Name: Tanishka Shrivastava

Class: XII Sec: Humanities

Subject: Economics
Topic: Income Method Measure To
Calculate National Income
INCOME METHOD
MEASURE TO CALCULATE
NATIONAL INCOME
 NATIONAL INCOME
It is defined as the sum total of all the factor
incomes earned by normal residents of a
country, within the domestic territory of a
country and from the rest of the world, during
a period of an accounting year.
 INCOME
METHOD
In this method, national income is
measured in terms of factor payments
(wages, rent, and profit) to the
owners of the factors of production
(labour, land, capital, and enterprise),
during an accounting year. This
method is also known as the Share
Method or Factor Payment Method
Steps to calculate National Income using Income Method
1. Estimation of Compensation of Employees
It includes
*Wages and salaries in cash
*Payments in kind such as rent-free house
*Employer’s contribution to social security schemes such as provident fund
*Pension on retirement, as it is the part of service contract between employer and employees
Symbiotically
Compensation of employees = Wages and salaries in cash + payments in Kind +
Employer’s Contribution to Social Security Schemes + Pension on Retirement

2. Estimation of Operating surplus

It refers to income from property and entrepreneurship. I include the following items
*Rent and Royalty
*Interest
* Profit
Symbiotically,
Operating Surplus = Rent and Royality + Interest +Profit
Where,
Profit = Dividend / Distributed Profits + Corporate Dividend Tax + Undistributed Profit
3. Estimation of mixed Income of Self-Employed
The income of the self-employed persons using their
own land, labour, capital, and entrepreneurship for
production is termed as mixed-income

4. Estimation of National Income (NNP at fc)

It is computed using the following formulae

NDP at fc = Compensation of Employees + Rent and

Royalty + Interest + profit + Mixed Income of Self-
employed
PRECAUTIONS OF INCOME METHOD
While using the income method, items included and excluded in the
calculation of national income are:-
* Income From Illegal activities like smuggling, theft, gambling, etc.
should not be included.
* Commission paid on the sale and purchase of second-hand goods
are to be included.
* Income in terms of windfall gains should not be included
* Imputed rent of the owner-occupied houses is treated along with
rent as a component of factor incomes.
* Income tax is paid out of compensation of employees. It should not
be separately added to the estimation of national income.
* Brokerage on the sale/purchase of shares and bonds is to be
included.
* Transfer earnings like old age pensions, unemployment allowance,
scholarship pocket expenses, etc. should not be included
 EXAMPLE
Calculate the NDP at FC by using the income method.

S. No. Items Amount

(in crores)

Solution: (i) Wages and Salaries 32,100

NDP at FC = Compensation of employees +
Operating surplus + (ii) Rent 52,300

Mixed income + (iii) Royalty 12,500

Income from domestic products accruing to (iv) Interest 10,100

the public sector
(v) Corporate tax 50,590

= Rs. 32,100 crores + Rs. 2,26,900 crores + (vi) Dividend 20,410

Rs. 12,110 crores + (vii) Undistributed profit 81,000

Rs. 20,690 crores
(viii) Mixed income of self-employed 12,110

Ans = Rs. 2,91,800 crores (ix) Savings of non-departmental

enterprise
5,190

(x) Income from property and 15,500

entrepreneurship to government
administrative departments