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National Income

Last Updated On -03 Feb 2025

National income is the measurement of the health and prosperity of a nation representing the total goods and services produced within a country over a specific period of time. A country’s economic growth, the standard of living, and overall development.

Understanding the national income brings forth the knowledge on what next steps to take in taxation, infrastructure, and other economic decisions. This blog will help you understand the vitality of tracking national income.

What do you mean by National Income?

The meaning of national income refers to all the goods and services produced in a country in a given period of time. The measurement of overall performance economically indicates the growth and development done by analyzing the national income. Wealth generation, distribution, and then utilization, after understanding all this, government and policymakers use the data to generate important financial decisions. A society or nation is considered an “economic system” and the families or individuals contributing their services to this economic system are the two parts of national income.

Types of National Income

There are different types of national incomes providing a different perspective on economic growth and performance. Having understood all these types on an annual basis allows the government and policymakers to analyze the trends in the market and make decisions accordingly. The types of national income are based on income generation, distribution, and expenditure.

There are three main types of national income:

GDP: Gross Domestic Product
GNP: Gross National Product
NNP: Net National Product

1. Gross Domestic Product ( GDP )

GDP is the value of all final goods and services that are produced in a year by the country. GDP per capita is the average market value given by per person.

Types of GDP:

Nominal GDP: Measured at the current price of the market and not taking inflation into account.
Real GDP: Adjusted for inflation for actual economic output measurement.

Formula for GDP

GDP = C + I + G + ( X - M )

Where,

C = Consumption

I = Investment

G = Government Spending

X - M = Net Exports ( Exports - Imports )

2. Gross National Product ( GNP )

GNP is the total market value of all the goods and services produced in a year by labor and property supplied by all the residents.

In simpler terms, GNP is GDP plus net income from abroad which is the income by residents from foreign investments minus the income by foreigners from domestic investment.

Formula for GNP

GNP = GDP + Net Income from Abroad

3. Net National Product ( NNP )

NNP is measured by the total value of all the finished goods and services produced by the citizens domestically and overseas. It is equivalent to the total value of a nation’s output minus the amount minus the amount of GNP required to purchase new goods to maintain existing stock, which is called depreciation.

Formula for NNP

NNP = GNP - Depreciation

Formulas and Methods for Measuring National Income

The methods for measuring national income are different ways of getting an insight into the economy from different perspectives. There are 3 different ways of calculating the national income and to get a clear picture of the economic state, three of them play an equal role in it.

The three different strategies used to obtain the market value of all the goods and services produced take the individuals and their services into account.

Methods for Measuring National Income

The three primary Methods for Measuring National Income are:

Production Method
Income Method
Expenditure Method

1. Production Method ( Output Method )

The total value of goods and services produced in different sectors during a specific period is measured by the output method. As the name suggests, the total output of the economy is calculated by this method, and it tackles the whole measurement on an industry-by-industry basis. In order to avoid double-counting, a simple value-added method is used where the sum of values added by every industry is put together at each stage.

Method of calculating National Income by Output method:

Step 1. Divide the economy into three sectors for convenience:

Primary Sector ( Agriculture, Fishing, Mining )
Secondary Sector ( Manufacturing, Construction )
Tertiary Sector ( Banking, Transport )

Step 2. Calculate the Net Value Added by each sector

Step 3. Exclude Intermediate goods to eliminate double-counting

Step 4. Add Net factor income from abroad to get GNP.

The Formula for calculating National Income by Output method

National Income ( NNP ) = ( Total value of Output - Intermediate Goods ) - Depreciation + Net Income from Abroad

Example: If a farmer sells vegetables to a shop owner for 1,000 and the shop owner sells food items made from that vegetable for 1,500, only 500 ( shop owner’s value addition ) is included in the national income to avoid double-counting.

2. Income Method

All the earnings received by individuals and businesses in a year in the form of wages, rent, or profits are added together for calculation by income method. The total market value of the products by the producers is what they are paid, the total income is the total value of the product.

The Formula for calculating National Income by the Income method

National Income ( NNP ) = Compensation of employees + Rent + Interest + Profits + Mixed Income

Example: If the total wage of a company is 500 crore, rent is 200 crore, interest is 100 crore, and the profits generated are 400 crore, then national income = 500 + 200 + 100 + 400 = 1,200 crore

3. Expenditure Method

All or any organized sector buys products all year round, so the expenditure method is based on the same idea. The calculation of the total expenditure on goods and services must equal the value of everything produced. All the expenditures by individuals, businesses, and by government are all calculated to give total value.

The Formula for calculating National Income by the Expenditure method

National Income GDP = C + I + G + ( X - M )

Where,

C = Consumption

I = Investment

G = Government Spending

X - M = Net Exports ( Exports - Imports )

Example: If in a year, the household spending C is 6,000 crore, the business investment I is 2,000, and G government spending is 3,000 crore with X - M = Net Exports 1,000 crore then

GDP = 6,000 + 2,000 + 3,000 + 1,000 = 12,000 crore

National Income in India

The Indian economy has faced a lot of reforms in terms of economy, reflecting the conditions of the country over decades. The Central Statistics Office under the Ministry of Statistics and Program Implementation is accountable for all the calculations and publishing of the data.

The growing industrialization, technological advancements, and expansion in the service sector have led to a strong foundation.

Measures Taken to Improve the National Income of India

There are certain recent initiatives taken by the government to improve the national income:

Atmanirbhar Bharat ( Self-reliant India Initiative ): Encourages local production
Make in India: Promotes investment in local industries
Digital India & Startup India: Focuses on Indian IT sectors
Infrastructure Development: Focuses on roads, railways, and smart city making.

What is the Importance of National Income?

National income plays a vital role in measuring the economic health, growth, and prosperity of a country. All this provides a deeper understanding for policymakers to follow the trends, and reform the policies for a smooth economic performance.

Here are key reasons for National Income to be important:

Measures the economic growth
Helps in making policies
Indicates the standard of living
Comparison of economic performance on a global level

Frequently Asked Questions ( FAQs )

How is the national income important?

Here are key reasons for National Income to be important:

Measures the economic growth
Helps in making policies
Indicates the standard of living
Comparison of economic performance on a global level

What are the methods of measuring the national income?

There are 3 methods of measuring national income:

Production method: The total value of goods and services produced in different sectors during a specific period is measured by the output method.
Income Method: The total market value of the products by the producers is what they are paid, and the total income is the total value of the product.
Expenditure Method: The calculation of the total expenditure on goods and services must equal the value of everything produced