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What is National Income?

Updated on May 2, 2011

National income is a measure of a nation's economic productivity. Related measures of the productivity of an economy are gross national product (GNP), net national product (NNP), personal income, disposable income, and per capita income. These statistics are calculated from tax statements, government reports, and other sources.

This economic arithmetic, or national income accounting, serves many purposes. It makes it possible to chart business cycles, to study a country's economic growth, and to estimate its material standard of living. It is an essential tool in helping to shape economic policies. Although the concepts described in this article apply specifically to the United States, many nations now make similar calculations of their total national income.

Gross National Product

GNP is the total value at current market prices of all goods and services produced within an economy. One method ·of obtaining this figure is to add the market value of all final products and services sold to consumers, business, and government during the year. Statisticians use the prices of products at the final stage of production to avoid counting raw materials and the cost of intermediate processing more than once. As these prices are readily available, GNP is a convenient indicator of the overall production of an economy.

Net National Product

NNP is a more precise indicator of goods and services available to the economy.

In computing GNP, no allowance is made for the value of equipment that merely replaces machinery and other capital goods that have worn out during the year. This factor, called depreciation, is subtracted from GNP to determine net national product.

National Income

National income is the total income received by the factors of production: land, labor, capital, and management. Therefore, it is the total of all rent from property, wages and salaries, interest from loans, and business profits earned during the year. National income can also be calculated from net national product by subtracting excise and sales taxes from it. These indirect taxes are not earned by a factor of production, but are levied by the government.

Personal Income

Personal income is the total income received by all individuals in the nation. It differs from national income, for not all national income is received by individuals. Social security and corporate taxes, which are part of national income, are paid directly to the government. Undistributed corporate profits, retained by the business, do not increase the income of individuals. However, the government does transfer funds to individuals in the form of social security and veterans benefits and interest payments from government bonds. Personal income, therefore, is figured by subtracting undistributed profits, corporate taxes, and social security contributions from national income and then adding all government transfers.

Disposable Income

Disposable income is a more precise indicator of the public's potential purchasing power. It is the income families have at their disposal to spend or save. To calculate disposable income, personal income taxes must be subtracted from personal income. Per capita income is found by dividing a national income figure, such as personal or disposable income, by the number of the country's inhabitants.

All national income statistics are expressed in terms of a nation's currency. The value of the currency may change from year to year in terms of what it can buy.

To make comparisons between different years and between different countries more accurate, national income and GNP are often adjusted to account for changes and differences in the value of money.

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