*DAY #09 & 10 04 & 05.04.2020*
*TOPIC – NATIONAL INCOME CALCULATION*
*INOCME METHOD *
INCOME METHOD FOR MEASURING
NATIONAL INCOME-
The
income approach is an evaluation methodology used for real estate estimated
that is computed by dividing the capitalization tariff or price by the net
operating income of the rental payments. Investors use this computation to
value properties based on their profitability.
This methodology approaches national
income from allocation facet. To put it in other words, this methodology
quantifies national income at the stage of allocation and appears as income
paid or received by individuals of the nation. Hence, under this methodology,
national income is attained by adding up of the earnings of all individuals of
a nation. Individuals earn by contributing their own services and the services
of their property such as land and capital to the national production.
Hence, national income is computed by
summing up the rent of a land, salaries of employees and wages, interest on
capital, surplus profits of entrepreneurs (including unallocated corporate
profits) and earnings of self-employed people. This methodology of evaluating
national income has the great advantage of manifesting the allocating of
national income among different earning groups such as:
Workers
Landlords
Entrepreneurs
Owners of capital
As mentioned earlier, the sum of final
expenditures in the economy must be equivalent to the income received by all
the factors of manufacturing taken together. This follows from the simple
notion that the revenues earned by all the enterprises put together must be
allocated among the factors of manufacturing as profits, salaries, interest
earnings, wages, and rents.
In the words of Hanson, “Net domestic
Income is the income generated in the form of wages, rent, interest and profit
in the domestic territory of a country by all producers (normal residents and
non-residents) in an accounting year.”
METHOD:
The Income Method measures national
income from the side of payments made to the primary factors of production in
the form of rent, wages, interest and profit for their productive services in
an accounting year. Thus, national income is calculated by adding up factor
incomes generated by all the producing units located within the domestic
economy during a period of account.
The resulting total is called Domestic
Income or Net Domestic Product at FC (NDPFC)- By adding net
factor income from abroad to domestic income, we get National Income (NNPFC)- Mind, in income method national income is
measured at the stage when factor incomes are paid out by enterprises to owners
of factors of production—land, labour, capital and enterprise.
Since net value added by an enterprise
is the result of services of factors of production, therefore, the same is
distributed in the form of money income (rent, wages, interest, etc.) among
factors of production. Hence, value of national income method should be the
same as the one calculated by value added method.
Compensation of Employees
+ Operating Surplus
+ Mixed Income
= Net Domestic Product at Factor Cost (NDPfc)
= Domestic Income
(+) Net factor Income from Abroad
= Net National Product at Factor Price (NNPFC)
= National Income
Compensation of Employees –
(1) Wages and Salaries in Cash;
(2) Wages and Salaries in Kind;
(3) Employer’s contribution in Social Security
Schemes.
Operating Surplus –
(1) Factor Payment like Rent,
(2) Royalty,
(3) Interest and
(4) Profit (Profit Includes Dividend, Corporation Tax
and Retained Earning)
Mixed Income – Income from Self employment
STEPS - Following
are the main steps involved in estimating national income by income method:
(i) Identify
enterprises which employ factors of production (land, labour, capital and enterprise).
(ii) Classify factor
payments into various categories like rent, wages, interest, profit and mixed
income (or classify factor payments into compensation of employees, mixed
income and operating surplus).
(iii) Estimate amount
of factor payments made by each enterprise.
(iv)Sum up all factor
payments made within domestic territory to get Domestic Income (NDP at FC).
(u) Estimate net
factor income from abroad which is added to Domestic Income to derive National
Income.
STEPS IN SHORT-
(1) Identify and classify the production units.
(2) Estimate the factor income paid by each sector.
(3) Calculate Domestic Income (NDPFC) =
NDPFC = C.o.E. + Rent and Royalty + Interest + Profit + Mixed Income
(4) Estimate net factor income from abroad (NFIY) to
arrive at National Income. NNPFC = NDPFC + NFIA.
