LESSON 6: MEASURING NATIONAL INCOME

Intended Learning Outcomes:

 Explain the concept of national income and its importance in economic analysis.
 Analyze and compare GDP trends across countries and over time.
 Evaluate how GDP trends influence government policies, investment strategies, and business
planning.

What is National Income?

National Income is the money value of all goods and services produced in a country during a year. It
includes income from all the productive sectors
 The term ‘money value’ means the value estimated at the current price of the goods and services

BASIC CONCEPTS OF NATIONAL INCOME

 Gross Domestic Product (GDP): is the total monetary or market value of all finished goods and
services produced within a country’s borders during a specific time period, usually annually or
quarterly. It serves as a comprehensive scorecard of a country's economic health and a primary
indicator of economic activity and size.
 the value of all final goods and services produced by all sectors of the economy the citizens or
foreign sectors within a country.

2 Main methods for calculating GDP

1. Expenditure Approach: The total amount of money spent on final goods and services within a
country during a specific period.

Formula: GDP = C + I + G + (X−M)

 Consumption (C): Household spending on goods/services (e.g., food, healthcare).

 Investment (I): Business spending on capital (e.g., machinery, buildings).
 Government Spending (G): Public expenditures (e.g., infrastructure, education).
 Net Exports (X - M): Exports minus imports

Example 1:
Suppose a country reports the following for one year:
o Consumer spending (C): $10 million
o Investment by businesses (I): $3 million
o Government spending (G): $5 million
o Exports (X): $8 million
o Imports (M): $4 million

GDP Calculation:
GDP=C+I+G+(X−M)
GDP=$10 million+$3 million+$5 million+($8 million−$4 million)
GDP=$22million
Example 2:
Suppose a country reports the following expenses:
o Monthly Consumer spending: $150,000
o Quarterly Investment spending: $250,000
o Monthly Government spending: $50,000
o Annual Exports: $500,000
o Annual Imports: $300,000
What is the GDP for the year?

GDP Calculation:
GDP=($150,000 x 12) + ($250,000 x 4) + ($50,000 x 12) + ($500,000 - $300,000)
GDP = $3,600,000

Example 3:

A small country’s economy consists of:

o Households spent $500 million on goods and services (e.g., food, clothing).
o Businesses invested $200 million in new factories, machinery, and technology.
o The government spent $150 million on public services like schools and roads.
o Exports totaled $100 million, while imports cost $80 million.
What is the country’s GDP for the year?
Given:
Consumption (C): $500 million
Investment (I): $200 million
Government Spending (G): $150 million
Net Exports (X - M): $100 million - $80 million = $20 million

Calculation:
GDP=$500 million+$200 million+$150 million+$20 million
GDP = $870 million

2. Income Approach: The total income earned by all factors of production in an economy (wages,
rent, interest, profits) from producing goods and services.

Formula: GDP=Wages+Rent+Interest+Profits+Indirect Taxes+Depreciation−Subsidies

Example 1:
Suppose a country reports the following for one year:
o Wages (labor income): $400,000
o Rent (land/property income): $50,000
o Interest (capital income): $30,000
o Profits (business income): $120,000
o Indirect business taxes (e.g., sales tax): $20,000
o Depreciation (capital consumption): $25,000
o Subsidies (government support): $5,000

Calculation:
GDP=$400,000+$50,000+$30,000+$120,000+$20,000+$25,000−$5,000
GDP = $640,000
Example 2:
Suppose a country’s businesses and workers earn the following in a year:
o Wages (salaries, compensation): $700,000
o Rents (for land/buildings): $50,000
o Interest (from capital): $30,000
o Profits (business owners): $120,000
o Indirect taxes (sales, excise): $20,000
o Depreciation (capital consumption): $25,000
o Subsidies: $5,000

GDP Calculation:
GDP=Wages+Rent+Interest+Profits+Indirect Taxes+Depreciation−Subsidies
GDP=$700,000+$50,000+$30,000+$120,000+$20,000+$25,000−$5,000
GDP=$940,000

Example 3:
Suppose a country’s businesses and workers earn the following in a year:
o Daily Wages: $67
o Monthly Rent: $360
o Monthly Interest: $125
o Monthly Profits: $200
o Annual Indirect business taxes: $850
o Annual Depreciation: $350
o Subsidies: Not provided (assumed $0 here for simplicity)

Calculation:
GDP= ($67 x 360) + ($360 x 12) + ($200 x 12) + $850 + $350
GDP = 24,120 + 4,320 + 2,400 + 850 + 350
Result: GDP = $32,040

 Gross National Product (GNP): measures the total economic output produced by a country's
residents and businesses, regardless of where the production occurs. It includes income earned by
citizens and companies from overseas activities while excluding income generated within the
country by foreign entities.
 It measures how much money a country’s people and companies make, no matter where in the
world they make it.
Formula: GNP = C + I + G + (X − M) + Z
Or
GNP = GDP + Net Factor Income from Abroad (NFIA)
Where:
C = Consumption
I= Investment
G = Government Expenditure
X = Exports
M = Imports
Z = Net income from abroad
  Net Income from Abroad includes dividends, profits, and wages earned overseas by residents
minus similar payments to foreign entities operating domestically. Excludes intermediate goods:
Only final goods and services are included to avoid double-counting

Net Income from Abroad = Income Earned from Foreign Sources − Income Paid to Foreign Entities
Income Earned from Foreign Sources:
 Profits, dividends, interest, and wages earned by a country’s residents/businesses abroad.
Example: A U.S. company’s overseas profits or a citizen’s foreign salary.

Income Paid to Foreign Entities:

 Payments to foreign investors, workers, or businesses operating domestically.
Example: Dividends paid to foreign shareholders of a domestic company.

