4.1 National income statistics

National income is the income earned by the factors of production from current production during a period. In the national accounts, it corresponds in principle to the value of output and expenditure after the relevant adjustments.

The flow must be dated and measured consistently. Domestic and national concepts differ according to whether factor income crosses borders.

Wages, rent, interest and profits generated by production over one year contribute to national income, even though the underlying assets are stocks.

National income is not national wealth, and it is not simply the government’s tax revenue.

GDP measures output produced within a country’s borders. GNI adjusts GDP for net primary income from abroad. NNI further accounts for depreciation of capital, giving a measure closer to income after wearing out productive assets.

Use the geographic boundary and depreciation adjustment explicitly. A country can have GDP above GNI if more factor income flows abroad than in; NNI is lower than GNI when depreciation is positive.

GDP £1,000bn plus net factor income from abroad £20bn gives GNI £1,020bn; subtracting £70bn depreciation gives NNI £950bn.

GDP is not automatically the income of residents, and NNI is not GDP minus every kind of government spending.

Market prices include taxes on products and exclude subsidies, while basic prices measure the amount received by producers before product taxes and after product subsidies. To move from market to basic prices, subtract taxes on products and add subsidies.

State which valuation is used before adjusting; otherwise the sign can be reversed.

If GDP at market prices is 900, product taxes are 80 and subsidies are 20, GDP at basic prices is 840.

Basic prices are not “lower prices” in every case; the adjustment depends on the relative size of taxes and subsidies.

A gross measure includes the value of capital used up during production; a net measure subtracts depreciation (consumption of fixed capital). Thus net national income is gross national income minus depreciation.

The adjustment removes the amount needed to maintain the productive capital stock. Do not subtract every business cost or intermediate input.

If GNI is 1,020 and depreciation is 70, NNI is 950 in the same currency units.

Gross does not mean inaccurate and net does not mean after tax; the distinction concerns capital consumption.