National income is the total of all income earned in a nation during a specific period, usually a year. This figure shows whether a nation’s economy is growing or declining. Economists use national income figures to compare the economies of various nations.
Determining national income.
Economists calculate national income in either of two ways. One way is based on what individuals and businesses earn. The other is based on the production of goods and services. Each method provides the same national income figure because the amount that people earn equals the value of the goods and services produced.
National income based on earnings includes all the income earned in a nation during a certain period. This income consists of wages and salaries, interest, profits, and rents.
To find national income based on production, economists first determine a nation’s gross national product. This figure represents the total value of the goods and services produced by a nation during a specific period. Economists find the national income by subtracting depreciation and indirect business taxes from the gross national product. Depreciation includes the normal decline in the value of buildings and machinery as a result of doing business. Indirect business taxes are paid by buyers of goods and include sales and excise taxes. The difference between gross national product and depreciation is called the net national product.
National income may be affected by both inflation (rising prices) and deflation (falling prices). For example, if the amount people earn increases 10 percent in one year, the national income figure for that year will rise 10 percent. But if prices also rise 10 percent, people will not be able to buy any more goods or services than they did during the year before. Thus, the national income figure is 10 percent higher because of inflation, not because of economic growth.
In order to compare national income figures for two or more years, economists adjust the national income to include inflation or deflation. The adjusted figure is called real national income.
Importance of national income.
National income figures show the rate at which a nation’s economy changes. These figures also show the stability of the economy. For example, the economy may be unstable if national income varies greatly from year to year. National income figures also show how income is distributed in the forms of wages, interest, profits, and rent. In the United States, for instance, wages, salaries, and employee benefits account for about 70 percent of the national income. Interest, profits, and rents provide the rest of the national income.
Both government and industry adjust their budgets in terms of the level, distribution, and rate of change in national income. If national income falls, for example, the government might decrease taxes in order to allow people more after-tax income to spend. If people spent this additional income on goods and services, business activity would rise. As a result, more jobs would be created, and national income would increase.
National income figures include only payments and losses for which records are kept. As a result, these figures do not fully show the level of a nation’s well-being. A homemaker receives no salary for doing housework, and so his or her work does not raise the national income. On the other hand, environmental pollution causes great economic loss. But no one knows the total cost of this loss, and so economists cannot subtract it from the national income.
Changes in national income.
National income varies, depending on the efforts of workers, the level of employment, and the quality and quantity of fixed capital. Fixed capital includes the buildings and machinery used to provide goods and services. Improvements in fixed capital may create more jobs and raise the national income. National income in the United States, Canada, and many other industrialized countries has generally risen from year to year. It has increased mainly because of additions to fixed capital, growth of the labor force, and improvements in the efficiency of both capital and labor.
See also Capital ; Deflation ; Gross domestic product ; Income ; Standard of living.
