The term income can be understood as the profit or profit that is obtained from something. National, meanwhile, is what is linke to a nation (country, town, community).
The idea of national income refers to the income generated by the factors of production of a country in a given period, not counting those services or intermediate goods that are used in the framework of the production process.
The most common method to calculate the national income is to add all the goods and final services in a year. Intermediate goods are avoided because otherwise they would be counted twice.
When performing the calculation every year, it is possible to estimate whether the economy of the country in question grows or, on the contrary, contracts. You can also know how the distribution of income is made and what is the contribution of each productive sector to the national economy.
It is an instrument of great value to carry out the analysis of the result of the economic process, specifically by measuring the number of goods and services that a country has served over a year.
When the national income is calculated, the expenses of the State in goods and services are generally included, but not the funds that are destined to private citizens (such as pensions or pensions). On the other hand, net exports (derived from total exports minus total imports) are usually taken into account.
National income can be used for consumption, investment, or savings. Most of the national income is aimed at the consumption of products and services: that is, it is spent. The rest is invested to generate future income or saved without being destined for any productive purpose.
We talk about investment precisely when the savings represented by national income is used to acquire goods that are then applied to production. The consumer, meanwhile, aims to meet the diverse needs of the various players in the economy and is associated with the concept of ‘expenditure,’ as we mentioned in the previous paragraph.
The destination has the portion of the national income that is not consumed or invested in the export to foreign countries.
In this case it’s necessary to distinguish between two types of economy: a closed one, in which investing amounts to saving, since the savings destined to the purchase of capital goods inevitably becomes an investment; an open one, which contemplates the export and import of goods, and where saving and investment are not usually equivalent.
The equation in which the latter case can be seen as follows: (GDP – C) – I = X – M. Let’s see what each variable corresponds to:
It is also possible to say that saving (A) is the GDP less consumption, so the above equation may be expressed as follows: A – I = X – M.