Question

Explain the steps involved in calculating the National income by Income method.

Describe the steps involved in the estimation of national income by income method.

Answer 1

National Income can be calculated by three methods:

1. Product method
2. Income method
3. Expenditure method

Income method of calculating National Income involves the income generated from all the factors of production in an economy in a given time.

Following are the steps involved:

STEP I: Classification of Enterprises.
In this method, all the production units that employ factor inputs are identified, i.e.,.

1. Primary sector
2. Secondary sector
3. Tertiary sector

STEP II: Classification of Income Categories.

Factor income generated in the production unit are classified into the following categories:

1. Compensation of employees: It includes, wages and salary in cash and kind, employers contribution to social security scheme etc.
2. Operating surplus: It is also known as income from property and entrepreneurship. Capital income consists of rent, interest, and royalties. Profits can be divided into three parts:
   • Dividends
   • Undistributed profits
   • Corporate tax
3. Mixed income of self-employed: This is the income of self-employed people that have mixed characteristics of both compensation of employees and operating surplus. For example, this includes fees charged by a doctor and fees charged by a lawyer.

STEP III: Estimation of domestic factor income (NDP_fc)·

Factor income paid by each producing unit mentioned above are added to obtain NDP_fc' (Domestic income)

NDP_fc = Compensation of employees + Operating surplus + Mixed income of self-employed

STEP IV: Estimation of National Income (NNP_fc).

To calculate National Income, NFIA (Net factor income from abroad) is added to domestic factor income (NDP_fc)·

NNP_fc = NDP_fc + NFIA