Methods of calculating national income - Income Method

Correct answer: A. Because it is not a reward for factor service

Explanation: A scholarship is generally a transfer payment provided to support a student’s education. It is not paid in exchange for supplying labour, land, capital, or entrepreneurial services in current production. Since the income method includes factor incomes generated by production and excludes transfer receipts, scholarship is normally not added. Thus, option A is correct.

Correct answer: C. Salary received by an employee

Explanation: An employee’s salary is earned as payment for supplying labour, and labour is a factor of production. Therefore, it is factor income and is included under the income method. The sale of an old machine is an asset transfer, while a grant and a gift are transfer receipts; none of these represents payment for a current factor service. Hence option C is correct.

Correct answer: A. It is included in compensation of employees

Explanation: Wages in kind are goods or services provided to an employee as payment for labour instead of, or in addition to, cash wages. Because they are a reward for productive labour services, their value forms part of compensation of employees in the income method. They are not automatically excluded, are unrelated to exports, and are not transfer payments because a productive service has been provided in return.

Correct answer: A. ₹850 crore

Explanation: National income is obtained by adding net factor income from abroad to domestic factor income: National Income = Domestic Factor Income + Net Factor Income from Abroad. Therefore, ₹900 crore + (−₹50 crore) = ₹850 crore. The negative value means that factor income paid to the rest of the world is greater than factor income received from abroad, so it reduces domestic factor income when converting it into national income.

Correct answer: A. Compensation of employees

Explanation: A government employee receives a salary in return for providing labour services to the government. The payment is therefore recorded as compensation of employees, one of the major components of factor income in the income method. It is not a transfer payment, because the employee performs a service in exchange for the salary. Mixed income applies mainly to self-employed persons, while capital gain comes from asset-price changes.

Correct answer: C. ₹700 crore

Explanation: By the income method, domestic income is the sum of factor incomes generated within the domestic territory. In this question, Domestic Income = Wages + Operating Surplus + Mixed Income = ₹300 crore + ₹250 crore + ₹150 crore = ₹700 crore. Therefore, option C is correct. No separate addition or subtraction is required because all three given amounts are already components of domestic factor income.

Correct answer: B. Counting factor income generated from production

Explanation: The income method estimates national income by adding the incomes earned by the factors of production during the production process. Its central principle is therefore to count factor incomes such as compensation of employees, rent, interest, profits, and mixed income, while excluding purely transfer receipts and unrelated financial gains. Final expenditure belongs to the expenditure method, not the income method.

Correct answer: A. Rental income

Explanation: Rent received by a landlord is a return to the factor of land or property. It is earned because the owner allows the property to be used in an economic activity, so it represents factor income rather than a transfer payment or an intermediate cost. In the income method, it is recorded under rental income. Therefore, option A is correct.

Correct answer: B. Transfer payment

Explanation: An old-age pension is paid to support a retired person and is not a reward for a factor’s current contribution to production. Since no current productive service is exchanged for the payment, it is classified as a transfer payment. Transfer payments are excluded from factor income in the income method. Hence, option B is correct.

Correct answer: A. Owners of factors of production

Explanation: The income method views the value created by production as income distributed to the owners of the factors used in that production. Labour receives compensation, land and property receive rent, capital receives interest, and entrepreneurs may receive profit. Thus, it is also called the distributive approach. Option A is correct.

Correct answer: A. Compensation of employees

Explanation: Teachers provide teaching services to the private school, and their salary is the payment received for that labour service. Since it is earned through current productive employment, it is factor income and is recorded as compensation of employees. It is not profit, mixed income or a transfer payment. Therefore, option A is correct.

Correct answer: C. Amount received as gift

Explanation: Non-factor income is received without providing a current productive service or supplying a factor of production. Money received as a gift is a transfer from one person or institution to another and is not a reward for labour, land or capital. In contrast, wages, rent and interest are factor incomes. Hence, option C is correct.

