NATIONAL INCOME ACCOUNTING-
INCOME METHOD
A MANOHARAN
PGT ECO
INCOME METHOD-STEPS
• Income method measures national income by adding factor
incomes like rent, wages, interest and profit generated in the
economy in an accounting year.
Steps of Income method
• Step; 1 Identify production units and classify them into
industrial sector namely Primary, secondary and Tertiary
sector.
• Step ; 2 Estimate the factor income paid by each sector.
The factor incomes paid by each sector are classified into
• (1) Compensation of employees
• (2) Rent and Royalty
• (3) Interest
• (4) Profit
• (5) Mixed income
DOMESTIC FACTOR INCOME
Domestic factor income (NDP
FC)
Mixed income
Compensation Operating
of the self-
of employees surplus
employed
Rent and
Interest Profit
royalty
COMPONENTS OF FACTOR INCOME
(1)Compensation of employees refers to amount paid to
employees by employers for productive services. It
consists of 3 elements:
❖ Wages and salaries paid in cash: It includes wages,
salaries, bonus dear allowance paid in cash.
❖ Wages and salaries paid in kind: It includes non-
monetary benefits like rent free house, free medical
facilities, free educational facilities etc.
❖ Employers contribution to social security schemes: It
include the social security contributions like provident
fund, life insurance, pension schemes etc. the aim of
such fund is to ensure security of life of employees.
COMPENSATION OF EMPLOYEES
COMPENSATION OF
EMPLOYEES
EMPLOYERS
WAGES AND WAGES AND
CONTRIBUTION TO
SALARIES PAID IN SALARIES PAID IN
SOCIAL SECURITY
CASH KIND
SCHEMES
COMPONENTS OF FACTOR INCOME
(2) Rent and Royalty : Rent is a factor income earned from lending the
services of land, buildings etc. Whereas Royalty refers to income earned
by landlord by leasing rights of sub-soil assets (deposits of coal, iron and
natural gas etc.)
(3) Interest is the reward or payment given to the owner of capital for
using the capital for production.
(4) Profit : It is the reward given to the entrepreneur for his contribution
to the production of goods and services.
Profit = Corporate tax + dividend + undistributed profits (Retained
earnings)
(5)Mixed income of the self employed: It is the income earned by self-
employed persons and own account workers like farmers, doctors etc. and
unincorporated enterprises like small shop keepers.
Income method
Step:4 Calculation of Domestic income (NDP FC)
By adding all the factor incomes we get NDP FC
NDP FC = Compensation of employees + Rent
Royalty + Interest + Profit + Mixed income.
Step 5 Estimating National income (NNP FC)
If we add NDP FC and Net factor income from
abroad we will get National income.
National income ( NNP FC) = NDP FC + NFIA
PRECAUTIONS OF INCOME METHOD
1. Transfer incomes like old age pension, scholarship, unemployment
allowance are not to be included because they do not add value
to the production.
2. Sale and purchase of second hand goods are not to be included
because the value of these goods are already included.
3. Income from illegal activities like smuggling, black marketing,
windfall gains are not to be included because they are not
productive activities.
4. Buying and selling of bonds, shares are not be included because
these financial activities are mere change of ownership and do not
add to the current flow of goods.
5. Imputed value of services provided by the owners of production
activity like imputed value of owner occupied houses, interest on
own capital, production for self-consumption are to be included
because these are productive activities.
Income method- Numerical example
NDP FC = Wages and salaries + employers contribution to social
security schemes + rent and royalty + interest + profit +
Mixed income of the self employed.
OR
Net domestic product at factor cost =
Compensation of employees +
Operating surplus +
Mixed income of the self employed.
National income (NNP FC) = NDPFC + Net Factor Income from Abroad
Compensation of employees = Wages and salaries paid in cash and kind +
Social security contributions by employers.
Operating surplus = Rent and Royalty + Interest + Profit.
INCOME METHOD
• GROSS VALUE – DEP = NET VALUE
• NET VALUE + DEP = GROSS VALUE
• MP – NIT = FC
• FC + NIT = MP
• DOMESTIC PRODUCT + NFIA = NATIONAL PRODUCT
• NATIONAL PRODUCT – NFIA = DOMESTIC PRODUCT
INCOME METHOD
• NDPFC + NIT = NDP MP
• NDPFC + DEP = GDPFC
• NDPFC + NFIA = NNPFC
• NNPFC + DEP
• NNPFC + DEP = GNP FC
• GNPFC +NIT
• GNPFC + NIT = GNP MP
• NDP FC…………………. GNPMP
• + DEP
• + NFIA
• + NIT
• NDP FC NNP MP
Calculate National income
SLNO Values [Link]
1 Compensation of employees 800
2 Rent 200
3 Wages and Salaries 750
4 Net exports (-) 30
5 Net factor income from abroad (-) 20
6 Profit 300
7 Interest 100
8 Depreciation 50
9 Mixed income 100
NDP FC = Compensation of employees + Rent + interest + profit + Mixed income
=800 + 200 + 100 + 300 + 100 = 1500
National income (NNP FC) = NDP FC + NFIA = 1500 + (-) 20 = Rs.1480 Crores.
