Class 12  Chapter 4th  Measurement of National Income

Topic – Methods of Measuring National Income


2. Income Method 

·       It is also called Distributed Share Method or Factor Payment Method.
·       Income Method is that method which measures national income in terms of payments made in the form of wages, rent, interest and profit to the primary factors of production i.e. labour, land capital and enterprise respectively for their productive service in an accounting year.
·       According to this method, national income is estimated as the sum total of factor incomes of normal residents of a country during an accounting year.

What are Factor Incomes?

·       A factor income refers to income earned by a person as a reward for rendering his factor service.
·       It may be in the form of wage salary for for his labour, rent for his land, interest for his capital or profit for his med entrepreneurship.
·       It must be noted that factor incomes are only 'earned' income.
·       It does not include any income which is not earned or for which a factor service has not been rendered.

Classification of Factor Incomes

Factor incomes are broadly classified as under:

       I.            Compensation of Employees: The compensation of employees Include
a)    Wages and salaries in cash,
b)    Payment in kind,
c)     Employers contribution to social security schemes.
     d) Pension on retirement.

     II.            Operating Surplus: The operating surplus includes income from property and entrepreneurship. It is earned m both the le private and government enterprises. But there is no operating Tax surplus in general government sector. The operating surplus profit includes the following items:
a)    Rent
b)     Interest.
c)     Profit (Dividend + Corporation Tax + Saving of Enterprises or Undistributed Profits).

  III.            Mixed Income: Mixed income refers to the incomes of the of self-employed persons using their labour, land, capital and entrepreneurship to produce goods and services.
These incomes are mixed in terms of wages, rent, interest and profit. That is why it is called mixed income. Such incomes are also a part of national income.


Sum total of factor incomes generated within the domestic territory of a country is called NDPFC (net domestic product at factor cost).

NDPFC= Sum total of factor incomes generated within the domestic territory of a country during an accounting year.

National income (NNPFC) can be found out by adding net factor income from abroad to NDPFC

NNPFC =NDPFC + NET FACTOR INCOME FROM ABROAD.



Precaution while Estimating Factor Income

1.    Transfer earnings like old age pension, unemployment allowances, scholarships, pocket expenses, etc. should not be included in national income. Because corresponding to transfer payments, there is no value addition in the economy.
2.    Income from illegal activities like smuggling, theft, gambling, etc.  should not be included in national income. Income generated in terms of black money is also not accounted. It is because no accounts are available of such income.

3.    Sale proceeds of second hand goods like second hand car, second hand house, second hand TV sets are not included in national income. Because value of second hand goods is already estimated while these were initially produced and once sold to the final buyers.
4.    The sale proceeds of shares and bonds are not included in national income. Because such transactions are not related to the flow of goods and services.