National Income Statistics

The topic in one idea

National income statistics measure the value of economic activity in a period, and every calculation on this topic is one of three conversions.

Learn these three lines first. The rest of the page explains and practises them.

1. Meaning of national income

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A flow of final output over a period

National income is the value of final goods and services produced, and the income generated by producing them, over a period, usually a quarter or a year. It is a flow, not a stock of wealth.

Count only final output, or add value added at each stage, to avoid double counting. Wheat sold for $100, flour for $160 and bread for $240 add to $500, but the production is worth $240: the bread, or $100 + $60 + $80 of value added.

Output, income and expenditure

Output is sold, the spending on it is expenditure, and the revenue is paid out as wages, rent, interest and profit, so in principle:

Measured estimates can still differ, because of incomplete data, timing and revisions.

2. GDP, GNI and NNI

GDP: production inside the territory

Gross Domestic Product is the value of final output produced within the domestic territory, before depreciation. Location decides, not ownership: a foreign-owned factory in Economy A counts in A's GDP.

GNI: income of residents

Gross National Income is the gross primary income of residents: GDP adjusted for wages, profit, interest and dividends crossing the border.

NNI: after depreciation

Net National Income is GNI minus depreciation, the capital used up through wear and tear, ageing and obsolescence.

3. The GDP–GNI–NNI ladder

Step 1: GDP to GNI

Teaching materials often abbreviate the balance as NPIA or NFIA. A positive balance puts GNI above GDP; a negative one puts it below. Negative does not mean nothing is received, only that more is paid out. Keep the sign.

Step 2: gross to net

GNI of $900 billion with depreciation of $80 billion gives NNI of $820 billion. GDP minus depreciation is a net domestic measure, not NNI.

Worked example 1

GDP $800 billion; primary income received from abroad $70 billion; paid abroad $95 billion; depreciation $60 billion.

GNI is below GDP because the balance is negative; NNI is below GNI because depreciation is deducted.

4. Market prices to basic prices

Market prices are what purchasers pay, including taxes on products such as VAT. Basic prices are what producers receive: without those taxes, with subsidies on products.

Why taxes come off and subsidies go on

The purchaser pays the tax but the producer does not keep it, so it comes off. A subsidy lets the purchaser pay less than the producer receives, so it goes back on. In one step: basic equals market minus net taxes on products, taxes minus subsidies. Official statistics usually present the same identity as GDP at market prices = GVA at basic prices + taxes on products − subsidies on products.

Worked examples 2 and 3

Market prices $500 billion, taxes $45 billion, subsidies $10 billion:

$535 billion is the classic wrong answer: the conversion run backwards. In reverse, $620 billion at basic prices with taxes of $70 billion and subsidies of $15 billion gives the market-price measure:

5. All three conversions in one question

Worked example 4

In billions: GDP at market prices 1,200; received from abroad 90; paid abroad 130; depreciation 100; taxes on products 75; subsidies on products 20. Find NNI at basic prices.

Check you have it

Question 1

The table gives details of national income statistics for an economy. What is the net national income for this economy?

AUS$2700bnBUS$2800bnCUS$2900bnDUS$3000bn

Question 2

Governments in market economies give different reasons for intervening in the operation of an economy.
Which reason given is a normative statement?

AAverage incomes have failed to keep pace with price rises during the past year.BEnergy prices have increased by more than 50% during the past year.CThe distribution of incomes has become more unfair during the past year.DThe poorest 10% of households have suffered the greatest fall in average real income during the past year.

Question 3

A teenager received a cheque for $50 as a birthday gift from her parents. The teenager paid the cheque into her savings account at the bank. Why is this gift a transfer payment?

AIt did not involve a cash payment.BIt transfers money between bank accounts.CThe parents did not spend their money.DThe teenager did not produce any output.

The order that prevents mistakes

1. Write the target measure and the starting measure.
2. Domestic to national: add net primary income from abroad.
3. Gross to net: deduct depreciation.
4. Market to basic: subtract taxes, add subsidies.
5. State units, and explain any negative sign.

6. Which measure answers the question?

• GDP for production inside the economy.
• GNI for residents' gross income, including the effect of foreign ownership.
• NNI for income after capital consumption.

None is a complete measure of living standards; that belongs to later topics.

7. Exam traps

• Counting every transaction instead of final output.
• Defining GDP by ownership, or GNI as output inside the country.
• Adding income paid abroad, or dropping the minus sign.
• Including every cross-border payment: GNI uses net primary income only.
• Deducting depreciation twice, or confusing it with inflation or with investment: net investment is gross investment minus depreciation.
• Subtracting subsidies when converting market to basic prices.
• Leaving out units.

8. Exam technique

Four marks: explain the difference between GDP and GNI.

GDP measures gross final output produced within the domestic territory. GNI measures the gross primary income of residents and is found by adding net primary income from abroad to GDP. GNI can therefore be above or below GDP, depending on the direction and size of cross-border primary income.

Analysis: why GDP can exceed GNI. Foreign-owned firms produce domestically, raising GDP; part of the income is paid to non-resident owners; if more is paid abroad than received, net primary income from abroad is negative, so GNI is below GDP.

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