Methods of calculating national income - Income Method

Domestic income measures factor income generated within a country’s domestic territory, whereas national income measures factor income accruing to the normal residents of the country. The conversion is made by adding net factor income from abroad: National Income equals Domestic Income plus NFIA. Hence, option A is correct.

The income method adds incomes earned by factors of production, such as wages, rent, interest, profit, and mixed income. Transfer receipts are not payments for current productive services and must be excluded. Therefore, distinguishing factor income from transfer income is the first essential step, making option A correct.

The salary paid to a domestic servant is payment for a current service purchased in the market. The servant supplies labour, and the salary is therefore treated as compensation of employees, a component of factor income. It is included in the income method, unlike unpaid household work performed by a family member for the same household.

The income method measures income generated by current production, so only factor payments arising from that production should be added. These include compensation of employees, rent, interest, profit, and relevant mixed income. Gifts, transfer payments, and proceeds from selling old goods do not represent current production and must be excluded to avoid overstating national income.

A dividend is the part of a company’s profit distributed to its shareholders. It arises from ownership of financial capital, not from providing labour services, and it is not a government transfer payment. In the income method, corporate profit is represented by distributed profit, undistributed profit, and corporate profit tax; therefore, the correct answer is distributed profit.

A bonus paid to an employee for work performed or for participation in the production process is an additional payment for labour services. It is therefore included in compensation of employees along with regular wages and salaries. It is not a transfer payment because it is connected with productive employment, not a payment made without receiving a current service. It is also neither a capital gain nor an intermediate cost. Thus, option A is correct.

An in-kind facility is a non-cash benefit provided by an employer because of an employment relationship, such as free food, housing, transport, or medical care. Since it is received in return for labour services, its imputed value may be included in compensation of employees under the income method. It is not a trade item, pension, or export.

A self-employed tailor supplies several factors at the same time: his own labour, capital, tools, and entrepreneurial effort. In practice, the return attributable to each factor cannot usually be separated accurately from the total earnings. Therefore, the combined return is recorded as mixed income of the self-employed. It is not merely wages, rent, or interest.

Unpaid household services, such as cooking, cleaning, or caring for family members in one’s own home, generally do not enter measured national income because they have no observable market transaction or payment. Their value is difficult to record consistently. In contrast, the same type of service performed for an employer for wages is a market service and is included.

Undistributed profit is the portion of a company’s profit that is retained in the business instead of being paid out as dividends. Although shareholders do not receive it immediately, it remains part of the enterprise’s total operating profit and is counted as such in income accounting. It is not wages, pension income, or an import.

Under the income method, domestic income is calculated by adding factor incomes generated within the domestic territory. Therefore, domestic income = compensation of employees + operating surplus + mixed income = ₹900 crore + ₹640 crore + ₹260 crore = ₹1,800 crore. Hence, option B is correct. No deduction is required because all three figures are components of domestic factor income.

National income is net national factor income, while domestic factor income is obtained after removing net factor income from abroad. The relationship is: national income = domestic factor income + net factor income from abroad. Therefore, domestic factor income = national income − net factor income from abroad = ₹2,450 crore − ₹150 crore = ₹2,300 crore. Hence, option A is correct.

Operating surplus is the combined total of rent, interest and profit in this calculation. Therefore, operating surplus = rent + interest + profit. Rearranging the formula gives profit = operating surplus − rent − interest = ₹720 crore − ₹180 crore − ₹140 crore = ₹400 crore. Hence, option C is correct. The calculation uses the same unit, crore, throughout and requires no further conversion or adjustment.

Operating surplus is the return received by owners of property and capital, and it generally includes rent, royalty, interest, and profit. An employee’s salary is a payment for labour services and is therefore recorded under compensation of employees, not operating surplus. Thus, employee salary is the item that is excluded from operating surplus.

Wages are factor income because they are paid to labour in return for a current productive service. A pension is generally received without the recipient providing a current productive service in exchange, so it is treated as transfer income. Rent and profit are also factor incomes, while donations and lottery receipts are transfers. Therefore, only option A is correctly matched.

The income method measures the income generated during production by adding the rewards paid to the factors that participate in production. Labour receives wages and salaries, land and property receive rent, capital receives interest, and entrepreneurship receives profit. Thus, domestic production income is distributed among the factors of production, making option A correct.

Land is a factor of production, and rent is the payment received by its owner for allowing others to use it. Therefore, rent of land is property income and also factor income generated by a productive asset. A lottery prize and a government scholarship are transfer receipts because they are not paid for a factor service. A bank loan is borrowed finance and creates a liability, not income from supplying a factor.

A tailor operating an own-account shop is self-employed in an unincorporated business. The earnings usually combine a return for personal labour, a return on the owner’s capital, and entrepreneurial profit. Because these elements cannot be separately measured with sufficient accuracy, the total is recorded as mixed income. A dividend is property income, house rent is rental income, and government salary is compensation of employees.

A donation is a transfer receipt because the recipient does not provide labour, land, capital, or entrepreneurship in exchange for it. The income method includes earnings generated by current factor services, such as wages, rent, interest, profit, and mixed income. Since a donation is not payment for production, adding it to factor income would overstate income generated by the production process. It is therefore recorded separately.

Operating surplus is divided into rent, interest, and profit. Therefore: Operating surplus = Rent + Interest + Profit. Substituting the given values, ₹950 crore = ₹230 crore + Interest + ₹420 crore. Hence, Interest = ₹950 − ₹230 − ₹420 = ₹300 crore. This is a direct application of the income-method classification of operating surplus, so option B is correct.

National income is obtained from domestic income by adding net factor income from abroad. Net factor income from abroad equals factor income received from abroad minus factor income paid abroad: ₹350 crore − ₹275 crore = ₹75 crore. Therefore, national income = ₹5,200 crore + ₹75 crore = ₹5,275 crore. The correct answer is option C. The calculation must use the net, not the gross, foreign factor-income figure.

Compensation of employees is calculated by adding all three relevant components: cash wages, wages in kind and the employer’s social contribution. Thus, compensation = ₹700 crore + ₹90 crore + ₹110 crore = ₹900 crore. The amount ₹790 crore omits the social contribution, while ₹810 crore and ₹910 crore result from incorrect arithmetic or incorrect inclusion of components. Hence, option C is correct.

Operating surplus is composed of rent, interest and profit. Therefore, rent = operating surplus − interest − profit. Substituting the given values gives rent = ₹1,180 crore − ₹260 crore − ₹540 crore = ₹380 crore. The other values do not satisfy this component relationship. Hence, the correct answer is option B, ₹380 crore.

National income is obtained by adding net factor income from abroad to domestic income: National income = Domestic income + NFIA. Here, NFIA is negative, so it must be subtracted: ₹6,800 crore + (−₹325 crore) = ₹6,475 crore. The value ₹7,125 crore would result from wrongly adding the absolute value of the negative amount. Therefore, option A is correct.

Net factor income from abroad (NFIA) is calculated as national income minus domestic factor income: NFIA = National Income − Domestic Factor Income. Therefore, NFIA = ₹7,350 crore − ₹7,500 crore = −₹150 crore. The negative sign means that factor payments made to foreign countries exceed factor income received from abroad by ₹150 crore.