Methods of calculating national income - Income Method

National income is obtained by adding net factor income from abroad to domestic income: National Income = Domestic Income + NFIA. Here, NFIA is positive, so it increases domestic income. The calculation is ₹1,180 + ₹70 = ₹1,250. Therefore, option C is correct. The answer would be lower only if NFIA were negative, because a negative NFIA represents a net outflow of factor income to the rest of the world.

The income method calculates national income by adding the factor incomes generated through the production process. These generally include compensation of employees or wages, rent, interest, and profits, with the necessary adjustments for mixed income and relevant national-income aggregates. It therefore focuses on income earned by factors, not on expenditure or imports.

Wages are the reward paid to labour for supplying physical or mental effort in the production process. In the income method, wages form part of compensation of employees and are counted as factor income generated by production. Land earns rent, capital earns interest, and the entrepreneur generally receives profit, so labour is the only correct answer.

Rent is the payment received for allowing land or other natural resources to be used in production. In the income method, it is recorded as factor income accruing to the owner of land or natural resources. Labour receives wages, capital receives interest, and the entrepreneur receives profit; consequently, land is the correct factor for rent.

Interest is the return received for supplying or using capital in production. Capital may include funds, machinery, buildings, and other produced means of production, depending on the context. Under the income method, interest is recorded as factor income of capital. Rent belongs to land and wages belong to labour, so capital is correct.

Profit is the reward received by the entrepreneur for organizing production, making business decisions, bearing uncertainty, and taking risks. In the income method, profit is included as factor income generated by production. Wages reward labour, rent rewards land, and interest rewards capital; therefore, profit is associated with the entrepreneur.

Factor income is the income earned by the factors of production—land, labour, capital, and entrepreneurship—in return for supplying productive services. Rent, wages, interest, and profit are the usual examples. Government donations are transfer payments, imports are goods from abroad, and the sale of an old good does not represent current production income.

Transfer payments such as pensions, scholarships and unemployment benefits are payments made without receiving a current productive service in return. Since they do not arise from the production of goods or services during the current period, they are not factor incomes and must be excluded from the income method to avoid overstating national income.

Compensation of employees is the income earned by workers for supplying labour services. It includes wages and salaries, along with employers’ contributions to social security and similar benefits. In the income method, it is treated as a major component of factor income, whereas rent, interest and profit are recorded under operating surplus.

Compensation of employees is a factor income earned for supplying labour and is therefore included in the income method. Private consumption expenditure, government consumption expenditure and net exports are expenditure-side items used in the expenditure method, not components of the income method.

Operating surplus is the income earned from the ownership of property and from entrepreneurship. It generally includes rent, interest and profit, including relevant mixed or imputed returns where applicable. Salaries and wages are instead classified as compensation of employees, while imports and taxes are not the complete definition of operating surplus.

Mixed income refers to the income of self-employed persons, such as small farmers, shopkeepers and independent professionals. Their total earnings contain returns to both their labour and the capital they own, but these parts cannot be separated reliably. Therefore the combined amount is recorded as mixed income in the income method.

Domestic income measures factor income generated within the domestic territory, regardless of who owns the factors. National income measures the factor income accruing to normal residents. Therefore, net factor income from abroad is added to domestic income: National Income = Domestic Income + NFIA. NFIA is factor income received from abroad minus factor income paid abroad.

The income method adds factor incomes generated through the current production of goods and services. These include compensation of employees, operating surplus such as rent, interest and profit, and mixed income of self-employed persons. Donations, loans and lottery winnings are transfer or financial receipts, not payments for current productive factor services.

A pension is generally paid because of a person’s past service, age or eligibility under a social-security arrangement, rather than in exchange for a current productive service. It is therefore treated as a transfer payment. Wages, rent and profit are factor incomes arising from current production and are included through the income method.

Salaries and wages are payments made to employees for supplying labour services during production. They therefore form the main part of compensation of employees, which is a factor-income component of the income method. Net exports, gross capital formation and government consumption are expenditure-side aggregates and do not classify employee remuneration.

An employer’s contribution to social security, such as provident fund, pension or insurance contributions, is a benefit connected with employment. It is paid on behalf of employees and is therefore included in compensation of employees under the income method. The other options are expenditure or trade items, not factor income paid to labour.

The income method measures national income by adding factor incomes generated during production. Labour receives wages, land receives rent, capital receives interest, and the entrepreneur receives profit. Consumption, investment, exports and imports are expenditure or trade concepts, while taxes, loans and donations are not the four factor incomes.

A scholarship is generally a financial support or transfer received by a student, not a payment made in return for a current productive service. Since the income method adds factor incomes such as wages, rent, interest and profit, a scholarship is excluded from national income unless it is actually payment for a productive service.

NDPFC means Net Domestic Product at Factor Cost. In simple terms, it is domestic income: the net factor income generated within a country’s domestic territory during an accounting period. It is obtained after allowing for depreciation and valuing factor rewards at factor cost, excluding net indirect taxes.

An old-age pension is a transfer payment because the recipient does not provide a current productive service in exchange for it. It is therefore excluded from factor income and national income calculated by the income method. Factory wages, shop rent and interest on a business loan are payments for factor services and are included.

An employer’s contribution to an employee’s provident fund is a social-security contribution made in connection with employment. It forms part of compensation of employees even though the employee may receive the benefit later. Dividends, bond interest and rent are property or entrepreneurial incomes, not employee compensation.

A domestic servant receives a salary in return for supplying labour services. Therefore, the salary is labour income and represents the reward for labour under the income method. Capital income includes interest, land income includes rent, and transfer income is received without providing a corresponding current productive service.

Interest received on a bank deposit is a return associated with the use of financial capital. In the income method, it is classified as interest income, a component of property or capital income. It is not rent, which is the return to land, wages, which reward labour, or profit, which rewards entrepreneurial functions and risk-bearing.

Profit is the entrepreneur’s income because the entrepreneur organises production, makes business decisions, coordinates resources and bears uncertainty and risk. Under the income method, wages reward labour, rent rewards land, and interest rewards capital, whereas profit is the return to entrepreneurship after accounting for business receipts and costs.