INCOME METHOD FOR MEASURING NATIONAL INCOME

Income Method is that method which measures national income from the side of payments made in the form of wages, rent, interest and profits to the primary factor of production i.e.  labour, land, capital and enterprise respectively for their productive services in an accounting year. The steps of income method are-

STEP I-  Identification and Classification of Producing Enterprises
The first step of this method involves identifying all those producing enterprises which employ factor inputs. All the producing enterprises are classified into three industrial sectors
1)      Primary Sector – Primary sector is that sector which produces goods by exploiting natural resources. For example, Agriculture, fishing, mining etc.
2)      Secondary Sector- Enterprises of this sector transform one type of commodity into another type of commodity. This sector is also called as manufacturing sector. For example, manufacturing sugar from sugarcane, cloth from cotton etc.
3)      Tertiary Sector- Enterprises of this sector produce services only. This sector is also known as service sector. For example, banking, transport, insurance etc.

                          STEP II- Classification of Factor Income
The factor income is divided into following groups:
1)      Compensation of Employees-The compensation of employees includes
-Wages and salaries in cash
- Payment in kind
-Employers contribution to social security schemes
- Pension and Retirement
2)      Operating Surplus- The operating surplus includes income from property and       entrepreneurship. It is earned in both the private and government enterprises. The operating surplus includes –
      i) Rent
      ii) Interest
      iii) Profit (Dividend + Corporation Tax + Saving or undistributed profit
3)      Mixed income- Mixed income refers to the incomes of the self-employed persons using their labour, land, capital and entrepreneurship. These incomes are mixed in terms of wages, rent, interest and profits.
4)      Net factor income from abroad- The net factor income from abroad is the difference between the income received from abroad for rendering factor services and income paid for the factor services rendered by non-residents in the domestic territory of a country.
National Income= Net factor income from abroad + Net domestic income

                 STEP III- Estimation of Factor Income
Income paid out by each producing enterprise can be measured by multiplying the number of units of each input employed and income paid to each unit. The resultant will be the income generated by the enterprise. Income generated by all the enterprises in a particular industrial sector can be found out by adding the income paid out by each enterprise.
Net National Income = Net Domestic Income + Net Factor Income from Abroad
Gross National Income = Net National Income + Depreciation
Net National Product at Market Price = Net National Income + Net Indirect Taxes


Precautions Regarding Income Method
Items Included in National Income
Items Not Excluded in National Income
            Pension of retired employees
            Transfer earnings such as old age pension, scholarships etc.
          Services for self-consumption
          Illegal activities such as theft, gambling etc.
          Indirect taxes such as sales tax, production tax etc. are included in national product at market price
-          Income from sale of old things such as old car, old house etc.

            Income from sale of shares and bonds

            Capital gains

            Goods for self-consumption

          Indirect taxes are not included in national product at factor cost


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