Steps of Income Method

Step 1

The first step is to identify and classify the factors of production of all the producing firms into primary, secondary and tertiary sectors.

Step 2

The second step of calculating National Income through the Income method is the estimation of the factor income paid by each sector. The factor income paid by various sectors are grouped under the heads: Compensation of Employees, Rent and Royalty, Profit, Interest, and Mixed Income.

Step 3

The next step is to calculate domestic income NDP_FC . The total of all the factor incomes is known as Domestic Income(NDP_FC ).  

NDP_FC = Compensation of Employees + Profit + Rent & Royalty + Interest + Mixed income.

Step 4 

The last step of calculating National Income through the Income Method is the estimation of Net Factor Income from Abroad(NFIA). NFIA is added to domestic income (NDP_FC) to get the National Income(NNP_FC). 

NNP_FC = NDP_FC + NFIA. 

National Income refers to the value of goods & services produced by a nation during a particular financial year. Therefore, it is the net result of all the economic activities that take place during a financial year and is valued in monetary terms. It includes payments made to various resources either in form of rents, wages, interests & profits. A country’s progress can be estimated by the growth of its National Income.

According to Marshall: “The labor and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or national dividend.”

Gross Domestic Product

The total value of all the goods & services produced in a country during a particular year is known as its gross domestic product.

Further, GDP is determined at market price and is termed GDP at market prices. Various constituents of GDP are:

• Interest
• Rents
• Wages & salaries
• Undistributed profits
• Dividends
• Mixed-income
• Depreciation
• Direct taxes

Gross National Product

For GNP calculation, data of all productive activities like agriculture produce, minerals, woods, commodities, transport contribution to production, insurance companies and all professions ( lawyers, teachers, doctors, etc.) is required at market prices.

It also includes the country’s net income arising from abroad. Four primary constituents of GNP are:

• Consumer goods and services
• Goods produced or services rendered
• Income arising from abroad
• Gross private domestic income

The National Income of a nation can be measured by 3 different methods:-

1. Value Added method
2. Income method
3. Expenditure method