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Income method

It is also called factor payment method or distributed share method. According to this method, the components of NI are given by the formula:
NI / NNPFC = Compensation of employees + Operating surplus + Mixed income of self-employed + Net factor income from abroad
This method involves the following steps:

Step 1: Identification and classification of producing enterprises which employ factor inputs

  • Identifying the producing enterprise which employs the factor inputs
  • Classifying the producing enterprise: All producing enterprises can be classified under three heads:
    • …Primary sector: This sector produces goods by exploiting natural resources like land, water etc. It includes agricultural and its allied activities, fishing, mining, and quarrying.
    • …Secondary sector: It is also called the manufacturing sector. One type of commodity is transformed into another type of commodity.
    • …Tertiary sector: It is also called the service sector. It provides services like transport, communication, banking etc.

Step 2: Classification of factor income

Factor incomes or payments are classified into:
  • Compensation of employees: This includes wages and salaries in cash, compensation in kind, such as free housing, uniforms, food, conveyance facilities etc. and employer’s contribution to social security schemes such as provident fund, life insurance, pension, etc.
  • Operating surplus: This includes income from property in the form of rent, interest, royalty and income from entrepreneurship i.e., profit.
  • Mixed income of self-employed: This income is mixed in terms of wages, rent, interest and profit.
  • Net factor income from abroad: Net compensation of employees + Net property and entrepreneurship income from abroad + Net retained earnings of resident companies abroad.
  • NFIA = Factor income from abroad by normal residents – Factor income of non-residents in the domestic territory

It must be noted that the following should not be included under income method

  • ƒTransfer payments like old age pension
  • ƒIllegal incomes like gambling, theft etc.
  • ƒIncome from sale of second hand goods
  • ƒCorporation tax, income tax
  • ƒGift tax, death duty
  • ƒProduction for self-consumption

Step 3: Calculation of national income

  • National Income = Compensation of employees + Operating surplus + Mixed income + Net factor income from abroad + Depreciation + Net direct taxes

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