National Income Formula

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Formula to Calculate National Income

The National Income formula is the formulary used to calculate the value of total items manufactured in-country by its residents and income received by its residents. According to the formula, national income is calculated by adding together consumption, government expenditure, investments made within the country, and its net exports- deducting imports from exports, foreign production by a resident of the country, and then subtracting the domestic production by residents of another country.

Formula to Calculate National Income

The national income formula refers to the procedure utilized to measure the total item's value manufactured by the residents in the country and the income obtained by its residents.
One may estimate using this formula by adding consumption, government expenditure, investments made in the country, and its net exports - eliminating the imports from exports and foreign production by a country resident.
It is the gross domestic product broader version as it also considers foreign production by national residents and eliminates any domestic production by non-local residents.
This national income formula is essential and used by economists for comparing various countries yearly or quarterly.

National Income = C + G + I + X + F - D

Where,

C = Consumption
G = Government Expenditure
I = Investments
X =Net Exports (Exports - Imports)
F = National Resident’s Foreign Production
D = Non-National Resident’s Domestic Production

Step-by-Step Calculation Methods of National Income

The following are the methods to calculate national income using its formula.

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 investments, 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.

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.

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

Depreciation 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: -

Particulars	Country V	Country Z
GDP	2000.00	2000.00
Government Expenditure (G)	600.00	700.00
Investments (I)	120.00	320.00
Foreign Production by National Resident (F)	100.00	200.00
Domestic Production by Non-Resident (D)	300.00	100.00

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

Solution

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, investments, 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: -

Particulars	Country M	Country N	Country O
GDP	2000	1500	1200
Government Expenditure (G)	2800	2100	1680
Investments (I)	4800	3600	2880
Exports	1600	1200	960
imports	7900	7500	6100
Net Exports (X)	-6300	-6300	-5140
Foreign Production by National Resident (F)	200	150	120
Domestic Production by Non-Resident (D)	600	450	360

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?

Solution

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 changes from period to period.

Frequently Asked Questions( FAQs)

Are national income and GDP the same?

National income and GDP are related economic measures, but they are different. While there is some overlap between the two measures, national income considers all income earned by residents of a country, including income earned from abroad, while GDP only measures production within a country's borders.

What is the difference between domestic income and national income formula?

Domestic income refers to the income acquired in the country's geographical boundaries by residents and non-residents. In comparison, national income refers to the revenue the country's residents receive, regardless of the geographical location (inside and outside the country).

What is national income equilibrium?

National income equilibrium refers to a situation in which aggregate demand equals aggregate supply. Therefore, when an economy is in national income equilibrium, there is no excess demand or supply of goods and services, and there is no tendency for the economy to move away from stability.