National Income: Definition and Significance

National Income: Definition and Significance

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As the name suggests, national income is the aggregate of a nation’s monetary collection during a period. It is very important to measure this entity as it helps in understanding the economic activity of a country. To put it more elaborately, it is the value of all goods and services that are produced by a country through its economic activities during a financial year. It indicates the status of an economy and paints a clear picture of the nation’s economic growth. Thus, in-depth statistics of this entity can help economists in framing policies that foster economic development.

Another term that is often used is the gross national income which is also popularly known as the gross domestic product (GDP). To put it in simple terms, it is the total value of goods and services that are produced by a country. GDP is calculated for regular time intervals like a quarter or a year and to maintain global parity, it is represented in Dollars ($). Things that do not have an exact value are excluded from it. The constituents of GDP include direct taxes, wages and salaries, interest, mixed income, rent, undistributed profits, dividends and depreciation.

Once we define national income, the next thing that is important to understand is the gross national product (GNP) because GDP and GNP are the two subparts of national income. GNP is the estimated value of all goods and services that are produced by a nation’s citizens and businesses. It is inclusive of the net income that comes into a country from abroad. However, it does not include the services that go towards creating manufactured goods because the value is already included in the cost of the finished product.

National income accounting is very important for any country as it is a bookkeeping system that helps governments to measure a country’s economic activity level within a particular period. This type of accounting record includes data about total revenues earned through domestic corporations, salaries or wages paid to domestic and foreign employees, money spent on sales and income taxes by individuals and companies residing within the country. It allows nations to assess the current standard of living, and distribution of income within a population and determine the effects of different economic policies that are rolled out for the larger good.