Methods of calculating national income - Income Method

Correct answer: A. Because it is payment for a productive service

Explanation: Wages are payments made to labour for contributing to the production of goods and services during the accounting period. Since labour is a factor of production, its remuneration is included as factor income in the income method of measuring GDP. Transfer payments, resale transactions and subsidies do not represent payment for current productive services in the same way.

Correct answer: A. Compensation of employees

Explanation: The income method measures GDP by adding incomes generated through current production. Its major components include compensation of employees, operating surplus or property income, mixed income of self-employed persons, and relevant taxes less subsidies on production and imports. Compensation of employees is therefore a valid factor-income component. Intermediate goods, resale of old shares, and lottery prizes do not represent payment for current production.

Correct answer: A. Income of factors of production

Explanation: Under the income method, GDP is measured by adding the incomes earned by the factors of production during the production process. These include compensation of employees such as wages and salaries, rent, interest, and operating surplus or profit. Gifts, lottery prizes, and sales of existing shares are transfer or financial transactions rather than payments for current production, so option A is correct.

Correct answer: B. Labour

Explanation: The governing concept of the income method is to add factor incomes generated by production. Compensation of employees is paid for supplying labour services and generally includes wages and salaries, with relevant employer contributions where applicable. Thus option B is correct. Rent rewards land, interest rewards capital and profit is associated with entrepreneurship, so those alternatives represent different factor incomes.

Correct answer: C. Land

Explanation: In the factor-income framework, rent is the payment made for using land and other natural resources in production. Therefore option C is correct. Labour receives wages or compensation, capital receives interest, and entrepreneurship receives profit. Although rent may be discussed in wider forms in economics, the standard school classification clearly treats it as the reward for the factor land.