Politics & Society

What Is Gross National Income? Definition and Formula for GNI

Written by MasterClass

May 30, 2019 • 5 min read

Calculating a country’s income is incredibly useful for determining the country’s economic activity. There are many ways to calculate the national income of a country, but regardless of which method you choose, each attempts to determine the total market value of output by the country over a specific period of time. One of the most widely used methods is gross national income, or GNI.

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What Is Gross National Income?

Gross national income is the value of all income (also called output or national output) produced by a country’s residents (both citizens and foreign residents) within its geographical borders, plus net receipts of income (wages, salary, and property income) from abroad. In short, GNI is a measure of all money, goods, services, and investments that come into or stay in the country.

One caveat when these goods and services are tallied up is that only “final goods” are counted. This avoids double counting items. For instance, the value of a watermelon from the farm may be $1, then $5 at the grocery store. In this example, the watermelon’s “final good” value is $5, and so the total value of the good would be counted in the country’s income as $5.

How to Calculate Gross National Income

To calculate GNI for a country, add up 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 and send out of the country.

What Is the Formula for Gross National Income (GNI)?

The formula for calculating GNI is often represented as: GNI = C + I + G + X + NFFI

Why Calculate a Country’s Gross National Income?

Governments need to be well-informed about their own economies in order to implement effective fiscal policies. By tracking and analyzing countries’ incomes, economists are able to recommend fiscal policies that will actually be effective in creating economic growth—fiscal policies like government stimulus packages, public works projects, and tax hikes or cuts.

Two specific ways to look at GNI data are GNI per country and GNI per capita.

What Is GNI per Country?

Calculating GNI per country can provide reliable ways to look at a country’s income in two ways:

  • Entire income all at once. GNI is unique from other income calculations (like GDP) because it factors in net income from abroad, which is often a large part of a country’s total income. Thus, it gives a more accurate picture of a country’s income for countries that receive a lot of income from abroad.
  • Income from year to year. Calculating GNI per country and looking at the growth or decline over a range of years measures 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.

The World Bank, a prominent financial institution that collects economic data, collects data for GNI per country for countries all over the world, and it converts all data to the U.S. dollar for easy comparison. Rather than doing this conversion using the current exchange rate, the World Bank uses “purchasing power parity” (or PPP), which converts goods and services by comparing identical goods in each country and using that to determine what that good would cost in the United States. This is easy for goods like McDonald’s hamburgers, but it can pose a problem for items not made or sold in the United States, such as yak carts.

However, calculating GNI per country is not an effective way to compare the economies of different countries. This is because GNI per country does not take into consideration the population of each country, so the numbers can be misleading when looking at countries with vastly different populations. For comparing economies of different countries, GNI per capita is much more effective.

What Is GNI per Capita?

GNI per capita is a way to look at the country’s income divided by its population, and it is the clearest way to compare income per person in a country. GNI per capita is a strong indicator of the standard of living of an average citizen in the country, and higher GNI per capita numbers are correlated with things like:

  • Higher literacy rates
  • Lower infant mortality
  • Better access to safe water

The World Bank also collects this data, converts it to the U.S. dollar using the current exchange rate, and then applies the Atlas method, which uses average exchange rates over three years to even out any exchange-rate fluctuations.

How Does GNI Compare to Other National Income Calculations?

Aside from gross national income, there are several other ways to calculate national income, including GDP, GNP, and NNI.

  • Gross domestic product (GDP). GDP is an income calculation included within GNI. In fact, GNI can be represented as GDP + net foreign factor income. By comparing a country’s GDP and GNI, we can determine how much foreign aid or foreign labor a country receives. Most countries have very little difference between their GDP and GNI—for instance, in 2016 the United States had a GNI only about 1.5 percent higher than its GDP. But in other cases, there is a large difference—if a country’s GNI is mucher higher than their GDP, it means they receive a lot of foreign aid, whereas if their GDP is much higher than their GNI, it means that non-citizens make up a large portion of the country’s production.
  • Gross national product (GNP). GNP is very similar to GNI. However, there are a few small differences between them (for instance, GNP does not include subsidies receivable from abroad), and these differences have caused the World Bank to prefer GNI to GNP for income calculation.
  • Net national income (NNI). NNI is GNI minus depreciation (of things like homes, buildings, and machinery). It is the most precise of the national accounting methods and can give the most accurate estimation of a country’s total income and economic growth rate, as well as being the best measure for 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.

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