Correct answer: A. Domestic territory

Explanation: Domestic income refers to the factor income generated within a country’s domestic territory during the accounting period, regardless of whether the earners are residents or non-residents. Income earned by residents abroad is not part of domestic income; it is considered when moving from domestic to national income. Therefore, option A is correct.

Correct answer: A. Factor income

Explanation: Factor income is the payment received by the factors of production for supplying productive services. Wages reward labour, rent rewards land, interest rewards capital, and profit rewards entrepreneurship. The income method adds these factor incomes, subject to the relevant national-income adjustments. Therefore, option A is correct.

Correct answer: A. Compensation of employees

Explanation: Wages and salaries are payments made to employees for their labour services. Along with employers’ contributions to social security and similar employment-related payments, they form compensation of employees, one of the major components counted under the income method. Net exports, capital formation, and government consumption belong to expenditure or production classifications, not this component. Thus option A is correct.

Correct answer: A. Factors of production

Explanation: In the income method, production generates income for the factors that provide productive services. Labour receives wages, land receives rent, capital receives interest, and the entrepreneur receives profit. Foreign tourists, tax officers, and consumer expenditure are not the general source or classification of factor income. Hence option A is correct.

Correct answer: A. Wages

Explanation: Wages are the factor income of labour because workers supply physical or mental effort in the production process and receive wages in return. Rent is the return to land, interest is the return to capital, and profit is the return to entrepreneurship. This standard factor-reward relationship makes option A correct.

Correct answer: A. Rent

Explanation: Rent is the factor income earned by the owner of land or other natural resources for allowing their use in production. Wages or salary are returns to labour, interest is the return to capital, and profit is the return to entrepreneurship. Therefore, the income of land is called rent and option A is correct.

Correct answer: A. Interest

Explanation: Interest is the factor income earned for providing or using capital, such as money, machinery, or other productive assets. Rent is the return on land or buildings, wages are the return on labour, and profit is the reward for entrepreneurship and risk-bearing. Thus, the correct answer is Interest.

Correct answer: A. Profit

Explanation: An entrepreneur combines land, labour and capital, takes important business decisions, organises production and bears the uncertainty of profit or loss. The reward received for performing this entrepreneurial function and bearing business risk is called profit. Wages are the reward for labour, rent is the reward for land, and interest is the reward for the use of capital. Therefore, option A is correct.

Correct answer: A. Compensation of employees

Explanation: Compensation of employees is a major component of domestic income because it represents wages and salaries paid for labour services used in domestic production. Private final consumption expenditure, imports, and net exports belong to the expenditure or external-sector framework, not to the direct list of factor incomes in the income method.

Correct answer: A. Rent, interest and profit

Explanation: Operating surplus is the part of domestic factor income that arises from the ownership of property and the operation of enterprises. It generally includes rent from land or property, interest on capital, and profit earned by entrepreneurs. Wages are included under compensation of employees, while scholarships and pensions are generally transfer receipts.

Correct answer: A. Mixed income

Explanation: The income of a self-employed person is called mixed income because the person may simultaneously provide labour, use personal capital, and perform entrepreneurial functions. It is difficult to separate the returns attributable to each factor. Net exports and imports are trade measures, while a transfer payment is not a factor return from current production.

Correct answer: A. Net factor income from abroad

Explanation: National income is obtained by adding net factor income from abroad to domestic income: National Income = Domestic Income + NFIA. NFIA is the difference between factor income received from abroad and factor income paid to foreign factors within the domestic economy. It converts the domestic concept into the national concept.

Correct answer: A. NNP at factor cost / NNP₍FC₎

Explanation: National income is another name for Net National Product at Factor Cost, written as NNP at factor cost or NNP₍FC₎. It represents the net value of final goods and services produced by the normal residents of a country, measured at factor cost. GDP at market price, PFCE, and net exports are different aggregates.