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 its normal residents, wherever it is earned. The difference is adjusted by net factor income from abroad, calculated as factor income received from abroad minus factor income paid abroad. Therefore, option A is correct.

Royalty received by an author is a payment connected with the creation and use of an intellectual product. In national-income accounting, it may be treated as factor income arising from a productive service or from the use of a property right, depending on the accounting context. It is not automatically lottery income, a government transfer, or an import.

GDP at market price is a gross measure because it includes depreciation, and it is valued at market prices because it includes net indirect taxes. To obtain NDP at factor cost, first subtract depreciation to remove the capital-consumption component and then subtract net indirect taxes to change market-price valuation into factor-cost valuation. Thus, option A is correct.

Operating surplus is the broad income component that generally includes rent, royalty, interest, and profits arising from ownership of assets or operation of enterprises. Rent and royalty are returns related mainly to property or intellectual-property rights, not payments to employees for labour. Therefore, they are normally classified under operating surplus in the income method.

The relationship is: National Income = Domestic Income + Net Factor Income from Abroad (NFIA). Substituting the given values gives 1750 = 1800 + NFIA, so NFIA = 1750 − 1800 = −50. The negative sign is important: it means factor income paid to the rest of the world exceeds factor income received from abroad by 50.

Dividends and undistributed profits are two uses or distributions of a company’s total profit: one part is paid to shareholders and the other part is retained in the business. When estimating income, the total company profit should be counted once. Adding both separately on top of total profit would count the same income twice, so double counting must be avoided.

NFIA means Net Factor Income from Abroad, calculated as factor income received from abroad minus factor income paid abroad. A positive NFIA means residents receive more factor income from the rest of the world than foreign factors receive from the domestic economy. Therefore, when positive NFIA is added to domestic income, national income becomes greater than domestic income. Imports, taxes and domestic income are not what determine the sign of NFIA.

National income is obtained by adding NFIA to domestic income: National Income = Domestic Income + NFIA. If NFIA is negative, factor income paid abroad is greater than factor income received from abroad. The negative amount therefore reduces domestic income when the conversion to national income is made. Hence national income is less than domestic income; it is not necessarily zero and does not remain unchanged.

The income method measures factor incomes earned by providing productive services. Wages are paid to labour for its contribution to the production process, so they are included as compensation of employees. A donation, scholarship and lottery prize are transfer or non-factor receipts because the recipient does not provide a current productive factor service in exchange for them. Therefore option A is the only correct answer.

The income method calculates domestic income by adding factor-income components such as compensation of employees, operating surplus and mixed income. Private final consumption expenditure records spending by households and is a component of the expenditure method, not the income method. It is therefore the incorrect item in the list. The classification depends on whether a measure records income earned or expenditure undertaken.

Factor payments are payments made to the owners of land, labour, capital and entrepreneurship for their productive services. The total of these payments represents factor cost, because it measures the cost of factor services used in production. The income method therefore begins with or is closely associated with factor-cost valuation. Market price includes the effect of net indirect taxes, while import and retail prices describe different pricing contexts.

A self-employed person combines labour and capital and therefore earns mixed income. Since the production takes place within the domestic territory, that income is initially included in domestic income, regardless of the person’s nationality or residence status. Because the person is a foreign resident, the relevant factor-income flow is subsequently reflected through NFIA when converting domestic income into national income. It is not consumption, exports or capital formation.

Free meals supplied by an employer are a non-cash or in-kind benefit connected with employment. When such a benefit is provided as part of the employment relationship, its assessed value is included in compensation of employees along with wages and other employment benefits. It is not NFIA, because it is not a cross-border factor-income balance; it is not an import or a tax. The key test is whether the benefit is received for employment service.

Domestic income measures factor income generated within the domestic territory, whereas national income measures factor income accruing to the normal residents of the country. The adjustment between them is Net Factor Income from Abroad: National Income = Domestic Income + NFIA. If NFIA is positive, national income exceeds domestic income; if it is negative, national income is lower. Net exports, imports and private final consumption expenditure are expenditure concepts and do not replace NFIA in this formula.

A pension paid without a current productive service is generally treated as a transfer payment, because it arises from a past entitlement or social-security arrangement rather than present production. In contrast, salary earned from a current post-retirement job is payment for labour supplied during the current period. It is therefore factor income and is included in the income method, subject to the usual national-accounting definitions. The distinction is based on current service, not merely on the recipient’s age.

National income is obtained by adding net factor income from abroad (NFIA) to domestic income. NFIA = factor income received from abroad − factor income paid abroad = ₹300 − ₹450 = −₹150. Therefore, national income = ₹3,200 + (−₹150) = ₹3,050. Since payments to foreign factors exceed receipts from abroad, NFIA is negative and reduces domestic income.

Mixed income is the earning of a self-employed person whose income cannot be separated accurately into wages for labour, profit for entrepreneurship, and sometimes returns to capital. A self-employed tailor contributes personal labour and also owns or manages the business, so the total earning combines factor rewards. Therefore, it is recorded as mixed income. A government teacher receives salary, a bank depositor receives interest, and a house owner receives rent; these are separately identifiable factor incomes.

The income method measures income earned by factors of production, such as wages, rent, interest, profit, and mixed income. Transfer receipts, such as pensions, scholarships, or gifts, are not payments for current productive services and must be excluded. Checking the classification of every receipt prevents invalid inclusions and inaccurate national-income estimates.

National income is calculated by adding net factor income from abroad to domestic factor income. Here, national income = ₹1,800 crore + (−₹120 crore) = ₹1,680 crore. The negative NFIA means that factor income paid abroad is greater than factor income received from abroad, so the domestic amount must be reduced rather than increased.

Operating surplus is the income earned from ownership of property and entrepreneurship. Its main components are rent, interest, and profit, including relevant property and entrepreneurial returns. Wages are payments for labour services and are therefore recorded under compensation of employees, not operating surplus. Hence wages are the item excluded from operating surplus.

Interest on government national debt is generally treated as a transfer-type payment because it is not paid as a direct reward for a current productive service rendered in the production process. The income method includes factor incomes such as wages, rent, interest on productive capital and profit. However, interest on public debt is normally excluded in this school-level treatment because it does not arise from a currently supplied productive factor service. Therefore, option A is correct.

Capital gains are increases in the market value of assets such as land, buildings or shares. They may result from inflation, scarcity, speculation or changing market conditions rather than from producing additional goods and services during the current period. National income measures factor income generated by current production, including wages, rent, interest and profit. Since a capital gain is not normally a payment for a current productive factor service, it is excluded. Thus, option A is correct.

Interest is treated as factor income when it is earned as a return on capital that participates in productive economic activity. For example, interest received by a lender or bank for providing funds used by a firm to produce goods and services represents a return connected with the use of capital. A gift, lottery-related receipt or penalty payment is not a reward for a factor service in current production. Therefore, option A is the appropriate answer.

Unemployment allowance is a transfer payment made to a person without requiring a current productive service in return. The recipient does not provide labour, land, capital or entrepreneurial service for the amount received. The income method includes factor payments such as wages, rent, interest and profit because they arise from current production. Since unemployment allowance is not generated by such a service, it is excluded from national income. Hence, option A is correct.

Compensation of employees includes not only cash wages and salaries but also certain benefits provided in kind. If an employer gives an employee free housing as part of the employment arrangement or as a benefit for services rendered, the imputed value of that facility is treated as part of employee compensation. A lottery prize, an owner's capital gain and a government grant do not represent remuneration for the employee's current service. Therefore, option A is correct.