National Income, Calculation Method, Formula, Importance

National Income, Concept, Calculation Method, Formula, Importance

National Income refers to the value of goods and services produced by a country during a financial year. Read all about National Income Formula, Calculation Method and Importance for the UPSC exam.

Table of Contents

National Income

National income refers to the total value of all goods and services produced within a country’s borders in a given period of time (usually a year) and is used to measure the economic performance of a country. It includes all the income earned by individuals, businesses, and the government in the country, and can be calculated using different methods such as the production or income approach, expenditure approach, or value-added approach.

National income is an important concept in macroeconomics and is used by policymakers to make decisions related to economic growth, development, and distribution of resources.

Read More: Lorenz Curve

Gross National Income and Net National Income

Here is a tabulated comparison between Gross National Income (GNI) and Net National Income (NNI):

Parameter	Gross National Income (GNI)	Net National Income (NNI)
Definition	Total income earned by a country’s residents (including income from abroad)	Total income earned by a country’s residents (including income from abroad), minus depreciation of capital assets
Calculation	GDP + net income received from abroad	GNI – depreciation of capital assets
Significance	Measures the total income earned by a country’s residents	Measures the income available for consumption and savings by a country’s residents
Relationship with GDP	GNI includes income earned abroad by a country’s residents, whereas GDP only includes income generated within the country	NNI adjusts GNI for depreciation of capital assets
Usefulness	Useful for comparing the economic performance of countries with different levels of income from abroad	Useful for measuring a country’s economic welfare and standard of living
Limitations	Does not take into account the distribution of income within a country	Ignores non-monetary contributions to the economy, such as unpaid work

Read about: GDP Deflator

National Income Formula and Method

Here’s a detailed tabulated explanation of the three methods of calculating National Income along with their formulae:

Method	Description	Formula	Limitations
Production Method	Calculates national income by adding the value of all goods and services produced within a country	National Income = Gross Value Added + Taxes – Subsidies	Excludes non-market activities such as household work, black market activities, and self-consumed production
Income Method	Calculates national income by adding up all income received by the factors of production such as wages, profits, and rent	National Income = Wages + Interest + Rent + Profits	Excludes non-monetary income such as barter exchange and the underground economy
Expenditure Method	Calculates national income by adding up all expenditures on goods and services in a country	National Income = Consumption + Investment + Government Spending + Net Exports	Ignores the value of non-market production and self-consumption, excludes the effect of Inflation on real output and prices
Value-added Method	Calculates national income by adding up the value added by all sectors of the economy	National Income = Gross Value Added at Basic Prices + Taxes – Subsidies	Difficult to measure value added by individual sectors, excludes the informal economy and self-consumed goods

Limitations of these Methods of Calculating National Income

Some common limitations of these methods of calculating national income are:

Difficulty in measuring the informal economy and underground activities
Inaccurate or incomplete data due to the lack of records or poor record-keeping
Inability to capture the effects of inflation, changes in technology, and changing market conditions
Exclusion of non-monetary transactions, such as barter and non-market production
Differences in accounting practices and standards between countries may affect comparability

Read More: Types of Inflation

National Income Importance

The importance of calculating national income in an economy is:

Measure of Economic Performance: National income is used as a measure of a country’s economic performance and helps in understanding the overall economic growth and development.
Formulation of Economic Policies: National income data helps in formulating economic policies related to taxation, government spending, and trade.
International Comparisons: National income provides a basis for comparing the economic performance of different countries and determining their relative strengths and weaknesses.
Resource Allocation: National income data helps in allocating resources efficiently, identifying areas that require more investment, and boosting economic growth.
Forecasting: National income data provides a basis for economic forecasting and predicting future economic trends and challenges.
Employment Generation: National income data helps in analyzing employment trends and identifying areas that require more job creation.
Standard of Living: National income data helps in determining the standard of living of people in a country and improving it by devising policies that boost economic growth.
International Aid: National income data is used by international organizations to provide aid and assistance to countries facing economic challenges.

Read More: Phillips Curve

National Income Limitations

National income is a useful tool for measuring the economic performance of a country, but it has certain limitations. Some of the limitations of national income are:

Non-Monetary Transactions: National income only takes into account monetary transactions, which means that it does not consider non-monetary transactions such as unpaid housework or volunteer work, which can have a significant impact on the economy.
Informal Sector: National income only considers formal sector activities and does not take into account the informal sector. This can lead to an underestimation of the actual economic activity in a country.
Quality of Life: National income does not take into account the quality of life of the citizens of a country. It is possible for a country to have a high national income but low quality of life due to factors such as income inequality, poor living conditions, and lack of basic amenities.
Environmental Impact: National income does not take into account the impact of economic activities on the environment. It is possible for a country to have a high national income but also high levels of pollution and environmental degradation.
Distribution of Income: National income does not provide information on the distribution of income within a country. It is possible for a country to have a high national income but also high levels of income inequality, which can lead to social and economic problems.
Time Lag: The calculation of national income involves a time lag, which means that the data may not be up-to-date. This can be a problem in rapidly changing economies.

Therefore, it is important to use national income in conjunction with other economic and social indicators to get a comprehensive picture of the economic performance of a country.

Read about: Purchasing Power Parity

National Income UPSC

National Income is an important topic for UPSC as it is a key indicator of the economic health of a country. It is a part of the UPSC Syllabus under the Economics subject and is covered in both UPSC Online Coaching and UPSC Mock Test. Understanding the various methods of calculating national income, its limitations, and the significance of national income in the economy is crucial for aspirants preparing for the UPSC exam. Additionally, questions related to national income are frequently asked in both the Prelims and Mains examinations.

National Income FAQs

What is national income?

National income is the total value of goods and services produced by a country in a given period of time.

What is national income formula?

National income formula: NI = compensation of employees + operating surplus + mixed income + taxes - subsidies on production and imports

What is national income and GDP?

GDP is the total value of goods and services produced within a country's borders, while national income is the total income earned by the country's residents.