Methods of Measurement of National Income - Income Method

• Income Method is also called the Factor Income Method or Distributive Share Method.
• National income is measured by summing up factor incomes earned by all factors of production (land, labour, capital, enterprise) in an economy during an accounting year.
• It measures national income from the distribution side — i.e., how income is distributed among factor owners.

1. Compensation of Employees

• Wages and salaries (in cash and kind)
• Employer's contribution to social security schemes
• Other allowances and perquisites paid to employees

2. Operating Surplus

Income earned by owners of capital and land:

a) Rent - income from letting out land and buildings

b) Royalty - income from patents, copyrights, natural resources

c) Interest - income from lending capital (financial assets)

d) Profit - income of entrepreneurs; includes

• Dividends paid to shareholders
• Retained earnings / undistributed profits of corporations
• Corporation tax paid to the government

3. Mixed Income of Self-Employed

• Income of self-employed persons (e.g., farmers, doctors, lawyers, shopkeepers) where labour and capital contributions cannot be separated.
• Also called income from own-account workers.

4. Net Factor Income from Abroad (NFIA)

• Added to convert domestic income → national income.
• NFIA = Factor income received from abroad − Factor income paid to abroad

• Identify all production units in the economy (primary, secondary, tertiary sectors).
• Classify factor incomes: compensation of employees, operating surplus, mixed income.
• Sum all factor incomes to get NDP at Factor Cost.
• Add Net Factor Income from Abroad to arrive at NNP at Factor Cost (National Income).

• Wages and salaries (cash + kind)
• Employer's contributions to provident fund / social security
• Imputed rent of owner-occupied houses
• Retained earnings / undistributed profits
• Corporation tax
• Income from self-employment (mixed income)
• Income from subsistence farming (imputed value)

National Income (NI) using this income method is expressed as:

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

Where:

• R: Rent (including imputed rent of owner-occupied houses and income from government property)
• W: Wages and salaries (compensation of employees)
• I: Interest
• P: Profits (including distributed, undistributed, and corporate tax)
• MI: Mixed income of self-employed (where labour and capital income cannot be separated)
• X−M: Net exports (exports minus imports of goods and services)
• R−P: Net receipts from abroad (net income from abroad, such as factor income received from the rest of the world minus factor income paid abroad)

In words, national income is the sum of all domestic factor incomes plus net exports and net factor receipts from abroad.

• Include imputed values: Imputed rent of self-occupied homes and the value of goods produced for self-consumption must be included.
• Exclude transfer payments: Pensions, scholarships, gifts, and government subsidies must not be counted.
• Avoid double counting: Do not add both dividends and retained profits separately - count total profit.
• Include undistributed profits: Retained earnings of firms are part of national income even if not distributed.
• Include employer's contribution to social security; exclude employee's contribution (already counted in wages).
• Exclude capital gains: These are not earned through current production activity.
• Include income of non-residents working in the domestic economy; exclude income of residents working abroad (for NDP calculation).

• Self-employed income: Difficult to separate labour and capital components in mixed income (e.g., a doctor using own clinic).
• Non-marketed goods/services: Subsistence production, household services, and barter transactions are hard to measure.
• Unreported/illegal incomes: Black market and smuggling incomes are excluded but exist, leading to underestimation.
• Imputed values: Estimating imputed rent and self-consumed goods involves guesswork.
• Data unavailability: Lack of reliable data from the informal/unorganized sector makes accurate calculation difficult.

• Income Method measures National Income by adding all factor incomes earned during an accounting year.
• NDP at Factor Cost includes Compensation of Employees, Operating Surplus, and Mixed Income.
• National Income (NNPFC) is obtained by adding NFIA to NDPFC.
  Formula: NNPFC = NDPFC + NFIA
• Include only factor incomes. Exclude transfer payments, capital gains, windfall gains, second-hand goods, illegal income, gifts, and household services.
• Include imputed rent and undistributed profits. Avoid double counting.
• The main difficulties are mixed income, non-marketed production, imputed values, unreported income, and lack of data.
• Steps: Identify production units → Classify factor incomes → Calculate NDPFC → Add NFIA to get NNPFC.