Chapter 2 National Income - Part 4 Income Method

Economics Class 12
Macroeconomics

## 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 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

Interest

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

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

## 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

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

 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

 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

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

 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

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