Income Method for Measuring National Income: (Methods, Steps and Precautions)!

First the concerned definition. 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.”

#### (a) 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.

#### (b) Steps Involved:

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.

#### (c) Precautions:

For correct computation of national income by income method, following precautions need to be taken: