The Concept of National Income and How to Calculate It

The Concept of National Income – Have you ever heard of national income or gross and net national product? If not, you need to know about national income, both its meaning, concept and how to calculate it. The following is a summary of the meaning, concept and method of calculating national income.

Definition of National Income

  • According to Sadono Sukirno, national income describes the level of state production achieved in a certain period of time and changes in the level of production from year to year.
  • According to Soediyono Reksoprayitno, national income is the amount of goods and services produced by a country’s economy.
  • Karl E and Ray C argue that national income is the total income generated by several factors of production owned by citizens of a country.

Through national income, the government can calculate the amount of taxes obtained from its people. In addition, national income is influenced by various things in the macro economy , for example companies, families, state administration and other factors.

You can study national income as part of macroeconomics in the Textbook of Macroeconomic Theory by Sattar Sivana Kardinar Wijayanti.

Read more in the article: Definition of National Income

Benefit of Calculation of National Income

There are several benefits of calculating national income, one of which is knowing the economic development of a country. Apart from this, there are several benefits of calculating national income that you need to know.

  • Can determine the level of prosperity of a country.
  • By calculating national income, we can evaluate the performance of the economy on a certain scale.
  • By calculating the country’s national income can measure changes in the economy over time.
  • Countries can compare economic performance across sectors.
  • By calculating the country’s national income, it can find indicators of the quality of life of the people of that country.
  • The results of calculating national income can be a comparative indicator of the country’s economic performance.
  • Can be used as an indicator of comparison of the quality of living standards of a country with other countries.
  • Can be a measure and comparison of economic growth from time to time.
  • Can be used as a measure and comparison of economic growth and wealth between countries.
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Every country in the world has a very strong relationship of dependence and mutual influence. Likewise with Indonesia, which is a country with a strategic position that influences economic activities in it, which you can learn about in the Indonesian Economy & Global Economic Dynamics book.

National Income Concept

To be able to calculate national income, you need the categories within the national income itself. Basically, national income can be divided into six categories, namely as follows.

1. Gross Domestic Product or GDP

Gross domestic product is the total number of products in the form of goods and services produced by several production units within the boundaries of a country or within one year.

GDP = Domestic income (DN) + Domestic foreign income (DN)

In the calculation of GDP, it includes goods and services produced by related foreign companies and agencies. However, its territory is still within the territory of a country or domestic.

2. Gross National Product or GNP

Gross national product or gross national product is the value of products in the form of goods and services produced by residents of a country (national) for one year. These national products include those produced by citizens produced abroad. The formula for GNP is as follows.

GNP = Income of Indonesian Citizens DN + Income of Foreign Citizens (LN) – Income of Foreign Citizens

3. Net National Product or NNP

The formula for calculating net national product is as follows.

NNP = GNP – depreciation or depreciation of capital goods.

Depreciation referred to above is the replacement of capital goods for production equipment used in the production process. In general, depreciation is an estimate so that it can cause errors, even if it is relatively small.

4. Net National Income or NNI

Net national income or net national income is income calculated according to the amount of remuneration received by people who act as owners of production factors. The following is the formula from NNI.

NNI = NNP – Indirect taxes

The indirect tax in question is a tax whose burden can be transferred to another party, for example, gift tax, sales tax and so on.

5. Individual Income or PI

Individual income or personal income is the amount of income received by everyone in society. This includes income earned without carrying out any activity, for example, the salary of a civil servant or the income of an entrepreneur that is obtained in sequence. Here’s the formula for calculating PI.

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PI = NNI – Corporate tax – Dues – Retained earnings + Transfer payment

The transfer payment in question is income that does not include production fees, but is taken from a portion of last year’s national income. Examples include pension payments, unemployment benefits and so on.

6. Income ready to spend

This sixth concept can also be called disposable income, which is income that is ready to be used to buy consumption goods and services and the rest becomes savings which are channeled into investments. The following is the formula for disposable income.

DI = PI – Direct tax

The direct tax in question is a tax whose burden cannot be transferred to another party, for example income tax.

The formula for calculating national income

There are several methods of calculating national income that you need to know, each existing calculation method depends on the approach used, the following are the methods and methods for calculating national income that you need to know.

1. Production method

With the production method, national income is the total value added of goods and services produced by all sectors of the country’s economy. Here’s the formula for the production method.

Y = 1 unit x price 1 + added value (2 units x 2 price) + m.. added value (n x price n units)

2. Revenue method

National income in the income method is the total income received by all sectors of the country’s economy for a certain duration. For example one year. The following is the formula for calculating national income using the income method.

Y = rent + wage + interest or interest + profit

3. Dispensing method

National income in the expenditure method is the amount of expenditure that has been used by all sectors of the economy. The following is the formula for calculating national income using the expenditure method.

Y = C + I + G

From the formula above, here’s what you need to know.

C is consumption expenditure , which is all household expenditure.

Meanwhile, I referred to in the expenditure method is investment expenditure, which is an investment made by the company.

The G referred to in the expenditure method is government expenditure, which is routine expenditure by the government.