Why is domestic income measured at factor cost and not market price in the income method?
Answer and explanation
Correct answer: Because it measures the total income received by factors of production
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.
Frequently asked questions
What is the correct answer to this question?
Because it measures the total income received by factors of production
Why is this the correct answer?
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.
Which subject and chapter does this question cover?
This is a Class 12 Economics question. Chapter: National Income and Related Aggregates. Topic: Methods of calculating national income - Income Method.
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