Methods of calculating national income - Income Method

A self-employed lawyer usually contributes personal labour, managerial skill and sometimes own capital to provide legal services. Because the total receipt cannot be separately divided into wages for labour, interest for capital and profit for entrepreneurship, it is recorded as mixed income under the income method. Therefore, option A is correct.

Domestic factor income, also called domestic income, is obtained by adding all factor incomes generated within the domestic territory. The relevant components are wages, rent, interest, profit and mixed income. Thus, 900 + 150 + 100 + 300 + 250 = 1,700. Net exports, transfers and other non-factor receipts are not involved in this calculation, so option C is correct.

A scholarship is generally a grant or assistance provided to support a student’s education. It is not paid in exchange for a current productive service supplied by labour, land, capital or an entrepreneur. Since the income method adds factor payments generated by production, a scholarship is treated as transfer income and excluded. Hence, option A is correct.

A car supplied by an employer for an employee’s use may be a non-cash or in-kind employment benefit. Such benefits form part of the remuneration received because of employment, along with wages and salaries. Therefore, when properly valued and recorded, the facility is included in compensation of employees. It is not profit, net exports or mixed income, so option A is correct.

The relationship is: National Income = Domestic Income + Net Factor Income from Abroad (NFIA). Rearranging gives NFIA = National Income − Domestic Income. Substituting the values, NFIA = 2,950 − 2,800 = 150. The positive result means factor income received from abroad exceeded factor income paid abroad by 150. Therefore, option B is correct.

Undistributed profit is the portion of a company’s profit retained in the business instead of being paid to shareholders as dividends. It remains a return generated by entrepreneurial and business activity and is included with operating surplus or profit in the income method. Retention does not change its nature into wages, interest or a transfer payment. Hence, option A is correct.

Unemployment allowance is received without the recipient supplying a current productive service in exchange. It is therefore a transfer receipt rather than payment for a factor of production, and it is excluded from factor income in the income method. Wages reward labour, rent rewards the use of land or property, and interest rewards capital. Hence, option A is correct.

The income of a self-employed person usually contains several inseparable elements: payment for personal labour, return on owned capital, rent for owned assets, and entrepreneurial profit. Since these components cannot be separately measured in ordinary accounting, the entire amount is recorded as mixed income under the income method. Therefore, option C is correct.

Factor income is the income earned by factors of production—labour, land, capital, and entrepreneurship—for supplying productive services. Indirect taxes such as GST or excise duty are collected by the government from transactions or producers; they are not payments made to factors for their services. Hence, they are not directly included in factor income.

An owner-occupied house provides housing services to its owner even though no rent is actually paid. National-income accounting imputes, or estimates, the rent that the owner would have paid for using a similar rented house. Because this return arises from ownership of property, it is classified as property income. Therefore, option A is correct.

Compensation of employees includes not only wages and salaries paid directly to workers but also employers’ contributions to social-security schemes, such as provident fund or insurance contributions made on behalf of employees. Rent belongs to property income, profit to entrepreneurial income, and self-employed earnings to mixed income. Hence, option A is correct.

The old house itself was produced in an earlier period, so its full sale value must not be counted again as current production. However, a broker may provide a real service during the current year by arranging the sale, finding a buyer, and completing negotiations. The commission paid for this current productive service is therefore included as current income.

A company that is resident or domestically owned may earn profits from production or business activity carried out abroad. From the perspective of the domestic economy, this return is factor income received from abroad. It enters national income through net factor income from abroad, calculated as factor income received from abroad minus factor income paid abroad. Thus, option A is correct.

First calculate net factor income from abroad (NFIA): NFIA equals factor income received from abroad minus factor income paid abroad, so NFIA = 600 − 750 = −150. National income equals domestic income plus NFIA: 5,000 + (−150) = 4,850. The negative NFIA reduces domestic income because payments to foreign factors exceed receipts from abroad. Therefore, option A is correct.

Royalty is a payment received because the author allows another party to use a copyright or intellectual property. It is therefore connected with the productive use of a property right or creative work and may be treated as factor income, generally under property income or operating surplus. It is not a transfer payment, consumption expenditure, or an import. In the income method, receipts must be linked to a factor service or factor ownership.

Imputed rent represents the estimated value of housing services supplied by an owner to himself or herself. Although no actual money changes hands, the house provides a current productive service, so its estimated rental value is included as operating surplus or factor income. A pension and lottery prize are transfer receipts, while selling old shares only transfers ownership of an existing financial asset and does not create current production.

A domestic worker’s salary is an actual market payment for labour services supplied to the household. Because the service is purchased and has an observable payment, it can be recorded as compensation of employees and included in the income approach. Unpaid household work by a family member may be economically useful, but it normally has no market transaction or reliable recorded price, so it is generally excluded from measured national income.

Salary is paid in exchange for labour supplied during the current accounting period, so it is compensation of employees and a factor income. A regular pension normally represents a payment based on past employment, social security, or an entitlement, not payment for a current productive factor service. It is therefore treated as a transfer receipt in national-income accounting, subject to the specific accounting convention being used.

The income of a self-employed shopkeeper usually contains several inseparable elements: payment for the person’s own labour, a return on personally owned capital, and entrepreneurial profit. Since these components cannot be reliably separated from the accounts of the unincorporated business, the combined amount is classified as mixed income. It is not merely employee compensation, pure operating surplus, or a transfer receipt.

The income method adds factor payments generated by domestic production, such as wages, rent, interest, profit, and mixed income. These payments are received by labour, land, capital, and entrepreneurship, so the resulting measure is at factor cost. Market price includes net indirect taxes, meaning product taxes minus product subsidies. Those taxes and subsidies affect prices but are not direct payments to factors of production.

Compensation of employees consists of wages and salaries, bonuses, and employers’ contributions to social-security schemes made on behalf of employees. Entrepreneur’s profit is not payment for supplying labour; it is generally treated as operating surplus or entrepreneurial income. Therefore, option D is excluded from compensation of employees.

National income at factor cost, or net national income, is related to domestic income by the formula: National Income = Domestic Income + NFIA. Substituting the values gives 4,600 = Domestic Income + (-300). Thus, Domestic Income = 4,600 + 300 = 4,900. Hence, option C is correct.

Net factor income from abroad, or NFIA, is calculated as factor income received from the rest of the world minus factor income paid to the rest of the world. Profits received from abroad and profits paid abroad are included in such factor-income flows. Therefore, their net difference helps determine NFIA, making option A correct.

The income method includes factor incomes generated by current production, such as wages, rent, interest, and profit. Lottery winnings or a gift are received without supplying a productive factor or service, so they are transfer or windfall receipts rather than factor income. They must therefore be excluded; option A is correct.

The income method adds factor incomes generated by current production: compensation of employees, operating surplus, and mixed income. Transfer payments, such as pensions or unemployment benefits, are not paid in exchange for current productive services. Adding them would count a non-factor receipt as production income and would overstate national income. Therefore, option A is correct.