National Income: Definition, Benefits and Factors Influencing It – Does Sinaumed’s know what national income is? National Income is the result received from each member of the community or family household which is directly used or consumed at a certain time or one year.
Therefore, if the production of goods and services is not used, it can be interpreted that it will not function if it is not consumed. And it will be the result of products that are wasted so that they are not included in the income of the community or what is called National Income. See a more complete explanation regarding the Definition of National Income below:
A. Definition of National Income
National income is a form of benchmark used to calculate a country’s economy to obtain a picture of the economy that has been achieved and the value of expenditures produced. In short, national income is a measuring tool to determine the level of a country’s economy.
In simpler language, national income is the amount of income received by the people of a country in a certain period of time, usually one year.
In another sense, national income can also be interpreted as the total value of a country’s final output of all new goods and services produced in one year. Recording of national income is a bookkeeping system used by the government to measure the level of country’s economic activity in a certain period of time.
These accounting records include data regarding the total income earned by domestic companies, wages paid to foreign and domestic workers, and amounts spent on sales and income taxes by companies and individuals residing in the country.
With these notes, a country can find out the position and economic problems it is facing, which Sinaumed’s can learn more fully in the book Where is Indonesia’s Economy Going Where is Going by Boediono.
The simplest way to account for national income is to consider what happens when one product is produced and sold. Typically, goods are produced in a number of ‘stages’, where raw materials are converted by companies at one stage, then sold to companies at a later stage.
Value is added at each, intermediate, stage, and at the final stage the product is given a retail selling price. The retail price reflects the added value in terms of all the resources used in all previous stages of production.
So, judging from this definition, you must be thinking what are the benefits of knowing national income? If you have already made expenditures, that’s okay, you don’t need to count them anymore, it’s also complicated because the state must know the income of its people. Just add to the state’s duties.
B. Benefits of National Income
1. To measure the rate of growth of the national economy
With national income data, the state can know whether there has been an increase in the country’s economic growth rate from year to year, progress or setbacks. So, evaluation can be carried out in the future.
2. To compare economic progress between countries.
So, from here you can see which countries are in the category of developed and developing countries. The higher the national income, the more developed the country is.
3. To determine the structure of a country’s economy
We can see which country gets the highest income from which sector, whether agriculture or industry.
4. Become the basis for the formulation of government policies
After the government knows the level of the country’s economy, it can carry out an evaluation related to the policy so that it can be improved again.
5. Knowing and studying the structure of the national economy
National income data can be used to classify a country into industrial, agricultural, or service countries. For example, based on the calculation of national income, it can be seen that Indonesia is an agricultural or agrarian country, Japan is an industrial country, Singapore is a country that excels in the service sector, and so on.
6. Determine the contribution of various economic sectors to national income
For example, agriculture, mining, industry, trade, services, and so on. The data is also used to compare economic progress from time to time, to compare economies between countries or between regions, and as a basis for formulating government policies.
7. Get information about the level of community prosperity
If you want to know what the level of prosperity of a country’s people is like, the government of a country will usually calculate national income. Knowing the level of prosperity can make the government of the country obtain other information that affects the level of the economy, such as: the quality of life of the people, as well as the standard of living that applies in that community’s environment.
8. Helping the Government to Evaluate and measure Changes that Occur
After calculating national income, the government of a country will immediately know the level of prosperity of its people. This will certainly help the country’s government, especially when conducting evaluations later. The evaluation that is usually carried out concerns the economic policies that they have carried out so far.
It doesn’t stop there, the calculation of national income also helps the government to see the changes that have occurred in the country, especially in the economic sector. The results of calculating national income will show a graph of a country’s economic changes from time to time. That is why the government can see economic changes in the country easily.
So in summary National income is useful for:
- determine the development of a country, especially from economic factors,
- determine the level of prosperity of a country,
- evaluate the performance of the economy on a certain scale,
- measure changes in a country’s economy on a regular basis,
- makes it easier to compare the economic performance of each sector,
- as an indicator of the quality of life of people in a country,
- as an indicator of performance comparison between countries,
- as an indicator of the quality of standard of living comparison between countries,
- as an indicator and comparison of the level of economic growth from time to time and
- as an indicator and comparison of economic growth and wealth of a country.
With the existence of national income too, a country can make the right policies and strategies to improve performance. As in the case study of Policies and Strategies for Increasing Regional Original Income in National Development which are below.
C. Factors Affecting National Income
National income is the total value of a country’s final output of all new goods and services produced in one year. Recording of national income is a bookkeeping system used by the government to measure the level of country’s economic activity in a certain period of time.
Accounting records such as these include data on total income earned by domestic companies, wages paid to foreign and domestic workers, and amounts spent on sales and income taxes by companies and individuals residing in the country.
1. Consumption and Savings
Consumption is the total expenditure to obtain goods and services in an economy within a certain period of time (usually one year), while saving is the part of income that is not spent on consumption. Between consumption, income, and savings are very closely related. We can see this from Keynes’s opinion which is known as psychological consumption which discusses people’s behavior in consumption when it is related to income.
2. Investment
Spending on investment is an important component of aggregate spending. Investment is the activity of placing capital in the form of money or other valuable assets into an object, institution, or a party with the hope that the investor or investor will receive a profit after a certain period of time.
It is because of the hope of getting a profit at a later date that this investment is also referred to as an investment. The term investment itself comes from the Italian word, investire which means to use or use. Generally, funds or assets invested by an investor will be developed by a managing body or party.
Profits from the results of the development will later be distributed to investors as a return in accordance with the provisions between the two parties.