PRECAUTIONS - For
correct computation of national income by income method, following precautions
need to be taken:
(i) Only factor
incomes which are earned by rendering productive services are included. All
types of transfer income like old-age pension, unemployment allowance, etc. are
excluded.
(ii) Sale and
purchase of second-hand goods are excluded since they are not part of
production of current year but commission paid on sale of second-hand goods is
included as it is reward for rendering productive services. Likewise, sale
proceeds of shares and bonds are not included.
(iii) Imputed rent of
owner occupied dwellings and value of production for self-consumption is
included but value of self-consumed services like those of housewife is not
included.
(iv) Incomes from
illegal activities like smuggling, black-marketing, etc. as well as windfall
gains (e.g., from lotteries) are excluded.
PRECAUTIONS IN SHORT-
(1) Transfer Incomes are not included in the N.I.
(2) Income from sale of second hand goods will not be
included.
(3) Income from sale of shares, bonds and debentures
will not be included.
(4) Windfall gains.
(5) Imputed value of services provided by owners of
production units will be included.
(6) Payments out of past savings are not included in
the N.I.
(7) Indirect Taxes are not included in N.I. at factor
cost
QUESTIONS AND ANSWERS –
Question - Explain why ‘cash-transfers’ to the bank
account of the poor are not treated as the income of their beneficiaries. -
Answer
- Cash transfer by
the government are merely transfer payments. They not made in lieu of some
productive services.
Question - Manish buys a second hand car from a car
broker for Rs. 3,25,000. The broker receives Rs. 16,500 as commission for his
services from Manish. How will this transaction affect the national income of
the country? Give reason for your answer.
Answer
- The commission of
Rs. 16,500 received by the broker will be added in the national income of the
country as it is the income of the broker for his productive services to Manish.
The amount paid for purchase of car will not be included as it is the payment
for purchase of an already existing object and there is no addition to current
flow of goods and services.
Question – ‘The vegetables grown in kitchen gardening are
final good, yet their value is not considered in estimating national income
.Why?
Answer
- Such transaction
are not considered in estimating national income because it is difficult to
ascertain their market value. Moreover, such transactions are not done for the
purpose of earning income.
Question - Define ‘depreciation’.
Answer
- Depreciation is an
expected decrease in the value of fixed capital assets due to general use.
Question - Define domestic product.
Answer - It is the sum total of factor income
earned by factors of production within domestic territory of a country.
Question - Define national income.
Answer
- National income is
the sum total of money value of all the final goods and service produced by the
normal residents of a country during a period of one year.
Question - What is domestic product or income?
Answer
- Domestic product
refers to the net money value of all the final goods and services produced
within domestic territory of a country during the period of time.
Question - Mention the three methods of measuring
national income.
Answer
- i. Value added method
ii. Income method
iii Expenditure method.
Question - Give the meaning of operating surplus.
Answer
- Operating surplus
refers to the sum total of income from property (rent, royalty, Interest) and income from
entrepreneurship (Profit).
Question - What is meant by mixed income?
Answer
- Mixed income
refers to the income generated by own account workers (like, Farmers, barbers,
etc.) and unincorporated enterprise (like shopkeepers).
NUMERICALS
1. Calculate Operating Surplus from the following data:
terms (
in crore)
(i) Rent 120
(ii) Profit 200
(iii) Domestic income 800
(iv) Mixed income
70
(v) Wages and salaries 350
(vi) Indirect tax 150
(vii) Subsidies 50
(viii) Depreciation 200
SOLUTION
Operating Surplus
= Domestic income – Wages and salaries – Mixed income
= 800 crore – 350 crore – 70 crore
= 380 crore
Ans. Operating
surplus = ` 380 crore.
2. Calculate National Income by Income Method from the following Data:
1. Govt. final consumption
expenditure 100
2. Subsidies 10
3. Rent 200
4. Wages and Salaries 600
5. Indirect taxes 60
6. Private final Consumption
expenditure 800
7. Gross Domestic Capital
formation 120
8. Social Security
contribution by employers 55
9. Royalty 25
10.
