Prepared by: MANJU MEHTA
Domestic Income (NDPfc)
Labour Land Capital Entrepreneur
Compensation profit
Rent & Royalty Interest
of employees
Operating Surplus
NDPFC (Domestic Income)
Compensation of Operating Mixed
Employees Surplus Income
Wages & Rent &
Interest Profit
Salaries in Royalty
cash
Corporate
Wages & Tax
Salaries in
kind
Dividend
Employer’s
Retained
contribution to social
Earnings
security scheme
Steps of income method
Compensation of Employees
+Operating Surplus
+Mixed Income of Self-employed
Domestic Income
(NDPFC)
(+) NFIA
National Income
(NNPFC)
• Compensation of Employees = Wages & Salaries in cash + Wages &
Salaries in kind + Social security contribution by employer
• Operating Surplus = Rent & Royalty + Interest + Profit
• Profit = Corporate Tax + Undistributed Profit + Dividend
NDPFC = Compensation of employees + Operating Surplus + Mixed Income
NDPFC = (Wages & Salaries in cash + Wages & Salaries in kind + Social
security contribution by employer) + (Rent & Royalty + Interest + Profit) +
Mixed Income
NDPFC = (Wages & Salaries in cash + Wages & Salaries in kind + Social
security contribution by employer) + (Rent & Royalty + Interest + Corporate
Tax + Undistributed Profit + Dividend ) + Mixed Income
Compensation of Employees
COE refers to amount paid to employees by employer for rendering
productive services. COE consists of 3 elements:
Wages & Salaries in cash: it includes all monetary benefits, like
wages, salaries, bonus, dearness allowance etc.
Wages & Salaries in Kind: it includes all non-monetary benefits,
like rent free home, free car, free medical and educational facilities
etc. An imputed value of these benefits should be included in
national income.
Employer’s contribution in social security schemes: it includes
contribution made by employer to ensure safety and security of
life of the employees. For example: provident fund, gratuity etc.
Operating Surplus
Operating Surplus refers to sum total of income from property (rent +
Royalty + interest) and income from entrepreneurship (Profit)
Rent & Royalty: Rent is that part of national income which arises from
the ownership of land and building. Rental income includes both actual
rent as well as imputed rent.
Royalty refers to income received for granting leasing rights of assets.
Interest: Interest refers to amount received for lending funds to a
production unit.
Profit: Profit is reward to the entrepreneur for his contribution to the
production of goods and services.
Profit
The profit earned by an enterprise is used for 3 purposes:
• Corporate tax: it is direct tax paid by an enterprise to the government on
the total profit earned by it.
It is also known as profit tax or Business tax.
• Dividend: it refers to that part of profit, which is paid to the shareholders in
the ratio of their shareholding.
It is also known as distributed profits.
• Retained Earnings: it refers to that part of profit, which is kept as reserve to
meet unexpected contingencies or for business expansion.
It is also known as undistributed profits, savings of private sector or
Reserve & Surplus.
1. Identify and classify the production units:
All the producing enterprises employing various factors of production are identified and
classified into primary, secondary and tertiary sector.
2. Estimate the factor income paid by each sector:
The factor incomes paid by each sector are classified under the following heads: (a)
Compensation of employees (b) Rent and Royalty (c) Interest (d) profit and (e) Mixed Income.
3. Calculate Domestic Income (NDPFC):
When factor incomes of all the sectors are summed up, we get domestic income.
NDPFC= Compensation of Employees + Rent and Royalty + Interest + Profit + Mixed Income
4. Estimate net factor income from abroad (NFIA) to arrive at National Income:
In the final step, NFIA is added to domestic income to arrive at National Income (NNPFC), i.e.
NDPFC + Net factor income from abroad = NNPFC
Transfer Incomes Not included Such receipts are connected with any productive
activity and there is no value addition.
Income from sale of second- Not included Their original sale has already been counted.
hand goods
Income from sale of shares, Not included Such transactions do not contribute to current
bonds and debentures flow of goods and services. These financial assets
are mere paper claims and change of title only.
Windfall gains (lotteries, horse Not included There is no productive activity connected with
race) them.
Services provided by owners Included these are productive activities and add to the
of production units flow of goods and services.
(imputed value)
Income from brokerage or Included It is an income received by rendering productive
commission on sale of second- service. These assets are mere paper claims and
hand goods & shares etc. change of title only.