Calculate NNP FC
SLNO Values [Link]
1 Compensation of employees 1800
2 Rent 300
3 Wages and Salaries 850
5 Net factor income from abroad 20
6 Profit 200
7 Interest 200
8 Depreciation 30
9 Mixed income 500
NDP FC = Compensation of employees + Rent + interest + profit + Mixed income
=1800 + 300 + 200 + 200 + 500 = 3000
National income (NNP FC) = NDP FC + NFIA
= 3000 + 20 = Rs.3020 Crores.
Calculate NNP MP
Slno Values [Link]
1 Wages and salaries 700
2 Rent 50
3 Consumption of fixed capital 30
4 Factor income from abroad 20
5 Mixed income 400
6 Subsidies 100
7 Indirect Taxes 200
5 Factor income to abroad 30
6 Employers contribution to S S schemes 60
7 Interest 50
8 Profit 40
NDP FC =Wages and salaries + Employers contribution to S S schemes + Rent + Interest + Profit. + MI
= 700 + 50 + 50 +60+ 40 +400 = 1300
NNP FC = NDP FC + NFIA ( Factor income from abroad – factor income to abroad )
= 1300 + (20-30 ) = 1300-10 = Rs.1290 crores.
NNPMP = NNPFC + NIT
1290 + (200-100) = Rs.1390crores
Calculate Gross Domestic Product MP by (a) Production method and (b) Income method
1 Intermediate consumption by CR.
(a) Primary sector 500 VOP OF ALL THE SECTORS
- IC OF ALL THE SECTORS = GDP MP
(b) Secondary sector 400
(c) Tertiary sector 300 2600 – 1200 = Rs.1400 crores
2 Value of output by
Compensation of employees + rent
(a) Primary sector 1000 + int, profit + MIXED INCOME = NDP FC
(b) Secondary sector 900
(c) Tertiary sector 700
400 + 50 + 250 + 650 = 1350
3 Rent 50
4 Compensation of employees 400 NDPFC + DEP+ NIT = GDP MP
5 Mixed income 650
6 Net factor income from abroad (-)20 1350 + 40+10 = Rs.1400 Crores
7 Interest and profit 250
8 Consumption of fixed capital 40
9 Net indirect taxes 10
Calculate GNP MP
Slno Values [Link]
1 Wages and salaries 1000
2 Rent 100
3 Consumption of fixed capital 35
4 Factor income from abroad 25
5 Mixed income 500
6 Subsidies 10
7 Indirect Taxes 20
5 Factor income to abroad 40
6 Employers contribution to S S schemes 100
7 Interest 50
8 Profit 30
NDP FC =Wages and salaries + Employers contribution to S S schemes + Rent + Interest + Profit + MI
= 1000 + 100 + 100+ 50 + 30 +500 = 1780
NNP FC = NDP FC + NFIA( Factor income from abroad – factor income to abroad )
= 1780 + (25-40 ) = Rs.1780+ (-15) = 1765 crores.
NNPMP = NNPFC + NIT 1765 + (20-10) = Rs.1775crores
NNP MP + DEP = GNP MP = 1775 + 35 = 1810 Crores.
• NDPFC+DEP+NFIA+NIT= GNPMP
FIND (a) DOMESTIC INCOME (b) NATIONAL INCOME
Sl Value [Link]
1 Wages and salaries 30,000
2 Rent 15,000
3 Interest 1200
4 Dividend 9000
5 Mixed income 1200
6 Undistributed profit 600
7 Social security contributions by employers 1200
8 Corporate tax 1200
9 Net factor income from abroad 600
Domestic Income = NDPFC = Wages and salaries + SS by employers + rent + interest + Profit
+ Mixed income
30,000 +1200 + 15,000 + 1200 + 1200 + (9000+600+1200) = Rs.59400 Crores
National income = NNP FC = NDPFC + NFI
= 59400 + 600 = Rs.60,000 Crores
INCOME METHOD
• SAY WHETHER THE FOLLOWING ARE INCLUDED IN NATIONAL
INCOME:
• Financial assistance given to the victims of flood.
• No, because it is transfer payments
• Sale and purchase of financial assets like shares , bonds etc.
• No, they are mere exchange of papers does not make any change in
flow of goods and services.
• Intermediate consumption like purchase of materials.
• No. these values are included in the final goods.
• Sale and purchase of second hand goods.
• No, these values are already included in the year these were produced.
• Payment of bonus to the employees by the employer.
• Yes , part of compensation of employees.
• Brokers commission on the sale of second hand goods.
• Yes, it is the income for the services of brokers.
THANK YOU
