Methods of calculating national income - Income Method

Under the income method, domestic income is calculated by adding factor incomes generated within the domestic territory: compensation of employees, operating surplus, and mixed income. Therefore, domestic income = ₹400 crore + ₹250 crore + ₹100 crore = ₹750 crore. Hence, option C is correct.

The income method counts factor incomes earned from current production, such as wages, rent, interest, profit, and relevant dividends. A gift from a friend is a transfer receipt, not a payment for supplying a factor of production. Since it does not arise from current productive activity, it is excluded from national income. Therefore, option D is correct.

Rent received by a house owner is the return earned from allowing others to use property. It is therefore property income and forms part of operating surplus in the income method. It is not compensation of employees because no labour service is being rewarded, and it is not a transfer payment because the payment is made for the use of an asset. Hence, option B is correct.

Interest received on capital used in production is a factor income because it is the return to the factor of capital. It is earned in connection with productive activity and is included when factor incomes are measured under the income method. A transfer income is received without providing a current productive service, while a capital receipt and sale of a second-hand good are different concepts. Thus, option A is correct.

Profit is the reward received by an entrepreneur for organising production, making business decisions, and bearing uncertainty and risk. Wages are the reward for labour, rent is the return on land or property, and interest is the return on capital. Under the income method, entrepreneurial profit is counted as a factor income. Therefore, option C is correct.

Selling an old machine generally transfers ownership of an already existing asset; it does not represent new production during the current accounting period. Therefore, the sale proceeds are not fresh factor income generated by current production and are excluded from the income method. Only any current service connected with the sale, such as a broker’s commission, may be counted as income. Hence, option A is correct.

A lottery winning is received by chance and not as payment for supplying labour, land, capital, or entrepreneurial service in current production. It is therefore not factor income and is excluded from national income in the standard school-level treatment of the income method. The receipt may increase the winner’s money balance, but it does not represent newly produced output. Thus, option A is correct.

In the standard school-level national-income framework, the income method measures income arising from legal, identifiable, and recorded production activities. Income from illegal activities is generally excluded because it is not officially recorded and cannot be reliably measured in the conventional accounts. The issue is not whether it is domestic or foreign, nor whether it is salary or interest. Therefore, option A is correct.

National income is obtained by adding net factor income from abroad to domestic income: National income = Domestic income + Net factor income from abroad. Here, ₹1,200 crore + ₹80 crore = ₹1,280 crore. Since the net factor income from abroad is positive, it raises national income above domestic income. Therefore, option C is correct.

The relationship is National income = Domestic income + Net factor income from abroad. When NFIA is −₹30 crore, the negative amount is subtracted from domestic income. Consequently, national income is ₹30 crore lower than domestic income. A negative NFIA does not make national income zero and does not eliminate domestic income. Hence, option A is correct.

A government pension is generally a transfer payment because it is received without providing a current factor service or contributing directly to current production. It represents a redistribution of income by the government. Therefore, it is excluded from factor income under the income method and is not counted as compensation of employees, operating surplus, or mixed income.

A scholarship is generally financial assistance for education rather than payment for a factor service supplied during current production. It is therefore treated as a transfer receipt, not as wages, rent, interest, or profit earned from production. For this reason, it is excluded when national income is measured by adding factor incomes.

A homemaker’s unpaid service for her own household does not normally involve a market transaction or an observable monetary payment. National-income accounting mainly records production exchanged through markets or assigned an accepted monetary value. Since this household service is not sold, its value is generally omitted from the income method, although it may provide considerable economic and social benefit.

Compensation of employees consists of payments made to workers for their labour, such as salaries, wages, and employment-related bonuses or benefits. A company’s undistributed profit is not paid for employee service; it is retained by the enterprise and belongs to operating surplus or profit income. Therefore, undistributed profit is not part of compensation of employees.

Undistributed profit is the portion of a company’s profit that is retained instead of being paid to shareholders as dividends. The fact that it is not distributed does not remove it from the income generated by production. It is therefore included as part of corporate profit, which is an element of operating surplus in the income method.

Corporate profit tax is imposed on the profits earned by a company, so it is associated with the profit component of factor income. In national-income accounting, corporate profit is commonly considered through dividends, undistributed profits, and corporate profit tax. It is not a payment for employees’ labour, self-employment, or a transfer such as a gift.

Domestic factor income is calculated by adding all factor incomes generated within the domestic territory: wages + rent + interest + profit + mixed income. Thus, ₹500 crore + ₹90 crore + ₹60 crore + ₹150 crore + ₹200 crore = ₹1,000 crore. Therefore, option B is correct. No transfer payment, depreciation, or foreign-income adjustment is given in the question.

National income is calculated by adding net factor income from abroad (NFIA) to domestic factor income. Therefore, national income = ₹1,000 crore + (-₹60 crore) = ₹940 crore. The negative sign must be retained because it indicates that factor income paid to foreign countries is greater than factor income received from abroad. Hence, option A is correct; ₹1,060 crore would result from wrongly treating negative NFIA as positive.

A government grant is generally a transfer or assistance payment. It is received without the recipient supplying a current factor service directly in exchange. The income method counts factor incomes such as wages, rent, interest, profit, and appropriate mixed income earned from production. Since a grant is not itself a reward for a productive factor service, it is not directly included as factor income. Therefore, option A is correct.

Profit earned abroad by an Indian resident company represents a return to a factor owned or controlled by a resident of India. It is therefore treated as factor income from abroad. National income is obtained from domestic factor income after adding net factor income from abroad, which is factor income received from abroad minus factor income paid abroad. The profit contributes positively to this component, assuming it is income of the resident company. Thus, option A is correct.

Domestic income measures factor income generated from production within a country’s domestic territory. A foreign company operating in India uses productive resources and conducts production within India, so the profit arising from that domestic production is included in domestic income. The nationality or ownership of the company does not remove the production from India’s domestic territory. However, the income may be treated differently when calculating national income, because payments to foreign factors can form part of factor income paid abroad. Therefore, option A is correct.

Mixed income is earned mainly by self-employed persons whose income cannot be separated accurately into wages for their labour, rent for property, interest on capital, and profit for enterprise. A shopkeeper operating their own shop may supply labour, use personal capital, and undertake business risk at the same time. The total earning therefore combines several factor returns and is called mixed income. Salary, rent, and bank interest are generally identifiable single-factor incomes, so option A is correct.

Net indirect taxes are indirect taxes minus subsidies. They explain the difference between the price paid by buyers in the market and the factor payments received by producers. The relationship is: market price = factor cost + net indirect taxes, or factor cost = market price - net indirect taxes. Thus, net indirect taxes are used when converting an aggregate measured at factor cost into market price, or vice versa. Therefore, option A is correct.

The relationship is: national income = domestic factor income + net factor income from abroad. To find domestic income, rearrange the formula: domestic income = national income - NFIA. Therefore, domestic income = ₹900 crore - ₹50 crore = ₹850 crore. Since NFIA is positive, residents receive ₹50 crore more from abroad than foreigners receive from domestic sources, so it must be subtracted when moving from national income back to domestic income. Hence, option A is correct.

Royalty is the payment received by the owner of land, a natural resource, patent, copyright, or other property for allowing its use. When the royalty is connected with current production, it represents income earned from ownership of an asset. Therefore, under the income method, it is classified as property or rent-like factor income. It is not a transfer payment, gift, or sale of an old good.