Measuring national income

Measuring National Income


  • National income is the total amount of money earned by the citizens of a nation.
  • It provides a snapshot of the size and health of an economy, often used in international comparisons.

Calculation Techniques

  • Income Method: Sum of all wages, rents, interest, and profits received by firms and individuals in an economy.
  • Output Method: Sum of the value of all final goods and services produced in an economy within a specific time frame.
  • Expenditure Method: Total spent on goods and services across all sectors of an economy.

Gross Domestic Product

  • The sum of all goods and services produced within a country’s borders in a specific time period.
  • Real GDP: GDP corrected for inflation, provides a more accurate long-term picture of economic health.
  • Nominal GDP: GDP at current market prices without correction for inflation.

Gross National Product

  • Includes GDP plus income earned by residents of a country both domestically and overseas, adjusted for income earned within domestic boundaries by overseas residents.
  • Differentiates between territoriality and nationality of economic activity.

Net National Product

  • GNP after accounting for depreciation, i.e., the wear and tear on a country’s assets.

Limitations of Measuring National Income

  • It does not account for non-monetised transactions. Volunteer work and household chores are unaccounted.
  • Underground/black market transactions are also not accounted for.
  • Differences in cost and standards of living are not factored into national income calculations.
  • Economic measures like GDP do not consider income inequality.

Importance of Measuring National Income

  • It helps evaluate and compare the economic well-being of different countries.
  • It assists in economic planning and policy formulation.
  • It gives an insight into the spending power of an average citizen.
  • It allows monitoring of economic growth trends over time.