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What Is Net National Income?
Net national income represents the total income of a country’s residents, and it is uniquely precise in that it factors in depreciation.
In total, NNI takes into account all income produced by a country’s citizens and foreign residents within its geographical borders, plus net receipts of income (wages, salary, and property income) from abroad, and subtracts depreciation of fixed capital (things like homes, buildings, and machinery).
- For NNI, “income produced” primarily means goods and services, but also includes investments and taxes.
- However, NNI includes only direct taxes (taxes paid straight to the government, like income tax) and does not include indirect taxes (such as sales tax, which is paid by a consumer to a vendor who then gives that money to the government).
- One caveat in the total value of goods and services is that only “final goods” are counted, to avoid double-counting items. For example, the value of watermelon from the farm may be $5, then $10 at the grocery store. In this example, the watermelon’s “final good” value is $10.
How To Calculate NNI
The simplest formula for calculating NNI is:
NNI = GNI – Depreciation
In this equation, GNI = GDP + net property income from abroad.
The expenditure approach calculates NNI without using GDP or GNI. The formula for calculating NNI using the expenditure method is:
NNI = C + I + G + X + NFFI – IT – D
In this formula, the variables stand for the following:
- Consumption (C). Consumption (or personal consumption expenditure) is the value of all goods and services acquired and consumed by the country’s households.
- Investment (I). This is any domestic capital spending by a country’s citizen-run businesses.
- Government spending (G). This is all consumption and investments made by the government. Government spending does not include any transfer payments (such as social security paid to citizens), since they are not actually government spending, but a transfer of money.
- Net exports (X). This is the country’s exports MINUS the country’s imports. In order for this number to increase NNI, a country needs to export more than it imports.
- Net foreign factor income (NFFI). This is income that the country’s citizens earn abroad MINUS the income that foreign residents earn in the country.
- Indirect taxes (IT). These are taxes paid by taxpayers to intermediaries, who then file tax returns to deliver that tax to the government. The most common example of an indirect tax is sales tax.
- Depreciation (D). Depreciation (or consumption of fixed capital) measures the total income that has to be spent to repair wear and tear on fixed capital assets in order to maintain the existing physical capital stock. For example, machinery needs to have parts replaced in order to continue its consistent output—the price of those parts is subtracted from the total value as “depreciation.”
Why Is NNI Important?
NNI is important because it is the most precise of the various national accounting methods and can give the most accurate estimation of a country’s total income and economic growth rate. NNI builds off of GDP and GNI—the two most common national accounting measurements—to estimate a country’s economy. When measured per capita, NNI is a reliable economic indicator of citizens’ overall well-being.
NNI is also especially useful for measuring an economy’s ability to continue minimum production standards—in other words, how well a country can keep up a consistent national output of goods and services.
What Are the Drawbacks to NNI?
While in theory, net national income is the most precise of the measures of a country’s total output, it is heavily reliant on an accurate calculation of depreciation—and in practice, depreciation can be very difficult to calculate. When subtracting depreciation, analysts have to rely on estimates of the costs of maintaining machinery and buildings, and that estimation is often not representative of the true depreciation costs over the given time.
Due to the difficulty of determining depreciation, NNI is not often used in practical economic applications, and most countries and organizations—including the United States, the European Union, and the World Bank—instead collect data to calculate and track GDP and GNI.
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