National Income, Country Income

National income is a measure of income generated by overall production activities within a country during a specific period of time. Renowned economist J.M. Keynes defines national income as “the money value of all goods and services produced in a country during a year.â€

Need to Study National Income Trends

National income is considered a major economic indicator that helps the study of overall economic activity, production, consumption and trade in a country. Country income provides useful information about:

The overall size of the country’s economy.

Economic growth trends in comparison to the previous year’s performance and the nation’s economic health.

The contribution of various production sectors to the national economy.

Future growth prospects.

• Standard of living in the country.

National income data also helps the government strategize future economic policies and formulate developmental plans. It also helps business groups estimate future market trends in terms of product demand.

How to Calculate National Income

Economists use the following three methods to compute the national income of a particular country:

• Product or Output Method: This method utilizes the overall value of goods and services produced by the country to calculate national income. However, this method suffers from ‘double counting.’ Since the output of a production unit can be the input for another unit, it leads to double counting of a single variable.
• Income method: This method utilizes the overall income generated by various factors of production. Broadly, it includes employee wages, income of self-employed people, profits earned by business houses, government income surplus and net flow of money from abroad. The total value of all these factor incomes results in the national income value.

• Expenditure method: The sum of all the expenditures incurred by the economy leads to the estimation of national income. The formula to calculate aggregate expenditure is:

E = C + I + G + (X-M)

where,

E = Expenditure

C = consumer expenditures

I = domestic investment

G = total value of government expenditures

X = export value of goods and services

M = import value of goods and services

National income calculation excludes black money, non-monetized economy and the service sector. Hence, it does not reflect the actual economic growth of a country. Other economic indicators, such as the Human Development Index (HDI) and Sustainable National Income (SNI), are used to eliminate the drawbacks of the national income value.