Income at the National Level: Description, Mathematical Representation, Significance, and Its True Impact on Our Lives
National income, personal income, and Gross Domestic Product (GDP) are key economic indicators used to measure a country's wealth and standard of living. Each of these concepts provides a different perspective on a nation's economic activity.
National income, also known as Net National Income (NNI), is the total income earned by a country's residents and businesses, including income from abroad. It reflects earnings from production regardless of location and measures the sustainable economic value after accounting for capital wear and tear. National income can be calculated using the formula: National income = Employee compensation + Company profit before tax + Interest income + Owner income + Rent + Indirect business taxes less subsidies.
Personal income, on the other hand, is the total income received by individuals from all sources before personal taxes. It includes earnings from wages and salaries, transfer receipts (such as social security benefits), and property income (dividends, interest, rent) but excludes corporate retained earnings and some taxes. Personal income is derived from national income but adjusted to include transfer payments and exclude retained corporate income, reflecting actual income available to individuals.
GDP, the broadest measure of economic activity in a country’s territory, is the total market value of all final goods and services produced within a country’s borders during a specified period (usually a year or a quarter). It includes production by both domestic and foreign-owned resources located in the country.
The relationship between these concepts can be summarised as follows: GDP is the starting point for calculating national income. From GDP, by adjusting for net income from abroad, you get Gross National Product (GNP). Subtracting depreciation from GNP gives national income, which more accurately measures the income earned by the country’s residents and businesses, reflecting sustainable production. Personal income is derived from national income but includes transfer payments and excludes retained corporate income, focusing on income actually received by individuals.
\[ \text{GDP} \rightarrow \text{GNP} \rightarrow \text{National Income (NNI)} \rightarrow \text{Personal Income} \]
Each step adjusts the previous figure to reflect different economic perspectives: location of production vs. ownership, gross vs. net of depreciation, and total income earned vs. income received by individuals.
It's important to distinguish between national income and personal income. National income reflects the total income generated within a country, while personal income focuses on the income actually received by households. Disposable personal income, which represents the money remaining after taxes and other mandatory deductions are subtracted from personal income, is a significant measure for households' spending and saving habits.
Transfer payments, such as social security benefits, unemployment insurance, and welfare payments, while not technically "earned" income, represent a significant source of income for many households and are included in personal income calculations. Owner income, capturing the income earned by owners of unincorporated businesses, such as sole proprietorships and farms, to run their operations, is also included in national income calculations.
An increase in national income can lead to an increase in national savings, affecting the supply of loanable funds in the economy. Furthermore, personal income affects aggregate demand, as more affluent households tend to spend more on goods and services.
Understanding these economic indicators is crucial for policymakers, investors, and the general public to assess a country's economic health and make informed decisions.
In the context of measuring a country's economic activity, national income is the total income earned by a country's residents and businesses, including income from abroad, while personal income is the total income received by individuals from all sources before personal taxes. The relationship between these concepts can be summarized as follows: GDP is the starting point for calculating national income, which measures the sustainable economic value after accounting for capital wear and tear, and personal income is derived from national income but adjusted to include transfer payments and exclude retained corporate income, reflecting actual income available to individuals.
