Income Method of National Income

Production of goods and services and income generation take place simultaneously. Therefore national income can be defined as the flow of income in cash and kind paid out to the households in return for the supply of productive services plus profits retained by the firms as reserves. In income method, we thus estimate national income in terms of the factor payments. Therefore, income method is also known as ‘factor payment method.’

Definition

Income method refers to that method which measures national income by adding up the income of the factors of production generated by the production of current flow of goods and services during a given period of time.

Steps in Income Method

Step.1

Classification of Producing units

The first step in the income method of estimating national income is the classification of producing units. As already discussed in the ‘Product method’, all the producing units in the economy can be broadly classified into three sectors.

(i)         Primary Sector

(ii)       Secondary sector

(iii)      Tertiary sector

(For details of these three sectors, please see the product method of estimating national income)

Step II.

Components of National Income

National income = Wages+ Rent+ Interest+ Dividends + Undistributed profits + Corporate profit taxes + Surplus of public sector + Mixed incomes + Net factor income from abroad.

In india, factor income is classified into the following groups

(i) Compensation of Employees

Wages and salaries paid in cash and kind, employers contribution to social security schemes, pension to retired person are included in compensation of employees.

(ii) Operating Surplus

Income earned from property and entrepreneurship is known as operating surplus. It includes the income earned in private and Govt. enterprises. The components of operating surplus are rent, interest and profits. Profits include dividend, undistributed profits and corporate tax.

(iii) Mixed Income

It is income earned by the self-employed persons who do not separate their labour income from property income. Their income is the mixture of wages, rent, interest and profits.

(iv) Net Factor Income from Abroad

The net factor income from abroad is the difference between income received from the rest of the world for rendering factor services and the outflow of income to the world paid for factor services rendered by the non-residents in the domestic territory of a country.

Step III.

Estimation of National Income

The third step is the measurement of national income. Factor payments of each producing unit should be calculated by multiplying the number of units of each input employed and the payment made to each unit. The resultant will be the income generated by the enterprise. Income generated by all the enterprises in the primary sector, secondary sector and tertiary sector should be added up together to get net domestic income. Net national income can be estimated by adding up the net factor income from abroad with the net domestic income. Gross national income can be found out by adding depreciation to net national income. Net national product at market price can be found out by adding net indirect taxed with the net national income.