How to Measure National Income

How to Measure National Income

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Measurement of national income helps to summarise the economic performance of a nation and it is done by measuring the total income within a financial year. In other words, it helps in determining the economic activity of a nation in a given period. The different metrics to determine national income include Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product (NNP) and data like disposable income and personal income. Thus, for people who ponder over ‘how to calculate national income’, having an understanding of these concepts can help in answering the question effectively.

GDP is the most important measure to determine national income as it is the total monetary value of all the goods and services produced within a country. It reflects the economic situation of a nation and helps in estimating its growth rate. GDP helps in deriving the other indicators of national income and the national income formula using GDP can be calculated by either the Expenditure Approach (EA) or Income Approach (IA).

Using EA, the formula is:

GDP = C + I + G + (X – M)

where,

C = Personal Consumption Expenditure

I = Private Investment

G = Government Spending

X = Net Exports

M = Imports

Using IA, the formula is:

GDP = Gross Investment + Government Spending + Private Consumption + Government Investment + (Exports – Imports)

GNP calculates and measures only the finished goods and services produced in a country. It can be calculated using the formula:

GNP = C + I + G + X + Z

where,

Z = net Income from Abroad

NNP is the aggregate value of all goods and services produced in a country within a given time minus the depreciation value. It can be calculated as

NNP = GNP - Depreciation

Broadly, there are threemethods of measuring national income and these include the Product Method (PM), Income Method (IM) and Expenditure Method (EM). In PM, the output of all firms within the nation is added to determine the national income. In IM, it calculates income that comes from production like income from employment, returns on capital from private and public firms, patents, copyright, rents from buildings, depreciation, etc. And finally, in IM, the national income is determined by summing up all the expenditures that are used for purchasing the national output.