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Lecture 20

Lecture 20

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Published by praneix

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Published by: praneix on Aug 11, 2009
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Learning outcomes
After studying this unit, you should be able to:
Understand different methods for the measurement of netionalincome
Define income method
Know expenditure method
Classify factor income
Analyze the circular flow of income
Discover the flow of income in various sectors
Understand different sectors
Calculate gross national product, net national product
Classify the types of income
National income of a country can be measured in three alternative ways (i) as a flow of income (ii)as a flow of goods and services, and (iii) as a flow of expenditure. The three methods of measurement give us three measures of national income, viz., gross national income, grossnational product; and gross national expenditure. The three measures will be identical in value,i.e., in an economy.
As we have already discussed that the production process is a Continuous one in which goodsand services are produced with the help of various factors of production like our, land, capital,enterprise and so on. 'These factors co-operate in the production process because they receiveearnings in cash or in kind which will satisfy wants. The producers engage these factors becausethey have the capacity to produce tangible goods and services. The producers are, therefore,under an obligation to make payment for factor services. The earnings which the different factorsof production get in the production process are called factor incomes.From the producer’s point of view it is termed as 'income paid', and from the factor's point of viewas 'income received'
National income of a country could be c6mputed either by taking the sum of income paid by theproducing units to the factors of production, or by taking the sum of income received by thefactors. The former is known as 'income-paid-out variant' and the latter as 'income receivedvariant'. National income, whether measured. by income-paid out variant or by income-receivedvariant must give us. identical results. Different countries use either of the two variants tomeasure national income as sum of factor income, depending upon the availability of essentialdata.. At times, income paid and income received measures are used simultaneously, as inFrance, to compute the national income. In most of the countries, however, the income-paid-out.approach is extensively used because of the easy availability of data relating to it.
Classification of Factor Income
The income which the factors receive from enterprises, government, or other institutions couldbe classified into different categories accounting to economic division in which economicactivities are placed. The most comprehensive classification consists of the following five types of income:(i) Compensation of employees,(ii) Interest,(iii) Rent,(iv) Profits and Dividends, and(v) Mixed income of self-employed.We may adopt a less comprehensive but stilI effective classification -of factor income into threebroad categories, viz.,(i) Wage Income,(ii) Non-wage Income, and(iii) Other incomes.
(i) Wage Income.
Wage income refers to the income received by the employees in cash and inkind. These employees must be the normal residents of the country. Wage income must becomputed before payment of taxes and deductions of social security contributions. Factors of production work for private enterprises, government and sometimes they work for themselves(self. employed). The sum of the wages and salaries received by factors in a year's time gives usnational income of the country.Normally, wage income estimates are available through industrial reports, annual surveys,budgetary reports of the government, payroll tax data, and so on. Wages and salaries paid to thefactors are compiled from the information received from the different sectors-public and private-employing them.However, at times, aggregate wage income statistics are inadequate or available for certain yearsonly. In such cases, it is necessary to conduct special surveys to collect wage income data. Allthe units of factors are not taken into consideration for the collection of data. Suppose that wehave to estimate the earnings of the workers employed in the cotton textile industry in India. Wewill pick up a few workers at random basis representing all categories in an industrial unit. Thenwe will find out the average income of these representative workers by dividing their grossincome by their number. This average income, then, will be multiplied by the total number of -
workers engaged in this industrial unit to arrive at the total income of all the workers in this unit.Similarly, the wage income of workers employed in other cotton textile units is computed. Thesum of the wage income of workers in all the units will provide us data relating to income paid toworkers in cotton textile industry. Similar method may be employed to find out the wage incomeof workers working in other sectors.'We have to follow a different method to estimate the compensation paid in kind to domestic andfarm workers, restaurant, and industrial employees. The value of board or lodging is computed attheir cost to the employers or at the prices at which these facilities would be available to theemployees elsewhere.There is yet another form of wage income, known as 'supplementary labour income. This incomeis paid in the form of provident fund, pension, gratuity, and other social security benefits. Incomearising out of supplementary earnings is ascertained from the sample accounts of the enterprisesadministrating welfare programmes. Annual surveys and other reports also furnish informationrelating to supplementary earnings
(ii) Non-Wage Income.
Non-wage income refers to the income paid to the factors in the formof interest, rent, distributed profits and dividends . We would like to discuss in brief the differentsources of non-wages income which are as follows:
(a) lnterest.
Interest is the income received 'by individuals and non-profit' institutions as areward for the capital supplied to the enterprises, It also includes interest on life insurancepolicies, bank deposits and interest on government bonds. Normally, the interest accruing tohouseholds is not -shown in the national' income because no relevant information is available onthis count. In such casts, the interest payments to households appear in business profit as afactor share.Income from interest may be estimated from income tax data, as in the United States, or may beobtained by conducting surveys of the production activities of business enterprises.
(b) Rent.
Income from rent may be defined as' a capital share derived solely from theownership of land and building. Rental income includes net rent accruing to households andprivate non-profit making institutions. It does not include rent on the ownership of farm andowner-occupied business buildings. It is so, because it is reflected in the profits of the firms andbusiness enterprises. Data relating to the share of rent in the national income is collected throughspecial surveys or tax returns.
(c) Profits and Dividends.
Corporate profits include dividends and undistributed profits.Dividends are the income paid by the enterprises to households and non-profit makingorganisations as a share of profits. Data relating to the share of dividends in the national incomemay be computed from the reports of corporate income taxes or reports of special taxes onincome from stock and other securities. Undistributed profits are the sums set aside by .firms for future tax payments. It is obtainedafter payment of dividends, interest, transfers and direct taxes. Figures relating to undistributedprofits may be obtained from the corporate income tax returns or through special sample surveys.(c)
Mixed Incomes of the Self-employed.
Mixed incomes of the; self-employed areconsidered as income from work. It is true that the entire income a self-employed personreceives cannot be attributed to his effort alone. Any production activity requires theservices of other factors in addition to human effort to produce goods and services. In.most cases, the producer supplies his own land and capital instead of borrowing their 

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