National Income Formula: Methods, Steps & Solved Questions

National Income is defined as the total monetary value of all services and goods produced by a nation as a result of the different economic activities taking place in the country in a particular financial year. The National Income is an important indicator to determine the performance of a country as a whole and helps in measuring its growth and progress in a year. The different factors that contribute to the national income of a country are wages or salaries, interest, rent, and profit accrued by labour, capital, and land along with entrepreneurship of the people. The different methods used to calculate the national income of a country are the Product Method also known as the Value-Added Method, the Expenditure Method, and the Income Method. A combination of the Production method and Income method is used to calculate the national income in India.

Key Terms: National Income Formula, National Income, Product Method, Value-Added Method, Expenditure Method, Income Method, GDP, Personal Income, Consumption, Investments, Government Expenditure, Net Exports, Foreign Production, Domestic Production

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What is National Income?

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The National Income of a country can be defined as the comprehensive value of the goods and services produced in a country during a financial year. It measures the total value of goods and services produced during the year in terms of money with minimal or no duplication. The national income is a key indicator for determining the result of the economic activities of a country. If the national income obtained is not as per the estimations, then the government can take necessary measures to improve productivity.

The National Income of a country is calculated taking several factors into consideration like consumption of resources, expenditures, the value of exports and imports, investments, etc.

National Income

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National Income Formula Detailed Video Explanation:

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Key Concepts of National Income in India

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Some of the important concepts related to National Income are discussed below:

1. Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the monetary value of the commodities and services produced and provided within the country's boundaries in a particular financial year. The GDP does not include the income produced by nationals outside the country.

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

Where C is the Consumption, G is the Government Expenditure, I is the Investments, X is Exports and M is Imports.

2. Gross National Product (GNP)

GNP is the monetary value of the goods and services produced by the citizens of a particular country in a year irrespective of their geographical location.

3. Net National Product (NNP)

NNP is the monetary value of the goods and services produced by a country in a particular year after deducting the depreciation values like taxes. Therefore, 

NNP = GNP - Depreciation

4. Personal Income

Personal Income is the total amount received by the people of a country from different sources before the payment of direct taxes. 

5. Disposable Income

Disposable Income is the income remaining after the deduction of direct taxes from the personal Income.

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National Income Formula

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The formula for calculating the National Income of a country is mentioned below:

National Income (NI) = C + G + I + X + F - D

Here, 

• C denotes Consumption 
• G denotes the Government Expenditure
• I denotes Investment
• X denotes the Net Exports which is the difference obtained after subtracting Imports from Exports
• F denotes the foreign production by nationals
• D denotes the domestic production by non-nationals

In short, 

National Income (NI) = GDP + Foreign Production by Nationals - Domestic Production by Non-Nationals

National Income Formula

Steps to Calculate National Income Using the National Income Formula

The steps to follow for calculating the National Income using the National Income Formula are listed below:

1. The first component required for the calculation of National Income is the consumption amount which is the amount spent by the government on the procurement of different resources. This value must be computed by creating an exhaustive list of resources for which money is spent by the government.
2. The next component is the Government Expenditure which includes expenditure on infrastructure, capital investments, and expenditure on salaries of government employees.
3. The third component is the investments made by the government in different sectors like agriculture, industries, etc.
4. To determine the value of the next component the monetary value of the goods and services exported to other countries should be calculated. Then the monetary value of the goods and services imported from other countries should be calculated. The difference between the two is the value of component X in the formula.
5. The next component can be obtained by calculating the monetary value of the goods and services provided by national residents in other countries.
6. The last component in the formula can be obtained by calculating the monetary value of the goods and services provided by foreign residents domestically.
7. The National Income can be calculated using the National Income formula by adding the values obtained in steps 1 to 5 and then deducting the value obtained in step 6.

Read More: Inflation Rate Formula

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Relevance of National Income Formula

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The National Income Formula is used by economists to analyze the performance of a country in different quarters of a year. This analysis is useful for making the right decisions to improve the financial condition of a country. However, the different components of the National Income Formula are influenced by factors like inflation. So, it is necessary to make adjustments accordingly. 

In a closed economy, the value of National Income would be the same as the GDP as there would be no foreign investment. However, in today’s times, all the countries are connected to one another through trade, commerce, education, and employment. Hence, the values obtained by exports, imports, foreign production of nationals, and domestic production of non-nationals are quite significant and cannot be ignored.

Gross Domestic Product (GDP)

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Things to Remember

• The National Income is the total value of the goods and services produced by the country in a financial year.
• GDP is the value of the goods and services produced domestically during a financial year.
• GDP = C + G + I + (X - M), where C refers to Consumption, G refers to Government Expenditure, I refers to Investment, X refers to Exports and M refers to Imports.
• National Income Formula is given as C + G + I + X + F - D where C refers to Consumption, G refers to Government Expenditure, I refers to Investment, X refers to Exports - Imports, F refers to the Foreign Production by Nationals and D denotes Domestics Production by Non-Nationals
• In short terms, we can say that National Income (NI) is GDP + Foreign Production by Nationals - Domestic Production by Non-Nationals

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