National Income
National income is the total income earned by the residents of a country from the production of goods and services over a period, together with net income from abroad. It is one of the central aggregates of the national accounts, and it is closely related to gross domestic product, gross national product, and gross national income. National income measures the resources available to residents for consumption and saving, and it is used to assess living standards, to analyse distribution, and to compare economies.
Concepts and relationships
Several related concepts are used. Gross domestic product measures the value of goods and services produced within the borders of a country. Gross national product measures the value produced by the residents of a country, wherever they are located, and it equals gross domestic product plus net factor income from abroad. Gross national income is equivalent to gross national product and is the preferred term in international statistical standards.
Net national income deducts the consumption of fixed capital, or depreciation, from gross national income, and it represents the income available for consumption and saving after maintaining the capital stock. National income at factor cost measures the income accruing to the factors of production, and it differs from measures at market prices by the treatment of taxes and subsidies on production. Each concept has its uses, and the choice depends on the question being asked.
Measurement
National income is measured through the national accounts, which assemble data from surveys of households and firms, from administrative records, and from other sources. The accounts are built up from production, income, and expenditure measures, which should in principle be equal, and discrepancies are reported as statistical adjustments. The measurement of income requires careful treatment of depreciation, of income from abroad, and of the valuation of output.
International standards provide definitions and conventions so that data are comparable across countries. The system of national accounts specifies the treatment of production boundaries, of the informal sector, and of items such as imputed rents and own-account production. Despite the standards, comparability is affected by differences in data sources, in the size of the informal economy, and in statistical capacity, and revisions are common.
Uses
National income is used to compare the size and performance of economies, to assess growth, and to analyse the distribution of income. Per capita national income is a common measure of average living standards, although it ignores distribution, non-market activity, and differences in prices, which are addressed by using purchasing power parities. Growth in national income is a central indicator of economic performance.
The concept is also used to analyse the functional distribution of income, between labour and capital, and the transformation of income into disposable income through taxes and transfers. It informs fiscal and monetary policy, since the level and growth of income determine tax revenue and the demand for money, and it is used to assess the sustainability of external positions, through the ratio of external debt to income.
Limitations
National income has limitations as a measure of welfare. It excludes non-market activity, such as unpaid household work and care, which is substantial and disproportionately performed by women. It does not account for the depletion of natural resources or for environmental damage, so that growth may overstate improvements in welfare if it is achieved at the expense of the environment. It says nothing about the distribution of income among households.
These limitations have prompted the development of alternative and supplementary measures, including satellite accounts for household production and the environment, indices of inclusive wealth, and composite indicators of well-being. The objective is not to replace national income, which remains essential for macroeconomic analysis, but to complement it with measures that capture dimensions of welfare it does not include, and to inform policy that aims at broader objectives than output alone.
Distribution and the transformation of income
National income is transformed into disposable income through the operations of government. Taxes are levied on income, on production, and on consumption, and transfers are paid to households, so that the income available for spending differs from the income generated in production. The distribution of national income among households, and the effect of taxes and transfers on that distribution, are central to the analysis of inequality and of the redistributive role of the state.
The functional distribution of income, between compensation of employees and operating surplus, describes how income is divided between labour and capital. This division has attracted renewed attention as the labour share has declined in many economies, with implications for inequality and for demand. The personal distribution of income, among households, depends on the functional distribution and on the distribution of wealth and of skills, and it is the focus of most analysis of inequality.
Comparisons across countries and over time
Comparisons of national income across countries require adjustments for differences in prices and in population. Purchasing power parities convert incomes into a common unit that reflects the actual purchasing power of each currency, and per capita measures adjust for the size of the population. These adjustments change the ranking of countries substantially, since price levels and populations differ widely, and they are essential for meaningful comparisons of living standards.
Comparisons over time require adjustments for inflation and for changes in the composition of output. Real national income, measured in constant prices, removes the effect of price changes, and chain-linking methods account for changes in relative prices over time. Adjustments for changes in the quality of goods and for the introduction of new products are necessary but difficult, and they affect the measured rate of growth, with implications for the interpretation of economic performance.
Beyond income
Recognition of the limitations of national income has led to efforts to measure welfare more broadly. Measures of inclusive wealth account for the stocks of produced, human, and natural capital, and they assess whether development is sustainable, in the sense of maintaining or increasing the wealth per head. Environmental accounts record the depletion of natural resources and the damage from pollution, providing a more complete picture of the costs of growth.
Composite indicators of well-being combine measures of income, health, education, and other dimensions, and they are used to compare countries and to inform policy. The objective is not to replace national income, which remains essential for macroeconomic analysis, but to complement it, so that policy can pursue objectives broader than the growth of output and can take account of sustainability and of the distribution of the benefits of growth.