Here is a full proof formula to calculate net national income at factor cost.
It is the sum-total of all income payments made to the factors of production. The sum-total of goods and services in a year are produced by the co-operation of the factors of production and as such their money value is also distributed among the factors of production.
Hence, national income may also be regarded as the total of income received by the factors of production or by persons supplying the services or resources used in production. These payments take the form of wages, rent, interest and profits.
Thus, the chief constituents of national income at factor cost are as follows:
(1) All wages, salaries and supplementary incomes earned by employees against productive service rendered, plus.
(2) Interests paid to private individuals, plus.
(3) Net rents of all individuals, including imputed payments like the rents of self-occupied houses, plus.
(4) Net profits of all kinds of business, including the income of individual business like farmers, partnerships, professional men like lawyers, net earnings of joint stock companies comprising dividend payments, undistributed profits and corporate taxes, minus.
(5) Transfer Payments i.e., those income payments for which no productive Service is made in return. In other words, which represent not payments for production of goods and services, but transfers of income through state or a similar public body from one set of individuals to another like interest paid on national debt, social security payments (e.g., unemployment benefit and old age pensions) etc. These transfer payments must be deducted from the total national income as determined by adding the total payment made to the factors of production.
NNP at FC = wages, salaries, supplement + gross profits of corporate, non-corporate, public sector undertakings + all categories of rents including imputed rents + all types of interest earnings + factor payments from abroad – transfer payments.
Following the income approach, NI can be computed by the sum of the annual flows of factor earning generated by the production of final output. The value of the output , say good i (PiQi) is also reflected in the sum of corresponding factor payments or incomes generated, i.e.
PiQi = Ri +Wi +Ii +Pb where R, W, I and P denote rent, wages, interest and profit i.e