Table Of Contents
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.
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.
