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Income Method of Calculating National Income

As per this Method

We calculate factor income earned by all factors of production

Like Rent, Interest, Wages and Salaries, Profit etc

What are Factor Incomes - Teachoo.JPG

How is Domestic Income Calculated by Income Method.JPG

Format For Calculating Domestic Income.JPG

Example-What is Mixed Income.JPG

Sum total of this is equal to NDP FC(Domestic Income)

In this ,we add, NFIA (Net factor income from Abroad) to arrive at National Income

Format

Calculation of National Income
Different Factor Incomes  
Rent 10
Royalty 50
Interest 30
Compensation to Employees 40
Profit 20
Mixed Income 30
Total (Domestic Income NDP FC 180
Add NFIA 20
NNP FC (National  income) 200

 

Note

In the above method,

We do not deduct Depreciation and Net indirect Taxes

Total of All Incomes is equal to Domestic income

In this, we add Net Factor Income from Abroad to arrive at National Income (NDPFC)

Components of Factor income

Rent

It refers to that part of National Income which arises from ownership of land and Building

In easy language, it is income earned by landlord from tenant by giving his property on lease

Royalty

It is the income earned by granting leasing right of subsoil assets

Subsoil assets means assets which are found inside the earth Example-Coal, Petroleum, Mineral Reserves

Example - A mining company takes a mine on lease from Govt against which it pays Rs 20 lacs per year

This 20 lacs amount is Royalty Income of Government

Difference between Rent and Royalty Income.JPG

Interest

It includes interest income earned by lending funds to production units only

Example - Loan taken by a Factory from Bank to Purchase Machine

Interest Income Earned.JPG

 

Note

It does not include interest on

Loan taken by public for consumption purpose (Personal Loan)

Loan taken by Govt from Public (Interest on Govt bonds)

Loan taken by one firm to another (inter company loans)

Compensation to Employees

 

It refers to total amount paid by employer to employee for rendering production services

It includes

Wages and Salaries (paid in cash)

Amount paid in kind (Any non monetary benefit given)

Employer Contribution to Social Security Schemes (Example - PF ESI Employer Contribution)

However, it does not include

Any Reimbursement of Office Expenses (Example-Travelling expenses of employee for office work reimbursed)

Any facility which is compulsory for the employee (Example-Compulsory uniform for employee)

Employee Contribution to Social securities (PF,ESI)

Profit

It is the amount earned by entrepreneur for his services

Out of this profit, some amount is paid as income tax to Government (Called Corporation tax)

Balance is distributed as Dividend to Shareholders

or Retained for future use (called Retained Earning)

Hence, Profit=Corporate Tax + Dividend + Retained Earning

Mixed Income

It is income earned by own account workers (Self employed, small businessman, farmers etc)

They contribute entrepreneurship as well as land, capital etc

So income earned by them is mixture of Rent income + Profit + Interest Income etc

Hence, it is called Mixed Income

 

How is Domestic Income Calculated

It is some total of all factor Incomes

Domestic income= Rent + Royalty + Interest + Compensation to employees + Profit + Mixed Income

NDP at FC= Rent+ Royalty + Interest + Compensation to employees + Profit + Mixed Income

How is National Income Calculated

We add NFIA to Domestic Income to arrive at National Income

Format for Calculating National Income.JPG

 

Example 20

Calculate NDP at FC.

Particulars  ₹ in Crores 
(i) Rent  400
(ii) Royalty  200
(iii) Interest  500
(iv) Compensation of Employees  1,000
(v) Profit  500
(vi) Mixed Income  1,000

 

Answer

Particulars Amount (In Crores)
Different Factor Incomes  
Rent 400
Royalty 200
Interest 500
Compensation to Employees 1000
Profit 500
Mixed Income 1000
Total (Domestic Income NDP FC 3600

 

NOTE

Sometimes in question,

Compensation to employees and Wages and Salaries are both given

In this case, wages and salaries are not to be taken

We take only compensation to employee

(Compensation to employees include wages and salaries as well as amount paid in kind and employer contribution to social welfare scheme)

Example 23

From the following data, calculate National Income.

