Income method is used for measuring national income at distribution level. According to this method, national income is estimated by adding incomes earned by all the factors of production for their factor services during a year.
If includes the following steps –
First : Classify the production units into primary, secondary and tertiary sector. The classification is same as in value added method.
Second : Estimate the following factor incomes paid out by the production units in each industrial sector.
- (i) Compensation of employees
- (ii) Rent
- (iii) Interest
- (iv) Profit
- (v) Mixed income of self-employed
The sum total of the above factor incomes paid out is the same as net value added at factor cost by the industrial sectors.
Third : Take the sum of factor payments by all the industrial sectors to arrive at the net domestic product at factor cost. .
Last : Add net factor income from abroad to the net domestic product at factor cost to arrive at net national, product at factor cost.
Precautions : The following are some of the main precautions which must be taken while estimating national income by the income distribution method
- (a) While estimating compensation of employees all benefits accruing to the employees whether in cash or in kind must be included.
- (b) In estimating interest, the interest on only those loans should be included which are taken for production, The interest on loans taken to meet consumption expenditure is not included in national income as it is treated as transfer payment.
- (c) Gifts, donations, charities, taxes, fines, income from lotteries etc., are not factor incomes but transfer incomes. These should not be included in estimating national income.
- (d) Income from sale of second-hand goods should not be included as it is not the income received from the goods produced in the current year.
Bibliography : NIOS – Economics