Lecture 06: National Income
National income is the total value of all the final services and goods produced in an economy
during a specific period of time. It includes both the public and private sectors and encompasses
everything from haircuts to housing, from medical care to national defense. National income is
also commonly referred to as gross domestic product (GDP).
Concept of national income:
National income is the money value of all the final services and goods produced in an economy
during a given period of time. It includes the incomes of all factors of production, such as rent,
wages, profits, and interest.
The main concepts of national income are:
Gross Domestic Product (GDP): This is the market value of all final services and goods produced
within a country in a given period of time.
The formula of GDP is:
GDP = C + G + I + NX
(Where G=government spending, C=consumption, I=Investment, and NX=net exports).
GNP: This is the market value of all final services and goods produced by a country’s residents in
a given period of time, regardless of where they are located.
The formula for GNP:
GNP = GDP + NF
(Where NF=net factor income from abroad).
NDP: This is the market value of all final services and goods produced within a country in a given
period of time, minus depreciation.
The formula for NDP:
NDP = GDP – Depreciation
Net National Income (NNI): This is GDP minus depreciation. Depreciation is the wear and tear
on capital equipment and buildings.
The formula for NNI:
NNI = GDP – Depreciation
National Income (NI): This is NNI minus indirect taxes plus subsidies. Indirect taxes are taxes
on the sale of services and goods. Subsidies are payments made by the government to producers.
Personal Income (PI): This is NI minus corporate income taxes plus transfer payments. Transfer
payments are payments made by the government to individuals that do not require the recipient to
provide any good or service in return.
The formula for PI:
PI = GDP – NIT
(where NIT=net indirect taxes).
Disposable Income (DI): This is PI minus personal income taxes.
National income is a very important concept because it allows us to measure the economic
well-being of a nation. It is also used in macroeconomic models to determine things like the level
of employment and inflation.
National Income Formula:
National income Formula is
Y = C + I + G + (X-M)
where
Y = national income
C = consumption
I = investment
G = government spending
X = exports
M = imports.
National income can be measured in either physical units or currency units. Physical units are
things like tons of steel or the number of cars. Currency units are things like dollars or euros.
All these concepts are important in the calculation of national income. National income is a very
important concept because it gives us an idea of how well the economy is doing. It also helps us
to compare the standard of living between different countries.
National income is usually measured in terms of GDP because it is the most comprehensive
measure of economic activity. However, there are times when it is more useful to measure national
income in terms of GNP.
Conclusion:
In conclusion, national income is a key concept in economics that refers to the total value of all
services and goods produced in a country over a specific period of time. It is important to
understand how national income is calculated and what factors can affect it in order to make
informed economic decisions.
