Formula to Calculate National Income

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Where,

  • C = ConsumptionG = Government ExpenditureI = InvestmentsX =Net Exports Net ExportsNet exports of any country are measured by calculating the value of goods or services exported by the home country minus the value of the goods or services imported by the home country. It includes various goods and services exported and imported by the government, like machinery, cars, consumer goods.read more (Exports – Imports)F = National Resident’s Foreign ProductionD = Non-National Resident’s Domestic Production

Step-by-Step Calculation Methods of National Income

Examples

Example #1

We are given the following hypothetical inputs in U.S. dollars in a trillion for economy XYZ. But, first, let us calculate the national income of the country XYZ.

  • The first part is the consumption that needs to be identified and computed and that is nothing, but total expenditure incurred by the countryu2019s government in the procurement of goods and services. Infrastructure, capital investmentsCapital InvestmentsCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more, government employee salary shall form part of total investments made by the government. Total investments made within the country also needs to figure out. Calculate the export value of goods and services that have been produced within the country. Imports Value needs to be calculated as well so this can be excluded for the calculation of national income. Next, find out the value of national production by foreign residents. Now figure out the value of foreign production by national residents. Now sum up all the values from step 1 to step 4 and deduct values computed in step 5 and step 6 and lastly add value arrived at step 7.

  • Consumption (C): $10Government Expenditure (G): $14Investments (I): $24Depreciation: $2Exports: $8Imports: $4Net Exports (X): $4Foreign Production by National Resident (F): $1Domestic Production by Non-Resident (D): $3

Solution

Therefore, the calculation of the national income is as follows:

  • = $10 + $14 + $24 + ($8 – $4) + $1 – $3

National Income will be – 

  • = $50

Hence, the national income of country XYZ is $50

DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more is not taken into consideration.

Example #2

XYZ and PQR are the two countries wherein the World Bank was confused about ranking. The GDP of the two countries was approximately $6,000 billion. Therefore, the bank decided to rate them based on national income. They gathered the following details: –

Based on the above information, you are required to calculate the national income formula and rank which country would be superior to another?

This example is not given all the required inputs to calculate national income. Still, if combined, certain inputs of national income will form GDP, summing up consumption, government expenditure, investmentsInvestmentsInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later.read more, and net exports that have been provided. Hence, we shall use GDP as a proxy and calculate the national income.

Therefore, the calculation of the national income for country XYZ is as follows:

  • = (C + G + I + X ) + F – D=  GDP + F – D=2000.00+100.00-300.00

National Income for country XYZ will be – 

  • =  1,800

Therefore, the calculation of the national income for country PQR is as follows:

  • = 2,000 + 200 – 100

National Income for country PQR will be – 

  • =  2,100

If the bank takes National Income as a decider to rank them then country PQR will be ranked above country XYZ as country XYZ has a national income higher by $300 billion.

Example #3

FPI is considering investing in a country where the country’s national income is a minimum of U.S.$1,300 billion. Below are the three developing nations which they have shortlisted and are considering investing in: –

All three countries are highly import-oriented countries.

FPI is looking to invest US$500 million. Based on National Income, you are required to determine where would FPI invest in?

The calculation of the national income for country M is as follows:

  • =2000+2800+4800+(-6300)+200-600

National Income for country M will be – 

  • =2900

Similarly, we can calculate national income for country N and country O as shown below:

National Income for country N will be – 

  • =600

National Income for country O will be – 

  • =380

The minimum national income FPI wanted was 1,300 billion. Only one country matches that criterion, country M. Hence, they might invest the entire amount of $500 million in country M.

National Income Calculator

You can use this national income calculator.

Relevance and Uses

It is a broader version of the gross domestic product as it also includes foreign production by national residents and excludes any domestic production by non-local residents. This metric is important and is widely used by economists to compare different countries, whether yearly or quarterly.

However, the national income equation includes the effect of inflation. Hence, comparing years or quarters shall warrant inflation adjustment to be compared properly. For example, the national income can change, even if the volume has not changed, but it’s due to price changesPrice ChangesPrice change in finance is the difference between the initial and final values of an asset, security, or commodity over a particular trading period.read more from period to period.

This article is a guide to the National Income Formula. We discuss step-by-step methods to calculate national income using its formula, practical examples with the calculator, and a downloadable Excel template. You can learn more about Economics from the following articles: –

  • Formula of Velocity of Money Formula Of Velocity Of MoneyThe velocity of Money refers to the frequency with which a unit of the currency can be exchanged for purchasing the goods and the services. Basically it means the number of times the money movement is done from one entity to another.read moreFormula of Nominal GDP Formula Of Nominal GDPThe nominal GDP formula is used to figure out the nation’s gross domestic product at the current price without considering inflation. It is the total of private consumption, gross investment, government investment and trade balance.read moreFormula of Real GDP Formula Of Real GDPReal GDP can be described as an inflation-adjusted measure that reflects the value of services and goods produced in a single year by an economy, expressed in the prices of the base year, and is also known as “constant dollar GDP” or “inflation corrected GDP.“read moreFormula of GDP Deflator Formula Of GDP DeflatorThe GDP deflator measures the change in the annual domestic production due to changes in price rates in the economy. Hence, it measures the change in nominal GDP and real GDP during a particular year calculated by dividing the nominal GDP with the real GDP and multiplying the resultant with 100.read more