Real income measures

20.3    The real income measures are a series of aggregates which measure the purchasing power of various income flows in the national accounts.

20.4    Income flows in the SNA (e.g. cash transfers or saving) are measured in nominal, monetary units and are not directly related to prices or quantities of goods or services. Income can be used to purchase goods or services, however, and is often defined as ‘the maximum amount that a household, or other unit, can consume without reducing its real net worth’¹⁰⁵. Real incomes measure the amount of goods and services that can be purchased with an income flow.

20.5    A numeraire is a set basket of goods and services. To measure the purchasing power of an income flow over a numeraire, the price of the numeraire in a specified reference period is used to deflate the nominal income value. Change in the deflated value of income over time, in comparison to the reference period, therefore measures change in the purchasing power of the nominal income flow over the numeraire. Real incomes are deflated in this way.

20.6    As GDP is a measure of the income generated in the economy by production, if GDP can be deflated, then real GDP is also a measure of real income. In this case, the numeraire is the set of all goods and services produced in the domestic economy. However, to move from domestic product in volume terms to national income in real terms, the power of income to purchase goods and services from the rest of the world also needs to be considered.

20.7    In a closed economy, without exports or imports, GDP is equal to the sum of final consumption and capital formation (otherwise known as domestic final demand). In this case, real GDP is an appropriate measure of the purchasing power of the income generated from domestic production. However, in an economy which is open to imports, and exports domestic production, the total real income that residents derive from domestic production also depends on the rate at which exports may be traded against imports from the rest of the world.

20.8    The terms of trade is the ratio of the price of exports to the price of imports. If the prices of a country’s exports rise faster (or fall more slowly) than the prices of its imports (that is, if its terms of trade improves), fewer exports are needed to pay for a given volume of imports. This means that at a given level of domestic production, goods and services can be reallocated from exports to consumption or capital formation. An improvement in the terms of trade therefore makes it possible for an increased volume of goods and services to be purchased by residents out of the incomes generated by domestic production.

20.9    The usual way to calculate real income figures is to start from real gross domestic income and add iterative adjustments deflated to real terms. The measures calculated are:

• real gross domestic income
• real gross national income
• real net national disposable income
• real net national disposable income per capita.

20.16    Real gross national income (GNI) measures the purchasing power of gross primary incomes for all institutional sectors, including net primary income receivable from non-residents.

20.17    Primary incomes generated by the domestic production of resident units are distributed mostly to other residents; however, part of them may go to non-resident units. Likewise, some primary incomes generated in the rest of the world may be distributed to resident units. Real gross national income (GNI) accounts for these flows. Real GNI is equal to real GDI less deflated primary incomes payable to non-resident units, plus deflated primary incomes receivable from non-resident units. The implicit price deflator for GNE is used to deflate the primary incomes. In contrast to volume GDP, real GNI is not a concept of value added, but a concept of income.

20.18    By removing the volume measure of consumption of fixed capital from real GNI, real net national income is obtained.

20.19    Primary incomes receivable by resident units may be used to make transfers to non-resident units. Likewise, resident units may receive transfers originating out of primary incomes in the rest of the world. Real gross national disposable income is equal to real GNI less deflated current transfers (other than taxes less subsidies on production and imports) payable to non-resident units, plus the corresponding deflated transfers receivable by resident units from the rest of the world. Again, the implicit price deflator for GNE is used. Real gross national disposable income measures the real income available to the total economy for final consumption and gross saving.

20.20    By removing the volume measure of consumption of fixed capital from real gross national disposable income, real net national disposable income (NNDI) is obtained. National disposable income is the sum of the disposable income of all resident institutional units.

20.21    Real NNDI per capita is calculated by dividing real NNDI by the estimated population as published in National, state and territory population and ABS projections.