National Income Formula

What is the National Income Formula?

National income is defined as the total monetary value of all services and goods produced by a country over a given time period. In other words, it is the total of all factor income generated during a given production year.


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National income is a measure of a country's economic activity. It can be calculated using one of three methods: the income method, the value-added method, or the expenditure method.

The income method is primarily based on the earnings generated by production factors such as labour and land. The expenditure method is based on investment and consumption, whereas the value-added method is primarily concerned with the value added to a product during the manufacturing process.


National Income Formula

National income formula = C + G + I + X + F – D

Where,

The letter C denote the consumption.

The letter G denote the government expenditure.

The letter I denote the investments.

The letter X denote the net exports (Exports subtracted by imports).

The letter F denote the national resident’s foreign production.

The letter D denote the non-national resident’s domestic production.


Step by Step Calculation Methods of National Income Formula

The methods for calculating national income using its formula are as follows.

Step 1 – The first component that must be identified and computed is consumption, which is nothing more than the total expenditure incurred by the country's government in the procurement of goods and services.

Step 2 – Infrastructure, capital investments, and government employee salaries must all be included in the government's total investments.

Step 3 – Total investments made within the country must also be calculated.

Step 4 – Determine the export value of goods and services manufactured in the country.

Step 5 – The value of imports must also be calculated so that it can be excluded from the calculation of national income.

Step 6 – Next, determine the value of domestic production by foreign residents.

Step 7 – Determine the worth of foreign production by national residents.

Step 8 – Now add all of the values from steps 1 to 4, deduct the values computed in steps 5 and 6, and finally add the value obtained in step 7.


Example of National Income Formula 

National Income formula equals GDP + Foreign Production by National Residents – Domestic Production by Non-National Residents. 

  1. National Income equals $3,000 billion + $900 billion – $600 billion.

  2. National Income equals $3,300 billion.


National Income Formula Macroeconomics

Economists use national income accounting to assess a country's economic performance. To calculate GNP, we use two methods: the expenditure approach, which adds up all of the purchases citizens made in the previous year, and the income approach, which adds up all of the earnings citizens received in the previous year.


A country, like a business, needs to know how well it is performing economically. National income accounting provides statistics that show whether the economy is doing well or struggling.

FAQs (Frequently Asked Questions)

1. What is the National Income Formula?

Answer. The term "National Income Formula" refers to the formula used to calculate the value of total items manufactured in-country by its residents and income received by its residents. According to the formula, national income is calculated by adding together consumption, government expenditure, investments made within the country, net exports (exports minus imports), and foreign production by residents.


Methods of Calculating National Income:

  1. National Income equals Rent + Wages + Interest + Profit + Mixed-Income.

  2. National Income equals C + G + I + NX.

  3. National Income equals (NDPFC) + Net factor income from abroad.

2. Is National Income the Same as GDP?

Answer. GDP (Gross Domestic Product) is a measure of a country's (national income = national output = national expenditure) output. GNP (Gross National Product) = (Gross National Product) includes the value of all goods and services produced by nationals – whether in the country or not.