National Income

I

Introduction

National Income, in the theory of economics, the total net income earned by the people of a country in producing the national output of goods and services over a period of time, usually a calendar year.

II

Computing National Income

National income figures are taken from the basic figure called gross national product and are the result of certain reductions and additions from that figure. Economists generally approach income figures from either of two standpoints. In one approach income consists of the total annual sum paid to factors of production: rent for land, wages for labor, interest on capital, and profits for management. In the second approach national income is the total net money value of the national output of goods and services. The equality of national income and national output arises because income and output are two sides of the same production activity.

A statistical concern is the computation of value. The difficulty arises because the value of a complete product includes the value of its component parts. Care is therefore taken to avoid duplication and to include only the value of the complete product. See Value.

Excluded from the national income figure is the value of transactions that do not represent payments to factors of production, or do not add value to national output, such as inheritances, gifts, or capital gains on assets.

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National income statistics may be taken as an index of the prosperity of a nation if the prices used to evaluate income and output provide a reasonable indication of the country's economic welfare and of changes in the price and quality of goods. The statistics on national income collected by the Department of Commerce for the U.S. are shown in the accompanying table.

In comparing the national income totals of various years, consideration must be given to the purchasing power of the dollar values represented by those figures, or, as it is called, real national income. Thus, the decline in the national income from 1929 to 1933 amounted to more than 50 percent. When considered in terms of the increase of the purchasing power of the dollar in 1933, resulting from the decline in prices, however, the real national income decreased only by about 40 percent. The great rise in national income after 1939 was offset to an important degree by a reduction in the purchasing power of the dollar as a result of inflation. See Inflation and Deflation.

III

Personal Income

Derived from national income figures, personal income is the amount of money received by individuals for their own use. It is made up of all types of income: wages and salaries, proprietor and rental income, dividends and personal interest, and transfer payments. The latter comprises income from pensions, social insurance, and social-service payments. In recent years transfer payments have become a more important segment of personal income. When total taxes are subtracted from personal income, the remainder is called disposable income, which is either spent or saved. Through the measurement of these income figures, the government determines how much money is available as income and how it is distributed.

A frequently cited measurement of a nation's economic prosperity is its annual gross national product per capita. For example, World Bank estimates of per capita GNP in 2000 ranged from a high of $44,340 for Luxembourg to a low of $100 for the Democratic Republic of the Congo (in the United States, $34,260).

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