National income reflects the income generated by the factors of production of a country in a certain period.
National income is a notion that refers to the income generated by the factors of production of a country in a certain period, without counting those services or intermediate goods that are used within the framework of the production process.
The term income can be understood as the profit or benefit obtained from something. National , for its part, is what is linked to a nation (country, town, community).
Calculation of national income
The most common method for calculating national income is to add up all final goods and services in a year. Counting intermediate goods is avoided since, otherwise, they would be counted twice.
By performing the calculation every year, it is possible to estimate whether the economy of the country in question is growing or, on the contrary, contracting. In addition, you can know how income distribution is carried out and what the contribution of each productive sector is to the national economy.
It is an instrument of great value to carry out the analysis of the result of the economic process, specifically measuring the amount of goods and services that a country has used over the course of a year.
When calculating national income, state expenditures on goods and services are generally included, but not funds allocated to private citizens (such as pensions or retirement benefits). On the other hand, net exports (derived from total exports minus total imports) are usually taken into account.
National income can be used for savings, investment or consumption.
Its use
National income can be used for consumption , investment or savings . Most of the national income is directed towards the consumption of products and services: that is, it is spent. The rest is invested to generate future income or saved without being used for any productive purpose.
We speak of investment precisely when the savings that represent national income are used in order to acquire goods that are then applied to production . Consumption , for its part, has the objective of satisfying the various needs of the various agents of the economy, and is associated with the concept of "spending", as mentioned in the previous paragraph.
Another destination for the portion of national income that is not consumed or invested is exporting to foreign countries . In this case it is necessary to distinguish between two types of economy: a closed one, in which investing is equivalent to saving, since the savings that are allocated to the purchase of capital goods are inevitably transformed into an investment; or an open one, which contemplates the export and import of goods and where savings and investment are not usually equivalent.
The equation in which this last case can be seen is the following: (GDP – C) – I = X – M. Let's see what each variable corresponds to:
- GDP is the Gross Domestic Product ; That is, the magnitude with which we can express the value in money of the production that a country carries out over a given period (usually a year) of products and services.
- C is total consumption , which includes both public and private.
- I represents the set of public and private investment .
- X expresses the value of the country's total exports .
- M is the total imports carried out throughout the period.
It is also possible to say that savings (A) is GDP minus consumption , so the previous equation could be expressed as follows: A – I = X – M.