Methods of calculating national income - Income Method

Production for self-consumption is still part of current production even though the grain is not sold in a market. To include it in national income, its value must be imputed, generally by using a suitable market price for a comparable product. Reliable valuation prevents arbitrary estimates and ensures that only the output produced during the relevant period is counted. A gift, old stock or foreign aid is not current domestic production by the farmer. Thus, option A is correct.

Corporate profit is the broad income category connected with the earnings of companies. Corporate profit tax is charged on company profits, dividends represent the part distributed to shareholders, and undistributed profit is the part retained by the company. These terms describe the taxation and allocation of corporate profits rather than wages, mixed income or transfer payments. Therefore, the three items are associated with corporate profit, making option C correct.

The income method adds factor incomes earned through current production, such as wages, rent, interest, profit and mixed income. Money obtained through theft is an illegal transfer of existing wealth, not a payment for supplying a factor of production. Therefore, counting it would not represent newly generated productive income in national income.

The sale of an old share changes who owns a financial claim, but it does not represent current production of a good or service. Hence the entire sale value is not included as national income. However, a current service connected with the transaction, such as a stockbroker’s commission, is counted as service income.

A stockbroker performs an actual intermediation service in arranging or executing a securities transaction. The commission is the broker’s payment for that current service and is therefore included as service-related factor income. The value of the shares themselves is not added, because trading an existing share does not create current output.

In the income method, the earnings of self-employed persons are called mixed income when they cannot be separately divided into wages for their labour, rent for property, interest on capital, and profit for entrepreneurship. A lawyer running a private practice may contribute personal labour and professional skill while also using an office, equipment, and invested capital. Therefore, the total receipt combines several factor incomes and is correctly treated as mixed income.

A domestic servant provides a service through the market and receives a recorded wage. That payment is factor income generated by a service and is included. A homemaker’s unpaid work may create valuable utility, but because it is not exchanged through a market and has no observable factor payment, it is generally excluded from measured national income.

Factor income is earned by supplying labour, land, capital or entrepreneurship in the production process. A scholarship is normally granted to support education or research and is not paid as a direct reward for supplying a factor in current market production. It is therefore treated as a transfer-type receipt rather than factor income.

An insurance claim generally replaces or compensates for a loss suffered by the policyholder; it does not itself represent payment for a newly supplied labour, land, capital or entrepreneurial service. Consequently, the full claim is not counted as national income. The insurer’s actual service charge or premium-related service output is considered separately where appropriate.

Undistributed profit is the portion of a company’s profit that is retained instead of being paid as dividends. It is still generated through the productive activity of the enterprise during the current accounting period. Therefore, it remains part of profit or entrepreneurial income under the income method, even though shareholders do not receive it immediately. Option A is correct; the other options describe wages, transfer income, or a non-current transaction.

Royalty is a payment made for the use of a property right, natural resource, copyright, patent, mineral deposit, or another owned asset. Since ownership of that asset generates the receipt, royalty is treated as property income, a component of factor income, when it arises from current economic activity. A scholarship, lottery prize, and unemployment allowance are not payments for the use of an owned productive asset.

An artist who performs in a programme supplies a service during the current period. The fee is the return to the artist’s labour, talent, and skill, so it represents factor income generated by current production and can be included under the income method. A lottery prize and pension are transfer receipts, while the sale of an old asset does not represent newly produced output in the current period.

Rent is the payment made for using land, buildings, or other property in production. It is therefore a return to the factor of production called land or property and is included as factor income under the income method. The word ‘net’ generally indicates that relevant costs such as maintenance or depreciation adjustments have been considered. It is not an employee contribution, government transfer, or receipt from selling an asset.

A subsidy is financial assistance or a payment provided by the government, usually to reduce costs, support producers, or influence prices. It is not a payment made to labour, land, capital, or entrepreneurship as a reward for supplying a current factor service. In national-income accounting, subsidies may be used when converting between market prices and factor cost, but they are not independently counted as factor income. Hence, option A is correct.

National income is obtained from domestic factor income by adding net factor income from abroad: National Income = Domestic Factor Income + NFIA. Therefore, NFIA = ₹2,725 crore − ₹2,600 crore = ₹125 crore. The positive result means factor income received from the rest of the world exceeded factor income paid abroad by ₹125 crore. Thus, option A is correct.

The income method measures factor incomes arising from current production, not all monetary receipts. Loans are financial transactions, gifts and pensions may be transfer receipts, and the resale of an old good generally does not represent current production, although a service charge may. Thus, a cash receipt must be examined according to its source and economic character. Option A is the only accurate statement.

Under the income method, domestic income is the sum of factor incomes generated within the domestic territory. Add compensation of employees, mixed income, rent, interest and profit: ₹1,400 + ₹500 + ₹250 + ₹200 + ₹650 = ₹3,000 crore. No item is omitted because each amount represents a component of domestic factor income. Therefore, option C is correct.

Double counting occurs when the same income is entered more than once, either in two factor categories or at different stages of the calculation. The correct precaution is to identify the source of each receipt and record it only once under the appropriate category, such as compensation, rent, interest, profit or mixed income. Therefore, option A is correct.

The income method measures the income generated during the production process rather than adding the market value of every product separately. Payments made to factors of production—such as wages for labour, rent for land or buildings, interest for capital, and profit for entrepreneurship—together represent the value created. Thus, the sum of factor incomes provides an alternative measure of national income, provided double counting and transfer payments are excluded.

The final check in the income method is whether each included amount is a factor payment generated by current production. Compensation of employees, rent, interest, profit, and mixed income may be included when they arise from productive activity. Cash form alone is not sufficient, because some relevant income may be recorded in kind. Transfers, capital gains, and receipts from the sale of old assets must not be counted as current factor income.

Rent and interest are both factor incomes, but they arise from different factors of production. Rent is the return associated mainly with land, buildings, or other property used in production, whereas interest is the return on supplied financial or physical capital, such as machines. They are identified separately so that the income method records the distribution of production income accurately. Neither receipt is automatically a transfer payment or a sale proceeds item.

Domestic income calculated by the income method consists of factor incomes generated within the domestic territory during the accounting period. These include wages or compensation of employees, rent, interest, operating surplus, profit, and mixed income when they arise from current production. Lottery receipts and government donations are transfer receipts because they do not represent payment for current productive services. The sale proceeds of old shares are financial transactions, not newly generated production income.

Domestic income measures factor income generated within the domestic territory, while national income measures factor income accruing to the normal residents of a country. The two differ because residents may earn factor income from abroad and non-residents may earn factor income within the country. The adjustment is net factor income from abroad, calculated as factor income received from abroad minus factor income paid abroad. Thus, national income equals domestic income plus NFIA.

The income method adds incomes earned by factors of production during the accounting period. Compensation of employees, operating surplus, and mixed income are therefore relevant components. Government final consumption expenditure is not an income-method component; it belongs to the expenditure method, where spending by the government on final goods and services is counted. The question asks for the wrong item, so option D is correct.

A self-employed shopkeeper usually supplies several factors of production at the same time: their own labour, capital invested in the shop, and entrepreneurial ability. Since it is difficult to separate the return attributable to each factor, the combined receipt is classified as mixed income. It is not compensation of employees because the person is not working as an employee, and it is not rent or a transfer payment.