Particulars  ₹ in Crores 
(i) Compensation of employees  800
(ii) Rent 200
(iii) Wages and salaries  750
(iv) Net exports  (-) 30 
(v) Net Factor income from abroad  (-) 20 
(vi) Profit  300
(vii) Interest  100
(viii) Depreciation  50

 

Answer

Particulars Amount (In Crores)
Different Factor Incomes  
Rent 200
Interest 100
Compensation to Employees 800
Profit 300
Total (Domestic Income NDP FC 1400
Add NFIA -20
NNP FC (National  income) 1380

 

Note

In Income Method

We do not reduce Depreciation

as we calculate NDP at FC Directly

NDP at FC= Rent + Royalty + Interest + Compensation to employees + Profit + Mixed Income

What is Operating Surplus

It is total of income from property + Income from entrepreneurship

Operating Surplus =Income from Property +Income from Entrepreneurship

Operating Surplus =(Rent + Royalty + Interest) +(Profit)

How to Calculate Domestic income using Operating Surplus

Domestic income= Rent + Royalty + Interest + Compensation to employees + Profit + Mixed Income

Domestic income= Rent+ Royalty + Interest + Profit + Compensation to employees + Mixed Income

Domestic income=Operating Surplus + Compensation to employees + Mixed Income

What is Operating Surplus - Teachoo.JPG

How To Calculate National Income - Teachoo.JPG

 

Example 22

Calculate National Income.

Particulars  Amt in Crores 
(i) Compensation of employees  13,300
(ii) Wages in kind  200
(iii) Indirect taxes 3,800
(iv) Gross domestic fixed capital formation  6,200
(v) Operating surplus   5,000
(vi) Mixed income of self employed  16,100
(vii) Net factor income from abroad  300
(viii) Net exports  (-) 100 

 

Answer

Calculation of National Income
Different Factor Incomes  
Operating Surplus 5000
Compensation to Employees 13300
Mixed Income 16100
Total (Domestic Income NDP FC 34400
Add NFIA 300
NNP FC (National  income) 34700

 

