National Income

National Income the total amount of money earned within a country. National income is the total value a country’s final output of all new goods and services produced in one year.

National income accounts The published national income accounts for the UK, called the ‘Blue Book’, measure all the economic activities that ‘add value’ to the economy.

• Adding value - National output, income and expenditure, are generated when there is an exchange involving a transaction. However, for an individual economic transaction to be included in national income it must involve the purchase of newly produced goods or services. It must create an addition to the value of the scarce resources.
• Transactions which do not add value are called transfers, and include second-hand sales, gifts and welfare transfers paid by the government, such as disability allowance and state pensions.
• The Creation of National Income - goods are produced in a number of 'stages', where raw materials are converted by firms at one stage, then sold to firms at the next stage. Value is added at each, intermediate, stage, and, at the final stage, the product is given a retail selling price. The retail price reflects the value added in terms of all the resources used in all the previous stages of production.
• Final output - only the value of the final stage, the retail price, is included, and not the value added in all the intermediate stages - the costs of production, plus profits.  In short, national income is the value of all the final output of goods and services produced in one year.

Example - 

For example, consider the production of a motor car which has a retail price of £25,000. This price includes £21,000 for all the costs of production (£6,000 for components, £10,000 for assembly and £5,000 for marketing) plus £4,000 for profit. To avoid double-counting, the national income accounts only record the value of the final stage, which in this case is the selling price of £25,000.

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When goods are bought second-hand, the transaction does not add new value and will not be included in national output. If second-hand goods are included, double-counting will occur, and this would falsely inflate the value of national income.

For example, if the car in question is sold in two year’s time for £15,000 it would provide the owner with money, but the sale will not add to national income. If it were included in national income, it would make the value of the car £35,000  - the initial £25,000 plus the second hand value of £15,000. This is clearly not the case, so any future second-hand sales are not included when valuing national income. Such second-hand transactions are called transfers.