National income is the sum of the incomes of the owners of the production factors, belonging to a specific nationality and during a specific period of time, usually one year.
- Income of labour: Salaries
- Income of capital: Rents, interests, utilities and dividends
- Income of land: Rent of the land
National income doesn’t include those incomes that doesn’t have the provision of a good or a service as a counterpart, like:
- Child benefits
- Retirement pensions
National income includes incomes generated by production factors that belong to people of a specific nationality, generated abroad. For example, dividends of shares of foreign enterprises.
It doesn’t include income generated by production factors that belong to people of a foreign nationality.
National income and national product
Each final sale of a good or a service has, as a counterpart, the payment of a price. This price includes the payment to every factor involved in the production of that good, during the whole productive chain. Namely, it includes salaries, rents, interests, etc.
If we take into account that the national product is the monetary value of final goods and services produced by an economy in a given period of time, the value of national income is the same as the value of the national product.
Failures of national income
National income is sometime used as a measure of the welfare of a country or as a way of evaluating the economic policies of a country. However, one should be careful by using this approach. National income doesn’t take into account some issues like:
- Environmental pollution
- Income distribution
National income doesn’t take into account a lot of transactions that take place outside the market and neither take into account the production of good or services that don’t have a payment as a counterpart.