Real National Income

Pub. Date
03 May, 2000
Pub. Type

The concept of real national income differs from that of real domestic product. The former has to reflect the terms of trade as well as receipts of net factor income from abroad. In this paper we show how a welfare-based measure of income relies on the deflation of nominal national income by the consumption deflator, allowing a definition of income in terms of future consumption. Application of the measure to an open economy requires allowance to be made for the effects of expected changes to the terms of trade and to factor prices. We show that the measure can be aggregated satisfactorily across different countries, or different types of consumer in the same country and also demonstrate the link between capital gains and future changes to factor prices.