Methods of calculating national income - Income Method

Compensation of employees includes wages and salaries plus employers’ social-security contributions made for their employees. A provident-fund contribution is connected with the employee’s employment and is therefore included. Old-age pensions and unemployment allowances are transfer payments, while dividends are property income. Hence, option A is correct.

Domestic income measures factor income generated within a country’s domestic territory, regardless of whether the factor belongs to a resident or a non-resident. National income measures factor income accruing to normal residents, whether earned inside or outside the territory. A normal resident working domestically satisfies both conditions, so the income enters both aggregates. Option A is correct.

A capital gain usually results from an increase in the market price of an existing asset, such as land, a house, or old shares. It does not necessarily represent income generated by current production or by supplying a factor service during the accounting period. Consequently, it is kept separate from normal factor income in the income method. Option A is correct.

Compensation of employees includes direct wages and salaries as well as employers’ contributions to social-security schemes, including provident funds. An old-age pension is a transfer payment; a capital gain comes from an asset-price change; and lottery money is a windfall receipt. None of these is payment for current employee service. Therefore, option A is correct.

Commission is included in compensation of employees when it is paid in return for services performed as part of an employment relationship. It then represents labour income generated by current production. Lottery winnings and donations are transfer or windfall receipts, while money from selling old shares is an asset transaction or capital gain, not employee compensation. Hence, option A is correct.

The income method totals factor incomes generated by current production, such as compensation of employees, rent, interest, profit, and mixed income, subject to the relevant accounting treatment. Consumption expenditure belongs to the expenditure method, while loans, donations, and many transfers are not payments for current production. Including such items would produce an incorrect estimate.

National income is obtained by adding net factor income from abroad to domestic factor income: National Income = Domestic Factor Income + NFIA. Therefore, ₹3,600 crore + ₹240 crore = ₹3,840 crore. Since NFIA is positive, it increases domestic factor income to the national-income figure. Hence, option C is correct.

Net factor income from abroad is calculated as factor income received from abroad minus factor income paid to abroad. A negative value therefore means that payments made to foreign factors exceed income received by domestic residents from factors abroad. Consequently, national income, which equals domestic income plus NFIA, is lower than domestic income.

The owner of a small shop commonly contributes labour, uses personal or business capital, organises the activity, and bears entrepreneurial risk. The total return cannot usually be separated accurately into wages, interest, rent, and profit. Therefore, the income is classified as mixed income, which combines returns to the owner’s labour, capital, and enterprise.

Undistributed profit is the part of a company’s profit that is retained instead of being paid to shareholders as dividends. It is nevertheless generated from the firm’s production and business activity. Under the income method, profits, including retained or undistributed profits, form part of operating surplus and are counted as factor income. The other options are transfer receipts or personal gifts, not operating profit.

Using the income method, domestic income is calculated by adding compensation of employees, operating surplus and mixed income. Therefore, domestic income = ₹1,250 crore + ₹980 crore + ₹370 crore = ₹2,600 crore. No deduction is required because all three figures are already income components generated within the domestic territory. Hence, option B is correct.

The relationship is: National income = Domestic income + Net factor income from abroad. Rearranging gives NFIA = National income − Domestic income. Thus, NFIA = ₹4,100 crore − ₹4,350 crore = −₹250 crore. The negative sign means factor payments made to the rest of the world exceeded factor income received from abroad by ₹250 crore. Therefore, option B is correct.

A self-employed doctor may simultaneously provide medical labour, use personally owned equipment and premises, and organise the business. The total clinic receipt therefore combines returns to labour, capital and entrepreneurship. Since these components cannot always be separately measured from accounts, the income is classified as mixed income. It should not automatically be treated as salary, a transfer, or a tax.

A dividend is the portion of a company’s profit distributed to its shareholders. The profit was generated through the company’s production and business operations before distribution. Therefore, the dividend is not a separate, additional act of production; it is a distribution of an income component already recorded as profit. This treatment prevents the same production income from being counted twice.

Net factor income from abroad is calculated as factor income received from abroad minus factor income paid to the rest of the world. Therefore, NFIA = ₹480 crore − ₹520 crore = −₹40 crore. Because payments to foreign factors are greater than receipts from domestic factors working abroad, the balance is negative. Hence, option B is the correct answer.

Factor income is payment made to a factor of production—such as labour, land, capital or entrepreneurship—in return for its productive service. A subsidy is financial assistance provided by the government to reduce costs or support producers or consumers. It is not payment for a separately supplied factor service. Therefore, subsidy is treated as a transfer or policy-related adjustment, not as factor income in the income method.

The income method counts factor incomes generated by current production, such as wages, rent, interest, profit, and income from services. A lottery agent performs a distribution or selling service, so the commission is remuneration for that productive service and may be included. A lottery prize, however, is not paid in exchange for a currently supplied productive service; it is generally treated as a transfer-type receipt and is excluded from factor income. Thus, the two receipts have different economic bases.

The income method classifies income according to the factor or service that generates it. If an owner actively manages the enterprise, the payment identified as managerial salary is remuneration for labour or management services. The residual profit is the return to entrepreneurship and risk-bearing. The same individual can supply more than one factor service, so receiving both forms of income is possible. Separating them improves classification and prevents the entire amount from being incorrectly placed in only one category.

Rent is a return to the factor of land or property. When a resident household receives rent from property located abroad, the income accrues to a resident from an external economic territory. It is therefore recorded as factor income from abroad. In moving from domestic income to national income, such receipts contribute to net factor income from abroad, after subtracting factor income paid by the country to non-residents. Hence, option A is correct.

The physical location of payment does not determine the recipient's economic residence. If a domestic enterprise generates profit but pays it to a non-resident owner, that profit is part of domestic income because production occurred within the domestic territory. However, it is not part of the income accruing to residents. Therefore, it is recorded as factor income paid abroad and deducted, usually through the net factor income from abroad adjustment, when deriving national income.

A government employee's current salary is paid in exchange for labour or administrative services supplied during the current period. Since it is remuneration for current production-related service, it is included as compensation of employees in the income method. A pension, in contrast, is normally paid because of past service, retirement status, or a social entitlement and is not payment for work performed in the current period. It is therefore generally treated as a transfer payment and excluded from factor income.

Goods produced for self-consumption are not sold through an observed market transaction, but their production still represents current economic activity. To include their contribution consistently in national income, the value is imputed using the price that a comparable good would command in the market, or an appropriate equivalent valuation. This prevents non-market production from being omitted merely because the producer consumes it rather than selling it. Therefore, option A is correct.

In the income method, compensation of employees means the total payment made to workers for their current labour services. It includes wages and salaries paid in cash, payments or benefits provided in kind, and the employer’s contribution to social security or similar schemes. Rent, interest and profit are separate components of factor income, while gifts, grants and loans are not payment for current employee services. Therefore, option A gives the complete structure.

Transfer income, such as a pension, scholarship or unemployment allowance, is received without providing a current factor service or producing a corresponding current output. It is therefore not included as factor income in the income method. If it is added mistakenly, the measured income total includes a non-production receipt and may become higher than the true national income. Therefore, option A is correct.

A capital gain or loss arises because the market value of an existing asset changes, for example when land, shares or a building becomes more or less valuable. This change does not necessarily represent a newly produced good or a current factor service during the accounting period. National income measures income generated by current production, so capital gains and losses are kept separate. Hence, option A is correct.