Note

In income method format,

we do not take Net exports, Indirect tax and Gross domestic Capital formation

We will study about Gross domestic Capital formation in Expenditure method


Transcript

Income Method of Calculating National Income As per this Method We calculate factor income earned by all factors of production Like Rent, Interest, Wages and Salaries, Profit etc Sum total of this is equal to NDP FC(Domestic Income) In this ,we add, NFIA (Net factor income from Abroad) to arrive at National Income Format Calculation of National Income Different Factor Incomes Rent 10 Royalty 50 Interest 30 Compensation to Employees 40 Profit 20 Mixed Income 30 Total (Domestic Income NDPFC) 180 Add NFIA 20 NNP FC (National income) 200 Note In the above method, We do not deduct Depreciation and Net indirect Taxes Total of All Incomes is equal to Domestic income In this, we add Net Factor Income from Abroad to arrive at National Income (NDPFC) Components of Factor income Rent It refers to that part of National Income which arises from ownership of land and Building In easy language, it is income earned by landlord from tenant by giving his property on lease Royalty It is the income earned by granting leasing right of subsoil assets Subsoil assets means assets which are found inside the earth Example-Coal, Petroleum, Mineral Reserves Example - A mining company takes a mine on lease from Govt against which it pays Rs 20 lacs per year This 20 lacs amount is Royalty Income of Government Interest It includes interest income earned by lending funds to production units only Example - Loan taken by a Factory from Bank to Purchase Machine Difference between Rent and Royalty Income Rent income It is income earned for use of Land and Building Example Rent Income earned by Landlord from Rent of Factory Building Rent of Godown It is normally fixed Rent Example 30000 per month Royalty Income It is income earned for extraction of sub oil assets Example Royalty Income earned by Govt from Coal Mines petroleum Reserve It is Variable in Nature (depends upon output) Example Rs 1000/Kg coal extracted Interest Income Earned Money (Loan) Interest Different types of Loan Business Loan Persona Loan Govt Bonds Inter Company Deposits Loan for Production Purpose Loan for Consumption Purpose Loan by Govt from Public Loan by One firm to anOTHER Only this covered in this Method All these not covered All these not covered All these not covered WHAT IS MIXED INCOME Example 1 Suppose Doctor starts Clinic at Rented Premises He pays Rent He pays Salary to Nurse He buys Medical Equipment Total Expenses 30000 10000 20000 60000 Income Earned Profit Earrned 1000000 60000 We can say Income Earned of 100000 is distributed to different fators of Production as Rent labour Capital Profit Total 30000 10000 20000 40000 100000 Example 2 Suppose Doctor starts Clinic at own house Rent paid Salary to Wife (acting as nurse) Use of Own Medica Equipment Total Expenses 0 0 0 0 Income Earned Profit Earrned 100000 100000 This income earned of 100000 Cant be distribured among different fators of production This is called Mixed Income FORMAT FOR CALCULATING DOMESTIC INCOME AND NATIONAL INCOME Calculation of National Income Different Factor Incomes Rent 10 Royalty 50 Interest 30 Compensation to Employees 40 Profit 20 Mixed Income 30 Total (Domestic Income NDPFC) 180 Add NFIA 20 NNP FC (National income) 200 As per this Method We calculate factor income earned by all factors of production Like Rent,Interest,Wages and Salaries,Profit etc Sum total of this is equal to NDP FC(Domestic Income) In this ,we add,NFIA (Net factor income from Abroad) to arrive at National Income Note Depreciation not reduced in his method What is OPERATING SURPLUS OPERATING SURPLUS = INCOME FROM PROPERTY (Rent,Royalty,Interest) INCOME FROM ENTRPRENURSHIP (profit) It does not include Compensation to Employees Mixed Income HOW TO CALCULATE NATIONAL INCOME By Normal Method By Operating Surplus Calculation of National Income Different Factor Incomes Rent 10 Royalty 50 Interest 30 Compensation to Employees 40 Profit 20 Mixed Income 30 Total (Domestic Income NDPFC) 180 Add NFIA 20 NNP FC (National income) 200 Calculation of National Income Different Factor Incomes Operating Surlus 110 Compensation to Employees 40 Mixed Income 30 Total (Domestic Income NDPFC) 180 Add NFIA 20 NNP FC (National income) 200 What are Factor Payments It is the Remuneration Paid to Factors of Production Factors of Production Remuneration Paid Land Rent Capital Interest Labour Wages Entrepreneurship Profit ote It does not include interest on Loan taken by public for consumption purpose (Personal Loan) Loan taken by Govt from Public (Interest on Govt bonds) Loan take by one firm to another (inter company loans) Compensaion to Employees t refers to total amount paid by employer to employee for rendering production services It includes\ Wages and Salaries (paid in cash)\ Amount paid in kind (Any non monetary benefit given) Employer Contribution to Social Security Schemes (Example - PF ESI Employer Contribution) However, it does not include Any Reimbursement of Office Expenses (Example-Travelling expenses of employee for office work reimbursed) Any facility which is compulsory for the employee (Example-Compulsory uniform for employee) Employee Contribution to Social securities (PF,ESI) Profit It is the amount earned by entrepreneur for his services Out of this profit, some amount is paid as income tax to Government (Called Corporation tax) Balance is distributed as Dividend to Shareholders or Retained for future use (called Retained Earning) Hence, Profit=Corporate Tax + Dividend + Retained Earning Mixed Income It is income earned by own account workers (Self employed, small businessman, farmers etc) They contribute entrepreneurship as well as land, capital etc So income earned by them is mixture of Rent income + Profit + Interest Income etc Hence, it is called Mixed Income

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Davneet Singh

Davneet Singh is a graduate from Indian Institute of Technology, Kanpur. He has been teaching from the past 12 years. He provides courses for Maths and Science at Teachoo.