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Questions
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.
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Solution
National Income can be calculated by three methods:
- Product method
- Income method
- 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.,.
- Primary sector
- Secondary sector
- Tertiary sector
STEP II: Classification of Income Categories.
Factor income generated in the production unit are classified into the following categories:
- Compensation of employees: It includes, wages and salary in cash and kind, employers contribution to social security scheme etc.
- 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
- 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 (NDPfc)·
Factor income paid by each producing unit mentioned above are added to obtain NDPfc' (Domestic income)
NDPfc = Compensation of employees + Operating surplus + Mixed income of self-employed
STEP IV: Estimation of National Income (NNPfc).
To calculate National Income, NFIA (Net factor income from abroad) is added to domestic factor income (NDPfc)·
NNPfc = NDPfc + NFIA
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| Rs (crore) | ||
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Calculate National Income using Income method and Output method.
| PARTICULARS | (₹ crores) | |
| (i) | Value of output | 1200 |
| (ii) | Wages and salaries | 165 |
| (iii) | Rent | 60 |
| (iv) | Subsidies | 15 |
| (v) | Mixed Income of self employed | 180 |
| (vi) | Employer's contribution to social security | 15 |
| (vii) | Value of intermediate consumption | 600 |
| (viii) | Interest | 7 |
| (ix) | Factor income earned from abroad | 15 |
| (x) | Indirect taxes | 90 |
| (xi) | Profits | 23 |
| (xii) | Depreciation | 75 |
| (xiii) | Factor income paid abroad | 30 |

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