Question

Explain the steps involved in calculating the 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 period.

Following are the steps involved:

STEP I: Identification and classification of producing enterprises.
In this method, all the production units that employ factor inputs are identified i.e.

(a) Primary sector

(b) Secondary sector

(c) Tertiary sector

STEP II: Classification of factor income.

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 the sum of income from property i.e rent, royalty and interest and income from entrepreneurship i.e profits. 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. Example- fees charged by a doctor, 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