MEASUREMENT OF NATIONAL INCOME BY INCOME METHOD
According to this method, all the incomes that accrue to the factors of production by way of wages, profit, rent,
interest, etc. are summed up to obtain the national income. Income method is also known as ‘Distributive Share
Method’ or ‘factor Payment method’.
Components of Factor income
The sum total of all the factor incomes earned within the domestic territory of a country is known as ‘Domestic
Income (NDPFC)’. The following are the components of Income Method:
1. Compensation of Employees (COE): COE refers to amount paid to employees by employer for rendering
productive services. It consists of 3 elements:
i. Wages and salaries in cash: It includes all monetary benefits, like wages, salaries, bonus, dearness
allowances, commission, etc.
ii. Wages and 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 should be included in national
income.
iii. Employers’ contribution to social security schemes: It includes contributions made by employer for
the social security of employees. For example, contribution to provident fund, gratuity, labour
welfare funds, etc.
2. Rent and Royalty: Rent is that part of national income which arises from ownership of land and building.
Rental income includes both actual rent (rent of let out land) as well as imputed rent (rent of self-occupied
properties). Imputed rent of owner occupied houses is calculated on the basis of market rental value of the
house.
Royalty refers to amount received for granting leasing rights of sub-soil assets. For example, owners of
mineral deposits like coal, iron ore, natural gas, etc. can earn income by giving rights of mining to the
contractors.
3. Interest: Interest refers to amount received for lending funds to a production unit. It includes both actual
interest as well as imputed interest on funds provided by the entrepreneur. ‘Interest income’ includes
interest on loans taken for productive services only.
4. Profit: Profit is the reward to the entrepreneur for his contribution to the production of goods and services.
It is the residual income, which an entrepreneur earns after paying all the other factors of production.
The profit earned by an enterprise is used for 3 purposes:
i. Corporate Tax: It is the 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.
ii. 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.
iii. 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 of Private Sector or
Reserves and Surplus.
In short, PROFIT = CORPORATE TAX + DIVIDEND + RETAINED EARNINGS
Operating surplus is another term used in factor payments. It refers to sum total of income from
property (rent + royalty + interest) and income from entrepreneurship (profit).
So, OPERATING SURPLUS = RENT + ROYALTY + INTEREST + PROFIT
5. Mixed Income: Mixed income arises from productive services of self-employed persons, whose income
includes wages, rent, interest and profit and these elements cannot be separated from each other. For
example, income of a doctor running a clinic at his residence.
DOMESTIC INCOME (NDPFC)
Compensation Rent and Interest Profit Mixed Income
of Employees Royalty
Operating Surplus
STEPS OF INCOME METHOD
Compensation of Employees
+ Rent and Royalty
+ Interest
+ Profit
+ Mixed Income
Domestic Income (NDPFC)
(+) NFIA
National Income (NNPFC)
Precautions of Income Method
1) Transfer Incomes (like scholarships, donations, charity, old age pensions, etc.) are not included because
such receipts are not connected with any productive activity and there is no value addition.
2) Income from second-hand goods will not be included as their original sale has already been counted.
However, any brokerage or commission received by brokers or commission agents on sale of such goods, will
be included as it is an income received for rendering productive service.
3) Income from sale of shares, bonds and debentures will not be included as such transactions do not
contribute to current flow of goods and services. These financial assets are mere paper claims and involves a
change of title only.
4) Windfall gains (like income from lotteries, etc.) are not included as there is no productive activity connected
with them.
5) Imputed value of services provided by owners of production units will be included: Imputed value of
owner-occupied houses, interest on own capital, production for self-consumption, etc. will be included as
these are productive activities and add to the flow of goods and services.
6) Payments out of past savings (like death duties, gift tax, interest tax, etc.) are not included because they are
paid out of wealth or past savings and do not add to current flow of goods and services.