Methods of calculating national income - Income Method

A lottery prize is received by chance and not as payment for supplying labour, land, capital or entrepreneurship in current production. It is therefore treated as a transfer or windfall receipt rather than factor income. Since the income method adds factor incomes generated by production, a lottery prize is excluded from national income.

Transfer income is received without providing a current productive service in return. Examples include pensions, scholarships, gifts, and other transfers. Since it does not arise from the use of factors of production, it is excluded from national income under the income method. Wages, rent, interest, and profit are factor incomes and are included.

A self-employed doctor provides professional labour and also manages or owns the medical practice. The total receipt generally combines remuneration for labour with an element of entrepreneurial return, and it may also contain returns to capital. Because the separate components cannot usually be identified, this receipt is classified as mixed income.

Profit is a return to the entrepreneur, who is a factor of production, so it is classified as factor income. The income method adds factor incomes such as compensation of employees, rent, interest, profit, and mixed income to estimate domestic income. The expenditure method instead totals spending on final goods and services.

A bonus paid by an employer for work performed is an additional employment-related payment. Therefore, it forms part of compensation of employees along with wages, salaries, and eligible benefits. It is not gross capital formation or net exports. It is also not a transfer payment when it is linked to the employee’s current productive service.

Total factor income is the sum of all factor payments: wages for labour, rent for land or property, interest for capital, and profit for entrepreneurship. Therefore, total factor income equals 400 + 100 + 80 + 120 = 700. Option B is correct. No adjustment is required because every amount given is already a factor income.

Under the income method, domestic income is obtained by adding compensation of employees, operating surplus, and mixed income. Substituting the given values gives 500 + 300 + 100 = 900. Therefore, option C is correct. Omitting mixed income would produce 800, but that would leave out one of the required components of domestic income.

Domestic income is measured through factor earnings generated within the domestic territory. Its principal components are compensation of employees, operating surplus, and mixed income. Consumption, investment, and exports are expenditure-side items, while taxes, loans, donations, imports, and stocks are not the complete set of factor-income components used in this calculation.

Rent is the return received by the owner of land, buildings, or other property for allowing its use in production or economic activity. It is therefore a factor income and is included in the income method. It is not a transfer payment, loan, or import because it arises from providing the service of property ownership.

Selling an old share only transfers ownership of an existing financial asset from one person to another. It does not represent payment for current production of a good or service, nor does the full sale price constitute newly generated factor income. Consequently, the transaction is excluded from national income measured by the income method.

Factor income is income received by the factors of production as a reward for supplying labour, land, capital, or entrepreneurship. Indirect taxes such as GST or excise duty are collected by the government from transactions and are not payments to those factors for their services. Therefore, they are not directly included as factor income.

Income at factor cost refers to the income earned by the factors of production for providing productive services. It includes wages and salaries for labour, rent for land, interest for capital, and profit for entrepreneurship. In the income method, these factor incomes are added to estimate domestic income, generally measured as NDP at factor cost.

Net factor income from abroad is abbreviated as NFIA. It is calculated as factor income received by the residents of a country from abroad minus factor income paid to foreign residents within the country. While moving from domestic income to national income, NFIA is added: National Income = Domestic Income + NFIA.

Domestic income is also called NDP at factor cost, written as NDPFC. It measures the net factor income earned within the domestic territory during an accounting year. The word net means depreciation is deducted, domestic means production within the country’s territory, and factor cost means the value is measured as payments to factors of production.

Under the income method, domestic income is calculated by adding all factor incomes earned within the domestic territory. These include compensation of employees, operating surplus such as rent, interest and profit, and mixed income of the self-employed. Items such as imports, population, and final expenditure do not themselves represent factor incomes earned from domestic production.

Housing provided by an employer is a benefit received by an employee because of employment. Its imputed value is treated as a payment in kind and forms part of compensation of employees, along with wages, salaries, and other employment benefits. It is not a transfer payment, import, or net export because it is connected with a productive employment relationship.

The income of a self-employed person is classified as mixed income because it contains returns to more than one factor of production. The person may provide labour, use capital or land, and perform entrepreneurial functions. Since the separate shares cannot normally be measured accurately, the combined return is recorded as mixed income rather than compensation of employees or operating surplus alone.

A teacher earns a salary by providing labour services in a school. Income received as a reward for the current services of a factor of production is called factor income. Labour receives wages or salaries, land receives rent, capital receives interest, and an entrepreneur receives profit. Donations, scholarships and lottery prizes are transfer receipts because they are not paid in exchange for productive services. Therefore, option A is correct.

Assistance received from the government is generally a transfer receipt when it is provided without a corresponding productive service. It is not payment to a factor for contributing labour, land, capital or entrepreneurial activity. In contrast, wages reward labour, rent rewards the use of land or property, and interest rewards the use of capital. Hence, government assistance is not factor income, so option D is correct.

The income method measures national income by adding the incomes generated through the production process. This income is distributed as rewards to the factors that participate in production: wages and salaries go to labour, rent goes to land, interest goes to capital, and profit goes to the entrepreneur. Importers, consumers and banks may participate in economic activity, but income is not distributed exclusively among them. Therefore, option A is correct.

The income method adds only incomes earned through current productive services supplied by factors of production. Wages, rent, interest, profit and relevant mixed income may be included, while transfer receipts such as pensions, scholarships, donations and government assistance are excluded because they are not generated by current production. Including transfers would count receipts that do not represent factor payments and would overstate national income. Thus, option A is the essential precaution.

National income is obtained by adding net factor income from abroad to domestic income: National Income = Domestic Income + Net Factor Income from Abroad. Therefore, ₹500 crore + ₹20 crore = ₹520 crore. Since the net factor income from abroad is positive, it increases domestic income to arrive at national income.

Under the income method, domestic income is the sum of factor incomes generated within the domestic territory. Add wages, rent, interest, profit, and mixed income: ₹200 crore + ₹40 crore + ₹30 crore + ₹70 crore + ₹60 crore = ₹400 crore. Mixed income must not be omitted because it combines the returns of self-employed factors. Therefore, option C is correct.

Domestic income measures factor income generated within the domestic territory, regardless of the nationality of the factor owners. National income measures factor income accruing to normal residents. Therefore, net factor income from abroad is added to domestic income: National Income = Domestic Income + NFIA. Option B is correct.

National income is calculated as domestic income plus net factor income from abroad: NI = DI + NFIA. When NFIA is negative, factor payments made to foreign residents exceed factor income received from abroad. Adding a negative amount reduces domestic income, so national income becomes lower than domestic income. Therefore, option C is correct.