calculated using the formula given below
National Income = Consumption + Government Expenditures + Investments + Exports – Imports + Foreign Production by National Residents – Domestic Production by Non-National Residents
- National Income = $5 trillion + $7 trillion + $12 trillion + $4 trillion – $2 trillion + $0.5 trillion – $1.5 trillion
- National Income = $25 trillion
Therefore, the national income of the nation stood at $25 trillion during the year.
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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 national income of the country. The following information is available for last year. Calculate the national income of the country based on the given information.
Solution:
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
- National Income = $3,000 billion + $900 billion – $600 billion
- National Income = $3,300 billion
Therefore, the country managed national income of $3,300 billion during the year.
Explanation
The formula for national income can be derived by using the following steps:
Step 1: Firstly, figure out the monetary value of the nation’s consumption which is the total value of consumer expenditure in the purchase of goods and services in the nation.
Step 2: Next, figure out the investment made by the government within the country which may include infrastructure, government employee salary, and other capital investments.
Step 3: Next, figure out the total investments made within the country which also includes the capital investments.
Step 4: Next, figure out the monetary value of all the goods and services produced within the country and exported to other foreign nations.
Step 5: Next, figure out the monetary value of all the goods and services imported from other foreign countries.
Step 6: Next, figure out the value of foreign production by national residents which include 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 include all the goods and services produced by the 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.
National Income = Consumption + Government Expenditures + Investments + Exports – Imports + Foreign Production by National Residents – Domestic Production by Non-National Residents
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 same quarters of different years. However, it should be kept in mind that it includes the effect of inflation and as such comparison across quarters or years warrants adjustments in terms of the rate of inflation so that the national income is compared in the right way. For instance, the national income would change, even if the output volume does not change, due to a change in prices from one period to another.
The value of GDP and national income would be exactly the same for a closed economy. However, no economy is a closed economy in today’s world and all the nations are interconnected to each other in terms of 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 |
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