National income

By:

James Knight

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Updated: Aug 20, 2021

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A measure of the money value of the total flow of goods and services produced in an economy over a specified period of time. It can be calculated in three ways: (a) as the value of the outputs of all goods and services in the economy, net of indirect taxes and subsidies, and corrected for inter-industry sales so as to avoid double-counting, (b) as the total flow of income paid out to households in return for the supply of factors of production, plus profit retained by firms as reserves, and (c) as the sum of expenditure on consumers’ goods and investment goods, government expenditure and expenditure by foreigners on exports less domestic expenditure on imports. This is frequently referred to as Gross National Expenditure or Gross national product. In principle, each of these methods of measurement should give the same result, since the flow of expen­diture on goods and services must equal the sales value of those goods and services, which in turn must equal the incomes paid out by firms as wages, salaries, interest, dividends and rent plus un­distributed profits. However, in practice, because of measurement problems, the three separate estimates of national income usually di verge, and the value finally adopted is a ‘compromise estimate’ of the three. Since national income measures the flow of goods and services produced, its leve! can be taken as an indicator of the well-being of the economy, though clearly it can never be a perfect indicator of this. The latter depends not only on the size of the flow of goods and services, but also on the way in which this is distributed among households, the quality of the goods themselves, the state of the environment, etc., which need by no means improve with a rising national income. National income is defined to include not only the income which arises from production within the economy, but also income which accrues to domestic residents from activities carried on abroad. If these overseas earnings are excluded, we would have Gross Domestic Product.

Reference: The Penguin Dictionary of Economics, 3rd edt.