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Explain the income method for measuring national income.

Vidyadip · Accepted Answer

* Introduction : * In this method of measuring income, during a year, the incomes earned by the factors of production of the country for their contribution to production are totaled. * This means that the owners of factors of production earn, rent, interest, wages and profit. * These incomes are calculated. * Income Method for Measuring national Income : * This method of measuring national income has developed by Prof. Pigou. * According to him, "In any country, during a year, the incomes made through physical goods or non-physical services that can be measured in terms of money can be called national income. * "According to the United Nations Publication, the incomes made by factors of production viz, rent, interest, wages and profit and their total increase during certain period of time is calculated." * Such data can be obtained from accounts, reports or public statements of accounts published by authorities concerned. Usually, following details are considered, * * * Wages and salaries, * Additional incomes to workers, * Self-employment or income from business, * Dividends, * Undistributed profit, * Interest, * Rent, * Profit of public enterprises, gifts at the time of calculating factor income, subsidy, transfer income must be subtracted at the time of calculating national income. * In short, "In any country, during a specific period (1 year) the total of incomes earned by four factors of production for helping in process of production and the income of the people engaged in self-employment is called national income. * Equation of measuring national income : * This method is known as Factor Cost Method. * It can be presented in equation in the following manner : * Y = (W + R + I + N) + (X - M) + (R - P) * Here, * Y + Income / Yield, * W = Wages, * R = Rent, * I = Interest, * N = Net Profit, * X = Export, * M = Import, * R = Receipts from foreign countries and * P = Payments to foreign countries. * Method (Important Factors) : * The following matters are considered while calculating national income. * To Count the Income of Factor : * Income obtained by the factor of production are calculated as under : * * * Income of Rent : * * The rent of land or building is considered as income. * Those who live in their own house may get the income of rent which is called imputed rent. * Even if a person does have to pay the rent. * Same as the income obtained by way of rights like the copy right of a book or patent is also considered as the income. * * * Income of Interest : * * The interest obtained by people on their capital during the year is considered as income but the interest obtained from the government is not considered as income because a state generates income through taxes and pays it as interest, which means that the money is transferred only. * * * Income of Wage : * * The wage or salary given to labourers for their work during a year is considered as an income. * There are two form of income for labourers : * In Cash Form, salary, bonus, wages, overtime income, travelling allowance, dearness allowance and In Form of Goods (kind) free lunch, use of car and house facilities are included. * * * Income of Profit : * * The income obtained in the form of profit or dividend by investors or share holders is also considered as an income. * It includes reserved profit and taxes played on it. * Income which are not Considered : * In this method for calculating national income, The income generated by way of gift, reward, prize, tip, theft, unemployment allowance, government assistance to elders, lottery, etc are not considered as national income. * The subsidy given by the government is deducted. * Net Foreign income is added (Export less Import). * Income generated as commission or brokerage on sale of consumable goods should be added. * Those incomes which show flow of production of goods or services in economy which increase the monetary value of goods in economy are considered as national income. * The income of the second hand goods is not considered for E.g. the income obtained by old mobile phones is not considered. * Gross profit before deduction of the company must be considered. * The income earned from government properties and income of profit from public enterprise must be included in national income. * Services of house-wives are not calculated as these services are not paid for the money. * The incomes of direct taxes of Government is a transfer of income, so it is not considered. * Income from sale of old assets is not considered.

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