1. Example: NDPFC = COE + OS + MI
Calculate NDP at FC
W & S = 800 Rent = 1400
Royalty = 200
₹ in SSS = 200
Particulars Interest = 1500
crores Profit = 500
(i) Rent 1,400
(ii) Royalty 200
1000 + 3600 + 1000
(iii) Interest 1,500
(iv) Wages and salaries 800 NDPFC = 5600
(v) Profit 500
NDPFC = COE + OS + MI
(vi) Mixed Income 1,000 NDP = (W & S + SSS) + (R + R + I + P) + MI
FC
(v) Depreciation 70 NDPFC = (800+200)+(1400+200+1500+500) +1000
Employer’s contribution NDPFC = 1,000 + 3,600 + 1000
(vi) 200
to social security scheme
NDPFC = ₹ 5,600 Crore
2. Example:
Operating Surplus = Rent + Interest + Profit
Calculate (a) Operating Surplus
(b) Domestic Income Profit = Dividend + Corporate tax +
₹ in Undistributed Profit
Particulars
(crores) Operating Surplus = Rent & Interest + (Dividend
(i) Compensation of employees 2,000 + Corporate tax + Undistributed Profit)
(ii) Rent & Interest 800 Operating Surplus = 800 + (940 + 460 + 300)
(iii) Indirect taxes 120 Operating Surplus = 2500
(iv) Dividend 940
Operating Surplus = ₹ 2,500 Crore
(v) Corporate tax 460
(vi) Consumption of fixed capital 100 Domestic Income (NDPFC) = COE + OS + MI
(vii) Subsidies 20 Domestic Income (NDPFC) = 2000 + 2500 +200
(viii) Undistributed Profits 300 Domestic Income (NDPFC) = 4700
(ix) Net factor income to abroad 150
(x) Mixed Income 200 NDPFC = ₹ 4,700 Crore
3. Example: Calculate National Income
NDPFC = COE + OS + MI
₹ in NDPFC = COE + (Rent + Interest + Profit) + MI
Particulars
(crore)
NDPFC = 2,000 + (400 + 500 + 900) + 7,000
(i) Compensation of employees 2,000
NDPFC = 2,000 + 1,800 + 7,000
(ii) Rent 400
(iii) Net current transfers to abroad 120 NDPFC = 10,800
(iv) Dividend 100
NNPFC = NDPFC + NFIA
(v) Net factor income to abroad 50
Or
(vi) Net exports 60
NNPFC = NDPFC – Net Factor Income to Abroad
(vii) Net Indirect Taxes 300
NNPFC = 10,800 – 50
(viii) Profit 900
(ix) Depreciation 150 NNPFC = 10,750
(x) Mixed Income 7,000
(xi) Interest 500 National Income = ₹ 10,750 Crore
4. Example:
NDPFC = COE + OS + MI
Calculate GNP at MP
NDPFC = COE + (Rent + Interest + Profit) + MI
₹ in
Particulars
(crore) NDPFC = COE + (Rent + Interest + Dividend +
Saving of private corporate sector) + MI
(i) Net Indirect taxes 900
(ii) Depreciation 400 NDPFC = 1,000 + (1,000 + 200 + 500 + 400) + 300
(iii) Net factor income from abroad (-) 20
NDPFC = 1,000 + 2,100 + 300
(iv) Rent 1,000
NDPFC = ₹ 3,400 Crore
(v) Dividend 500
Mixed Income of self GNPMP = NDPFC + Depreciation + NFIA +NIT
(vi) 300
employed
GNPMP = 3,400 + 400 + (- 20) + 900
Saving of private corporate
(vii) 400
sector [Retained earnings] GNPMP = 4,680
(viii) Interest 200
(ix) Compensation of employees 1,000 GNPMP = ₹ 4,680 Crore
5. Example: Calculate Operating Surplus
NDPFC = COE + OS + MI
₹ in
Particulars
(crore) NDPFC = Wages in cash + OS + MI
Gross Domestic Product at
(i) 10,000 NDPFC = GDPMP – Depreciation – NIT
Market Price
(ii) Depreciation 4,000 NDPFC = 10,000 – 4,000 – 500
(iii) Net Indirect Taxes 500 NDPFC = ₹ 5,500 Crore
(iv) Subsidies 100
(v) Rent, Interest 500 NDPFC = Wages in cash + OS + MI
(vi) Wages in cash 700 5,500 = 700 + OS + 300
(vii) Mixed Income 300 5,500 – 700 – 300 = OS
Dearness Allowance [already OS = 4,500
(viii) 200
added in wages in kind]
Old age pension [Not factor Operating Surplus = ₹ 4,500 Crore
(ix) 250
income i.e. Current Income]
5. Example: Calculate compensation of
Employees Compensation of Employees:
₹ in
Particulars (i) Wages and Salaries in cash = 60,000
(crore)
+ (ii) Rent of rent-free accommodation to
(i) Wages and Salaries in cash 60,000 employees = 20,000
Rent of rent-free + (iii) Employer’s contribution to provident
(ii) 20,000
accommodation to employees fund = 7,500
Employer’s contribution to + (vi) Medical expenses on employees = 180
(iii) 7,500
provident fund
Compensation of Employees = 60,000 + 20,000
Payment of life insurance
(iv) 2,500 + 7,500 + 180
premium by the employees
Contribution to provident fund Compensation of Employees = 87,680
(v) 35,000
by the employees
Medical expenses on Compensation of Employees
(vi) 180
employees = ₹ 87,680 Crore
(vii) Dearness Allowance 200