Economically, in investing, investors will buy something that will not be used now. Something that is purchased is stored as property which after a certain period of time can experience a change in value. Investments do not always end up making a profit. There is also a risk of loss in investing. Therefore, it is very important to understand the types of investments and their risks. In learning various things about investing, Sinaumed’s can read the book Investing Is Easy by Raymond Budiman.
Read more in: 10 Factors Affecting National Income
3. Aggregate Demand and Supply
Aggregate demand shows the relationship between the overall demand for goods and services according to the price level.
Aggregate demand is a list of all goods and services that will be purchased by economic sectors at various price levels, while aggregate supply shows the relationship between the overall supply of goods and services offered by companies at certain price levels.
Consumption is one of the factors that affect national income. If there is a change in aggregate demand or supply, then the change will cause changes in the price level, unemployment rate and level of economic activity as a whole.
An increase in aggregate demand tends to result in an increase in the price level and national output (national income), which in turn will reduce the unemployment rate. A decrease in the level of aggregate supply tends to increase prices, but will reduce national output (national income) and increase unemployment.
National Income Concept
1. Net National Income (NNI)
Net National Income is income calculated according to the amount of remuneration received by the community as the owner of the factors of production. The amount of NNI can be obtained from NNP less indirect taxes. What is meant by indirect tax is a tax whose burden can be transferred to other parties such as sales tax, gift tax, etc.
2. Individual Income (PI)
Individual income (Personal Income) is the amount of income received by everyone in society, including income earned without carrying out any activities. Individual income also includes transfer payments.
Transfer payments are receipts that are not remuneration for this year’s production, but are taken from a portion of last year’s national income, for example payments for pension funds, social benefits for the unemployed, ex-combatants, interest on government debt, and so on.
To get the amount of individual income, the NNI must be reduced by corporate profit tax (a tax paid by each business entity to the government), undistributed profits (a number of profits that are retained in the company for certain purposes, for example the need for company expansion), and pension contributions. (contributions collected by each worker and each company with the intention of being paid back after the worker is no longer working).
3. Income Ready to Spend (DI)
Income that is ready to be spent (Disposable Income) is income that is ready to be used to buy consumption goods and services and the rest into savings which are channeled into investments. This disposable income is obtained from personal income (PI) minus direct taxes. Direct tax is a tax whose burden cannot be transferred to other parties, meaning that it must be borne directly by the taxpayer, for example income tax.
4. Gross Domestic Product (GDP)
Gross domestic product (Gross Domestic Product) is the total value of products in the form of goods and services produced by production units within the boundaries of a country (domestic) for one year.
In this GDP calculation, it also includes the production of goods and services produced by companies/foreigners operating in the territory of the country concerned. The goods produced include capital goods whose depreciation has not been taken into account, therefore the amount obtained from GDP is considered to be gross/gross. National income is one measure of a country’s economic growth
5. Gross National Product (GNP)
Gross National Product or GNP includes the value of products in the form of goods and services produced by residents of a country (national) for one year; includes the production of goods and services produced by citizens abroad, but does not include the products of foreign companies operating in the territory of that country.
National Income Calculation Method
The simplest way to account for national income is to consider what happens when one product is produced and sold. Typically, goods are produced in a number of ‘stages’, where raw materials are converted by companies at one stage, then sold to companies at a later stage.
Value is added at each, intermediate, stage, and at the final stage the product is given a retail selling price. The retail price reflects the added value in terms of all the resources used in all previous stages of production. There are several methods used to calculate national income.
Try to remember the three definitions of national income in the understanding section above. State income can be calculated using three approaches, namely:
1. The revenue approach
The first approach is to add up all the income (wages, rent, interest and profits) received by consumption households in a country during a certain period in return for the factors of production provided to the company. The calculation method is as follows PN = w (wages/salary) + i (interest) + r (rent) + p (profit)
2. Production approach
The production approach is a way of calculating national income by adding up the value of all products produced by a country from the industrial, agricultural, extractive, services and trade sectors during a certain period.
The product value calculated with this approach is the value of services and finished goods (not raw materials or semi-finished goods). In Indonesia, the productive sector consists of nine business fields. These sectors are:
Agriculture (agriculture) Mining and quarrying (mining and quarrying) Manufacturing industries (electricity, gas, and water supply) Building (construction) Trade, restaurants, and hotels (trade, restaurant, and hotels) Transport and communication (transportation and communication) Finance, rental of buildings and corporate services (finance, rent of building and business service) Services (services).
How to calculate:
Value Added (NT) = Output Value (NO) – Intermediate Input Value (NI)
3. Expenditure approach
That is by calculating the total amount of spending to buy goods and services produced in a country during a certain period.
Calculations with this approach are carried out by calculating expenditures made by four actors in state economic activity, namely: households (consumption), government (government), investment spending (investment), and the difference between the value of exports minus imports.
The calculation method is as follows: PN = C + I + G + (XM). The results of calculations using the expenditure method are called the gross national product (GNP). Basically, the expenditure method has several weaknesses, including the presence of multiple expenditure factors that are not assessed.
For example, not all consumption expenditure is household. It could also be that these expenditures are not to spend on the use of value, but are intended for investment.
However, the calculation of national income using the expenditure method is relatively easier, especially in terms of income and census. This is because usually everyone will easily provide information about their expenses compared to their income.
So, that’s an explanation of national income, noble from the understanding, benefits, to the factors that influence it. Can Sinaumed’s understand this material well? if Sinaumed’s still needs references about national income and other economic material, then you can visit sinaumedia’s book collection at https://sinaumedia.com , like the following recommendations: Happy Learning. #Friends Without Limits.
Book Recommendations Related to National Income
1. Globalization, Constitutional Economics, and the Economics Nobel
2. Monetary Economy: Case Study of Indonesia
3. Indonesian Economic Politics
Source: from various sources