Question

What precautions are necessary while estimating national income by income method?

Answer 1

Precautions in the estimation of national income by income method:

1. To calculate national income using the income approach, include the following two things as revenue in kind:

1. Self-consumption value refers to the value of agricultural products produced by farmers for their families.
2. Imputed rent for self-occupied houses by their owners.

2. The value of services offered by production unit owners during the production process should also be considered. Certain products should not be included in revenue for several reasons: 

1. Transfer incomes like pensions, relief, and scholarships are excluded from national income as they are not payments for productive services. They simply redistribute income.
2. Illegal incomes from smuggling, drugs, and gambling are also excluded, as they are unaccountable and do not reflect legal production.
3. Interest on national debt is excluded from national income, as it is treated as a transfer income, assuming government borrowings are used for consumption purposes and do not reflect current production.
4. The national income does not include interest on consumption loans, as they are considered non-factor income. Only interest on loans for productive purposes is included.
5. Money from the sale of second-hand goods, bonds, and shares is excluded from national income as it does not reflect current production. However, broker’s commission on such transactions is included as it is a payment for services.
6. We exclude private transfer payments (such as pocket money, gifts, etc.) from national income because they are merely financial transfers, not payments for productive services.
7. Windfall gains like lottery income are excluded from national income as they do not contribute to current production.
8. While calculating national income, we include gross profits before deducting corporation tax. Therefore, we do not include corporation tax separately, and if we provide gross profits, we do not need to count the individual components again.
9. We exclude wealth tax, death duties, and gift tax from national income because they come from past savings, not current income.
10. Income tax is included in national income only when deducted at source (TDS) by the employer. Individual payments do not count separately.