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What are the key components of the income method in national income accounting?
The key components include compensation of employees, operating surplus, mixed income, and taxes minus subsidies on production and imports.
How is national income calculated using the income method?
National income is calculated using the income method by adding compensation of employees, operating surplus, mixed income of self-employed, and income from the public sector.
What is the difference between GDP and GNP when measured using the income method?
GDP using the income method reflects revenue made within a country's limits, whereas GNP includes money earned both domestically and outside by a country's population.
Can you calculate national income without the income method?
Yes, national income can also be calculated using the production and expenditure methods.
What are some limitations of the income method?
Limitations include difficulties in measuring informal economic activities and not accounting for non-monetary transactions.
What is Income Method? Meaning, Calculation, Examples
Learn about the Income Method of calculating national income, its meaning, steps, and examples. Understand how factor incomes like wages, profit, rent, and interest contribute to national income estimation.
Izhar Ahmad13 Mar, 2025
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Income Method: The Income Method is a crucial approach to estimating national income by analyzing an economy's income components. This method calculates national income by considering the earnings received by factors of production, including rent, wages, interest, and profit. In this comprehensive guide, we will explore the meaning, calculation steps, included and excluded items, and examples of the income method.
Income Method Meaning
The Income Method measures national income by summing up the factor incomes generated by all production units within a domestic economy over a specific accounting period. It is also known as the Factor Payment Method or the Distributive Share Method. The formula to derive National Income is:
National Income (NNPFC) = Domestic Income (NDPFC) + Net Factor Income from Abroad (NFIA)
Key Components of the Income Method
Wages and Salaries: Payments made to employees for their services.
Rent and Royalty: Earnings from land and intellectual property rights.
Interest: Income received from investments.
Profit: Earnings of businesses after deducting expenses.
Mixed Income: Self-employed and unorganized sector earnings.
Steps in Calculating National Income by Income Method
Below we've mentioned some steps for how to calculate income by income method:
Step 1: Identify Factor Incomes
Classify the production sectors into primary, secondary, and tertiary sectors. Identify their income sources.
Step 2: Calculate Factor Incomes
Factor incomes are categorized into:
Employee Compensation: Salaries, bonuses, and employer’s provident fund contributions.
Rent and Royalty: Income from leasing land, properties, or intellectual property.
Interest: Earnings from loans and investments.
Profits: Earnings from businesses after deducting operating costs.
Mixed Income: Income of self-employed individuals and freelancers.
In this instance, the national income of the country, computed using the income method, amounts to Rs. 21,400 crores.
The Income Method is a vital approach to estimating national income as it reflects the total earnings of a country’s citizens. By accurately categorizing and summing up factor incomes, policymakers and economists can assess economic growth, development, and income distribution effectively. Understanding its components, exclusions, and applications helps in better economic analysis and planning.
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