Net factor income paid to abroad 30
11.
Interest 20
12.
Consumption of fixed capital 10
13.
Profit 130
14.
Net Exports 70
SOLUTION -
National Income by Income Method=
NDPFC= Wages and Salaries + Social
Security contribution by employers + Rent + Royalty + Interest + Profit
=
600 + 55 + 200 + 25 + 20 + 130
= (655) + (375) + (0)
NDPfc = 1030
NNPfc = NDPfc - Net Factor Income from Abroad
= 1030
- (30)
NNPfc = 1000
3. From the following data calculate Gross National
Product at factor cost by Income method.
S.N
|
Items
|
Rs. in Crores
|
1.
|
Net domestic capital formation
|
500
|
2.
|
Compensation of employees.
|
1850
|
3.
|
Consumption of fixed capital
|
100
|
4.
|
Govt. final consumption
expenditure
|
1100
|
5.
|
Private final consumption
expenditure
|
2600
|
6.
|
Rent
|
400
|
7.
|
Dividend
|
200
|
8.
|
Interest
|
500
|
9.
|
Net export
|
-100
|
10.
|
Profit
|
1100
|
11.
|
Net factor income from abroad
|
-50
|
12.
|
Net indirect taxes.
|
250
|
NDPfc = Compensation of Employees + Operating Surplus
+ Mixed Income
= 1850 + (400 + 500 + 1100) + 0
= 1850 + 2000
NDPfc = 3850 + (-50)
= 3850 – 50
GNPfc = 3800
4. Calculate National income by Income method.
S.N.
|
Items
|
Rs.
|
1
|
Subsidies
|
5
|
2
|
Private final consumption expenditure
|
100
|
3
|
NFIA
|
-10
|
4.
|
Indirect Tax
|
25
|
5
|
Rent
|
5
|
6
|
Government final consumption expenditure
|
20
|
7
|
Net domestic fixed capital formation
|
30
|
8
|
Rent, interest, profit
|
20
|
9
|
Wages
|
50
|
10
|
Net export
|
-5
|
11
|
Addition to stock
|
-5
|
12
|
Social security contribution by employers
|
10
|
13
|
Mixed income of self employed
|
40
|
SOLUTION -
NDPfc = Compensation of Employees + Operating Surplus
+ Mixed Income
= (Wages + Social security contribution by
employers) + (Rent, interest, profit) + Mixed Income
= (50 + 10) + (20) + 40
= 60 + 20 + 40
NDPfc = 120
NNPfc = NDPfc + Net Factor Income from Abroad
= 120 + (-10)
= 120 – 10
NNPfc = 110
5. Calculate national income by income and expenditure method from the
following data:
Sl no.
|
Items
|
Rs. Crores
|
i)
|
Private final consumption
expenditure
|
1400
|
ii)
|
Mixed income
|
140
|
iii)
|
Gross Domestic fixed capital
formation
|
280
|
iv)
|
Opening stock
|
60
|
v)
|
Compensation of employees
|
1000
|
vi)
|
Closing stock
|
100
|
vii)
|
Government final consumption
expenditure
|
400
|
viii)
|
Operating surplus
|
800
|
ix)
|
Consumption of fixed capital
|
40
|
x)
|
Net factor income from abroad
|
-20
|
xi)
|
Exports
|
40
|
xii)
|
Imports
|
80
|
xiii)
|
Net Indirect Tax
|
100
|
SOLUTION -
NDPfc = Compensation of Employees + Operating Surplus
+ Mixed Income
= (Wages + Social security contribution by
employers) + (Rent, interest, profit) + Mixed Income
= 1000 + 800 + 140
NDPfc = 1940
NNPfc = NDPfc + Net Factor Income from Abroad
= 1940 + (-20)
NNPfc = 1920
Video #12
National Income Calculation - INCOME METHOD
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Regards
Dr. Asad Ahmad
KV IIM, Lucknow
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