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Methods of Measurement of National Income - Income Method

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Income Method :
This method of measuring national income is also known as factor cost method. This 
method estimates national income from the distribution side.
According to this method, the income payments received by all citizens of a country, in a particular year, are added up, that is, incomes that accrue to all factors of production by way of rents, wages, interest and profits are all added together, but income received in the form of transfer payments are ignored. The data pertaining to income are obtained from different sources, for instance, from income tax returns, reports, books of accounts, as well as estimates for small income.
GNP can be treated as the sum of factor incomes, earned as a result of undertaking 
economic activity, on the part of resource owners and reflected in the production of the total output of goods and services during any given time period.
 Thus, GNP, according to income method, is calculated as follows:
NI = Rent + Wages + Interest + Profit + Mixed Income + Net export + Net receipts from 
abroad.

NI = R + W + I + P + MI + (X–M) + (R–P)


Precautions :

1) Transfer incomes or transfer payments like scholarships, gifts, donations, charity, old 
age pensions, unemployment allowance etc., should be ignored. 
2) All unpaid services like services of a housewife, teacher teaching her/his child, should be ignored. 
3) Any income from sale of second hand goods like car, house etc., should be ignored. 
4) Income from sale of shares and bonds should be ignored, as they do not add anything to the real national income. 
5) Revenue received by the government through direct taxes, should be ignored, as it is only a transfer of income. 
6) Undistributed profits of companies, income from government property and profits from 
public enterprise, such as water supply, should be included. 
7) Imputed value of production kept for self-consumption and imputed rent of owner 
occupied houses should be included. 
In India, the National Income Committee of the Central Statistical Organization, uses 
the income method for adding up the income arising from trade, transport, professional 
and liberal arts, public administration and domestic services.

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