Impact:
 Positive NFIA: Indicates a nation earns more abroad than it pays to foreigners (e.g., developed
economies with large foreign investments).
 Negative NFIA: Occurs when foreign entities earn more domestically than residents earn
overseas (common in smaller economies with high foreign investment).

Example 1
Country A has the following data:
o GDP: $4,000,000,000
o Income earned by residents from overseas: $500,000,000
o Income earned by foreigners domestically: $300,000,000

Computation:
NFIA = (Income from abroad − Income to foreigners)
NFIA = $500,000,000 − $300,000,000
NFIA = $200,000,000
IMPACT: Positive NFIA: Indicates a nation earns more abroad than it pays to foreigners

GNP = GDP + NFIA

GNP = $4,000,000,000+$200,000,000
GNP = $4,200,000,000

Example 2
Given:
Country B has the following data:
o GDP: $2,000,000,000
o Income earned by residents from overseas: $250,000,000
o Income earned by foreigners domestically: $450,000,000
Computation:
NFIA = (Income from abroad − Income to foreigners)
NFIA = $250,000,000 − $450,000,000
NFIA = ($200,000,000)
IMPACT: Negative NFIA: Foreign entities earn more domestically than residents earn overseas

GNP = GDP + NFIA

GNP = $2,000,000,000 + ($200,000,000)
GNP = $1,800,000,000

 Net National Product (NNP): the market value of all final goods and services after allowing for
depreciation. It is also called National Income at market price. When charges for depreciation are
deducted from the gross national product.
 It shows how much a country really "earns" after accounting for the cost of keeping its equipment
and buildings in good working order.
Formula: NNP = GNP-Depreciation
Or
NNP = C+I+G+(X-M) + NFIA - Depreciation
Example 1
Given:
GDP: $1,000 billion
Net Factor Income from Abroad: $200 billion
Depreciation: $150 billion

Computation:
NNP = GDP + Net Factor Income from Abroad−Depreciation
NNP = $1,000 billion+$200 billion−$150 billion
NNP = $1,050billion

Example 2: Step-by-Step from GDP to NNP

Given:
o Consumption: $400 billion
o Investment: $60 billion
o Government purchases: $120 billion
o Exports: $100 billion
o Imports: $120 billion
o Income receipts from rest of the world: $10 billion
o Income payments to rest of the world: $8 billion
o Depreciation: $40 billion

Step 1: Calculate GDP

GDP=C+I+G+(X−M)
GDP=400 billion +60 billion +120 billion +(100 billion −120 billion)
GDP =400 billion +60 billion +120 billion −20 billion
GDP = $560 billion
Step 2: Calculate NFIA
NFIA = (Income from abroad − Income to foreigners)
NFIA = 10 billion – 8 billion
NFIA = $2 billion

Step 3: Calculate NNP

NNP = GDP + NFIA − Depreciation
NNP = 560 billion + 2 billion – 40 billion
NNP = $522 billion

 Personal Income: in economics refers to the total earnings received by individuals or households
from all sources over a specific period. This includes wages, salaries, bonuses, investment income
(like dividends and interest), rental income, profit-sharing, government benefits (such as Social
Security or food stamps), and any other forms of compensation or transfers received by
individuals, whether from domestic or foreign sources.
 The total money income received by individuals and households of a country from all possible
sources before direct taxes.
Formula: Personal Income (PI)=Salaries+Interest+Rent+Dividends+Transfer Payments

Example 1
Sources of income for Maria in one year:
o Salary: $45,000
o Interest from savings: $1,200
o Rental income: $6,000
o Dividends from stocks: $800
o Social Security benefits: $3,000
o Unemployment benefits: $2,500

Computation:
Personal Income=$45,000+$1,200+$6,000+$800+$3,000+$2,500
Personal Income=$58,500

Example 2
o Sources of income for the Lee family:
o Wages (combined): $60,000
o Business profits: $10,000
o Interest on bonds: $2,000
o Rental income: $4,500
o Pension received: $5,000
o Government child support: $1,500
o Rental Expense: $ 5,000
Computation:
Personal Income=$60,000+$10,000+$2,000+$4,500+$5,000+$1,500
Personal Income=$83,000
  Disposable Income: Disposable income means the actual income which can be spent on
consumption by individuals and families. The whole of the personal income cannot be spent on
consumption, because it is the income that accrues before direct taxes have actually been paid.
 it's the amount of your paycheck you actually get to keep and use for your needs, wants, or
savings
Formula: Disposable Income=Personal Income – Direct Taxes - miscellaneous expenses
Example 1:
o Gross Income: $150,000
o Tax Rate: 27%
Calculation:
Taxes paid = $150,000 × 27% = $40,500
Disposable Income = $150,000 – $40,500 = $109,500

Example 2:
o Gross Annual Income: $80,000
o Taxes (10%): $8,000
o Other Deductions: $4,000
Calculation:
Total deductions = $8,000 + $4,000 = $12,000
Disposable Income = $80,000 – $12,000 = $68,000

 Per Capita Income: The average income of the people of a country in a particular year is called
Per Capita Income for that year. For instance, in order to find out the per capita income, the
national income of a country is divided by the population of the country in that year.
Formula:

Example 1:
o Total Income: $4,500,000,000
o Population: 150,000
Calculation:
Per Capita Income = Total Income of the Region / Total Population
PCI = 4,500,000,000 / 150,000
PCI = $30,000

Example 2:
Suppose a town has:
100 people earning $450,000 each per year in agriculture sector
5,000 people earning $35,000 each per year in manufacturing sector

Total Income = (100×450,000)+(5,000×35,000)

Total Income =45,000,000+175,000,000
Total Income =$220,000,000

Total Population = 100+5,000 = 5,100

Per Capita Income = 220,000,000 / 5,100

Per Capita Income = $43,137