4.3 INCOME METHOD ——————————— Gocome Method measures national income from the perspective of factor incomes. ‘Under this ‘method, incomes received by all the residents of a country for their productive services during a year are added up to obtain the national income. According to this method, all the incomes that accrue to the factors of production by way of wages, profits, rent, interest, etc. are summed up to obtain the national incoms, Income method is also known as ‘Distributive Share Method’ or ‘Factor Payment Method: Camnonente af Factor IncamaPiru i) [compansatonottmployees || Operating ‘Wages and Salaries in Cash Wages and Salaries in Kind Employers Contribution to Social Security Schemes Income from Income tom ne y Steps of Income Method The various steps involved in estimating national income by Income Method are: Step 1: Identify and classify the production units. All the producing enterprises employing various factors of Production are identified and classified into primary, secondary and tertiary sectors. Step 2: Estimate the factor income paid by each sector, The factor incomes paid by each sector are classified under the following heads: (i) Compensation of employees; (i) Rent and Royalty; (ii) Interest; (iv) Profit: a» 4M 4 Income.4A EXPENDITURE METHOD Factor income earned by factors of production is spent in the form of expenditure on purchase -sf goods and services produced by firms. * This method measures national income as sum total of final expenditures incurred by households, business firms, government and foreigners.Introductory Mactoeconemy, i o ‘ * This total final expenditure is equal to gross domestic product at market Price LFinal Expenditure = GDPyyp- * This method is also known as ‘Income Disposal Method’ or ‘Consumption and Incestmeny Method’. ponents of Final Expenditure ‘xpenditure is undertaken by all the sectors of an economy: Households, Government, Firm and the Foreign Sector. The various components of final expenditure are: eo ea Rash od Final ‘Consumption Private | Expend ree) Household + Private Non- Profit institutions Serving Final Consumption Expenditure ise Consumption { Government Final | Gross Domestic Consumption | l. Capital Formation | ++ | Net Exports (NE) | = | Eoertore | © coe (GFce) Gross Fixed + Inventory Exports = Img Capital Formation Investment (x) oy) Households Final fe : NetFixed + Depreciation Expenditure ——_CapitalFormation— | steps of Expenditure Method ‘The steps involved in calculating National Income by Expenditure Method step 1: Identify the Economic Units incurring Final Expenditure “Allthe economic units, which incur final expenditure within the domestic territory, are classified der 4 groups: (i) Houschold sector; (i) Government sector, df the world sector. are: Producing sector; (iv) Rest step 2: Classification of Final Expenditure Final expenditures incurred by the above mentioned economic units are estimated and classified under the following heads: « Private Final Consumption Expenditure (PFCE) + Government Final Consumption Expenditure (GFCE) + Gross Domestic Capital Formation (GDCF) « Net Exports (X-M). EXPENDITURE METHOD ~~ Thesum total of four components of final expenditure gives Gross Domestic Product at Market Price (GDP) ie. GDP p= PFCE + GFCE + GDCF +(X-M) Private Final Consumption Expenditure ++ Government Final Consumption Expenditure + Gross Domestic Capital Formation. + Net Exports ‘Gross Domestic Product at Market Price (GOP yp) Step 3: Calculate Domestic Income (NDP,<) By subtracting the amount of depreciation and net indirect taxes from GDPy,», we get domestic income, ie NDP pe = GDPyyp— Depreciation Net Indirect Taxes. (Depreciation (Net indirect Taxes Step 4: Estimate net factor income from abroad (NFIA) to arrive at National Income Inthe final step, NFIA is added to domestic income to arrive at National Income. (GONFIA National Ir (NI = NDP, +NFIASteps of Value Added Method The main steps for estimating national income by Value Added Method are: Step 1: Identify and classify the production units The first step is to identify and classify all the producing enterprises of an economy into primary, secondary and tertiary sectors. Step 2: Estimate Gross Domestic Product at Market Price In the second step, Gross Value Added at Market Price (GVAyp) of each sector is calculated and sum total of GVAyyp of all sectors give GDP yp, ie. E GVAyp = GDP yp. Step 3: Calculate Domestic Income (NDP) By subtracting the amount of depreciation and net indirect taxes from GDPyjp, we get domestic income, ie. NDP;c = GDPyyp - Depreciation — Net Indirect Taxes. VALUE ADDED METHOD GVA of Primary Sector (+) GVA of Secondary Sector (+) GVAye of Tertiary (-) Depreciation (-) Net indirect Taxes (+) NFIA, National Income (NNP,-) Step 4: Estimate net factor income from abroad (NFIA) to arrive at National Income In the final step, NFIA is added to domestic income to arrive at National Income. National Income (NNP yc) = NDP pe + NEIA