National Income Definition, Formulas, Benefits, & Components

BANKING & FINANCE, ACTIVELYSHARE.COM — Want to know the level of prosperity of the country? Let’s learn the concept of national income!

National income is one of the factors that describe the welfare of the people of a country. In the concept of national income, the higher the level of state income, the higher the economic class of the country’s people.

Understanding how to calculate national income is one of the materials taught in high school. However, as a reminder, ActivelyShare.com will re-explain the meaning of national income, its benefits, factors, and components for you.

Definition of National Income

Simply put, national income is the average income of people in a country. National income is a measure of the level of the country’s economy. So what is national income is the amount of production obtained by the entire community of a country in a certain period of time.

National income contains the total profit of domestic companies, public income, wages of foreign workers, sales tax burden and income of each citizen. From these calculations, the benefits of national income can be used as a benchmark for a country’s economic progress.

Benefits of Calculation of National Income

It is important for the government to calculate national income. Check out the benefits of national income below.

  1. Measuring the Economic Growth Rate The
    calculation of national income in a certain period of time is useful for the government to compare the results with the previous period. Therefore, the benefit of national income is to measure the rate of economic growth. The existence of these data from time to time makes the government assess and analyze the increase in the rate of economic growth. So that the government can evaluate and improve.
  2. Knowing the Economic Structure of a Country
    National income will show the largest and smallest state income data in a sector. Thus, the benefit of national income is knowing the economic structure of a country. The government will maximize the industry with the largest income in the future, while the industry with the lowest income will be repaired so that the results will increase.
  3. Measuring the Contribution of the Economic Sector to the Economy
    Each economic sector has a different level of economy in a region. The benefit of calculating national income is to measure the contribution of the economic sector to the economy. The data results of each sector are used as a comparison of economic progress between regions and countries. This comparison helps the government in formulating the right policy.
  4. Showing the Level of Community Welfare
    One of the benefits of calculating national income is to show the level of community welfare. Because the government obtains information related to the average income, standard and quality of life of the community where it affects the level of community welfare.
  5. One of the Indicators of Achievement of the Development Vision
    In realizing the vision of equitable distribution of sustainable development, the measure of success can be assessed from national income. When the average national income is high, it means that government development has increased because the community has received support for facilities and infrastructure to meet their needs, and vice versa.
  6. As a Basis for Government Decision-Making
    Finally, the benefits of national income are the basis for government decision-making. In setting a rule or policy, the government publishes it according to the conditions and needs of the community. The existence of national income data helps the state in considering a policy.

Factors Affecting National Income

Before knowing the level of national income, the government does a bookkeeping system first. In compiling it, there are several factors that affect national income, including the following.

  1. Consumption
    The main factor in influencing national income is consumption. This consumption includes all state expenditures in order to obtain goods and services within a certain period of time. This level of consumption will affect national income. The higher the consumption of the country, the income will decrease and vice versa.
  2. Investment and Savings
    Another factor affecting national income is investment and saving. Investment and saving activities are very important because they are related to state saving. Investment and savings factors can generate profits in the future so as to increase national income.
  3. Aggregate Supply and Demand
    The last factor that affects national income is aggregate demand and supply. This is closely related to the level of demand and supply of goods based on the price level. Changes in the following factors will cause economic levels such as prices, unemployment, and people’s income to change.

National Income Calculation Method

A country has several methods of calculating national income. The following is the method of calculating the national income in question:

  1. The State Revenue Approach
    sums up all household consumption income, starting from salaries, interest, rent, to profits as a result of the factors of production from the company. So the method of calculating national income is the income approach. If a country applies it, the national income formula can be used as follows:
    National Income = w (wages/salary) + i (interest) + r (rent) + p (profit)
  2. Production Approach
    When the state only adds up the products of the industrial, service, commercial, extractive, and agrarian sectors, the use of the national income calculation method is the production approach. Goods entered in the calculation stage are finished goods, not raw or semi-finished. The formula for national income uses a production approach, namely:
    Production Approach = Output (NO) – Intermediate Input (NI)
  3. Expenditure
    Approach.The expenditure approach, which is the method of calculating national income, is usually applied in income and enumeration because it is easy. The summation process involves all expenditures from four economic actors, including consumption (household), investment, government, and export and import.
    The expenditure approach, which is the method of calculating national income, is usually applied in income and enumeration because it is easy. The summation process involves all expenditures from four economic actors, including consumption (household), investment, government, and export and import.
    National Income = C (Consumption) + I (Investment) + G (Government) + (X (Exports) – M (Imports)).

National Income Component

The final result of national income is obtained from the accumulation of various incomes in a country. The components of national income are as follows.

  1. Net National Income (NNI)
    First, the component of national income is Net National Income (NNI). Net national income is the concept of national income from the calculation of the total remuneration from the community as the owner of the factors of production.
  2. Income Ready to Spend (DI)
    Next, the component of national income is income ready to be spent or abbreviated as DI. DI is income used to buy consumer goods and services, then if there is any remaining, it will be used as savings in investment products.
  3. Individual Income/ Per capita (PC)
    The concept of national income received by each individual in society is referred to as personal income or personal income (PI). Various individual payments enter this income, such as transfer payments, social benefits, pension funds, interest, and so on.
  4. Gross Domestic Product (GDP)
    One of the concepts of national income is gross domestic product. Gross Domestic Product (GDP) means the sum of the product values ​​produced by each domestic unit for one year. GDP is included in gross or gross income.
  5. Gross National Product (GNP)
    Finally, the concept of national income is gross national product. Gross National Product (GNP) is the net value of products produced nationally in one year. Goods produced abroad owned by citizens are also counted.

How to Calculate National Income and the Formula

After knowing several components of national income, you will learn how to calculate national income and its formula in the following discussion.

1. Net National Income (NNI)

How to calculate Net National Income (NNI), namely Product National Income (NNP) minus indirect taxes. Indirect tax is a transfer of the tax burden on other things such as gifts, VAT, and the like.The formula for net national income includes:

NNI = PNN (Net National Product) – indirect taxes + subsidies.

While the PNN formula is obtained from:

GNP – depreciation – capital substitute goods

2. Income Ready to Spend (DI)

How to calculate national income category DI or income ready to spend is the value of PC (Individual Income) minus direct taxes. Direct tax is the tax burden that must be borne personally and cannot be transferred to other parties. The DI national income formula includes

DI = PP – direct tax

3. Individual Income/ Per Capita (PC)

How to calculate national income PI (individual income) is obtained from the reduction of NNI and income tax. Profit tax, namely corporate tax must be paid to the government. The PI national income formula is as follows:
PC = NNI + transfer payments – (all types of contributions, profits and personal taxes)

4. Gross Domestic Product (GDP)

How to calculate national income from gross domestic product by adding up the prices of goods and services produced in a certain period of time based on market value. The calculation uses the income and expenditure approach formula. The formula for national income GDP income includes:

GDP = C + I + G + (XM)

The formula for national income GDP expenditure approach is:

GDP = w + r + i + p

Information:

C = firm consumption
G = government consumption
M = Import value
r = rent/rent value
p = profit/profit

I = investor consumption
X = export value
w = wage/wages/salary
i = interest/interest on capital

5. Gross National Product (GNP)

Finally, the method of calculating gross national product (GNP) is to add up the total product value of domestic and foreign residents in one year.

GNI national income formula includes:

GNP = GDP + products of Indonesian citizens in the country – products of foreigners in the country

This is the discussion from ActivelyShare.com regarding the definition of national income, benefits, components, and formulas! The concept of national income is one of the most important concepts in understanding a country’s economy, so study it carefully, ActivelyShare.com friends!


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