Gr xii-eco-macro-ch-2-s4
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The document discusses the factor income method of calculating national income. It defines the key components of national income according to this method as the sum of rent, wages and salaries, interest, profits, and self-employment income. It provides details on how each of these factors is measured, including compensation, rent, interest, profits, operating surplus, and mixed income. The document also outlines the steps and precautions used in the factor income method.
Gr xii-eco-macro-ch-2-s4
- 2. Factor Income Method Grade XII Economics
- 3. Learning Objectives • To know the components of national income according to Factor Income Method • To know the terms like operating surplus, royalty, mixed income, compensation of employees etc. • To understand the precautions of Income Method • To apply the formula for calculating national income according to income method
- 5. Factor Income Method National income is computed by summing up the rent of a land, salaries of employees and wages, interest on capital, surplus profits of entrepreneurs (including unallocated corporate profits) and earnings of self-employed people. This follows from the simple notion that the revenues earned by all the enterprises put together must be allocated among the factors of manufacturing as profits, salaries, interest earnings, wages, and rents.
- 6. Computation of National Income by Income Method
- 7. Compensation for Labor • Compensation includes salaries and wages that you earn in exchange for the services and skills that you provide for producing goods and services. • It also includes travel allowances, bonuses, accommodation allowances, and medical reimbursements. • Compensation in kind • Remuneration in the form of social security schemes such as insurance, pensions, provident funds.
- 8. Rent from Land • Rent is the money you pay for the use of land. While calculating income, rent refers only to the income earned from using any land. Rent paid for the use of machinery and other equipment is not accounted for as rent. • Now in addition to rent, another form of income is royalty. Royalty is the amount you pay to an individual or a company in exchange for the use of assets such as coal or gas.
- 9. Interest on Capital • Interest refers to the charges you pay for using borrowed capital. Now, this includes the interest paid when a company takes a loan for an investment. • Similarly, when a family invests in a property or a house, they take a loan from a bank and pay an interest for the same while repaying the loan over a period of time. • However, while calculating national income, economists consider only the interest paid by production units.
- 10. Profits by Organizations • Profits refer to the money that organizations make while producing goods and services. • Now companies distribute the profits they make by paying income tax to the government and dividends to shareholders. • And the amount that is left over after paying tax and dividends is called undistributed profit.
- 13. Mixed Income • Mixed income refers to the income of the self-employed individuals, farming units, and sole proprietorships. • The total earnings of a self-employed persons is a mixture of income from work and the income form property and entrepreneurship
- 14. Steps •I Calculate Factor Income •II Take the sum of all factor incomes to get NDPFC •III Add NFIA to NDPFC to get NNPFC
- 15. National Income Aggregates •National Income = Compensation + Operating Surplus+ Mixed income of the Self-employed + NFIA •Domestic Income= COE+OS+MI
- 16. Precautions While Using Income Method 1. Income from illegal activities like smuggling, theft, gambling, etc should not be included. 2. Corresponding to production for self consumption, the generation of income of economy to be taken into account. 3. Brokerage on the sale/purchase of shares and bonds is to be included. 4. Income in terms of windfall gains should not be included. 5. Transfer earnings like old age pensions, unemployment allowances, scholarships, pocket expenses, etc, should not be included. 6. Economists exclude transfer payments such as gifts and donations and profits from the sale of pre-owned goods. 7. They also exclude income from the sale of shares and debentures.
- 17. Review • What are the components of national income according to income method? • What precautions are to be taken whole calculating national income using income method? • Explain the steps of income method of national income accounting. • What is operating surplus? • How do we treat income from windfall gains in national income estimation?
- 18. Recapitulation • National income by income method is a sum of compensation of employees, operating surplus, mixed income of the self employed and net factor income from abroad. • Certain precautions are to be taken while using income method. • Income from illegal activities like smuggling, theft, gambling, etc should not be included. • Corresponding to production for self consumption, the generation of income of economy to be taken into account. • Brokerage on the sale/purchase of shares and bonds is to be included. • Income in terms of windfall gains should not be included.