Income Approach to National Income2 min read


Learning Objectives

  • Income Approach to National Income
  • The formula to calculate National Income by Income Method

Income approach to National Income includes all the sum of income of an economy. It includes the income earned by all the factors of production. 

National Income is the sum of the following components: 

  • Labor Income (W)     
  • Rental Income (R)     
  • Interest Income (i)     
  • Profits (PR)

National Income (NI) = Wages (W) + Rent (R) + Interest (I) + Profit (PR)

Labor Income (W):
Salaries, wages, and fringe benefits such as health or retirement. This also includes unemployment insurance and government taxes for Social Security.     

Rental Income (R):
This is income received from property received by households. Royalties from patents, copyrights, and assets as well as imputed rent are included.     

Interest Income (i):
Income received by households through the lending of their money to corporations and business firms. Government and household interest payments are not included in the national income. 

Profits (PR):
The amount firms have left after paying their rent, interest on
the debt, and employee compensation. GDP calculation involves accounting profit and not economic profit. 

Mathematically,

GDP at Factor Price = Compensation of Employees + Operating Surplus + Mixed Income + Depreciation

Compensation of Employees = Wages + Salaries + Commission + bonus + Insurance

Operating Surplus = Interest + Rent + Profit (Corporate Tax + Dividend + Retained Earning) + Royalty

Mixed Income = Income paid to self employed

Depreciation = Consumption of fixed capital + Capital Consumption Allowance

What not to include?

  • Transfer Payment
  • Social Security Allowance
  • Illegal Income
  • Lottery games
  • Sale of second-hand goods
  • Gift tax
  • Interest on the national debt

Personal Income = NNP – (Social Security Allowance + Corporate Business Tax + Retrained Earning – Transfer Payment)

GDP at Market Price = GDP at Factor Price + Net Indirect Tax

ParticularAmount
Compensation of Employees (A)xxx

●       Wages

●       Salaries

●       Bonus

●       Insurance

●       Commission

 
Operating Surplus (B)xxx

●       Interest

●       Rent

●       Profit (Dividend + Retained Earning + Corporate business Tax)

●       Royalties

 
Depreciation (C)xxx

●       Consumption of fixed capital

●       Capital Consumption Allowance

Mixed Income (D)xxx

●       Income from self-employed

●       farming enterprise

●       sole proprietorship

 
GDP at factor cost (E) [A+B+C+D]xxx
Net Factor Income from Abroad (F)xxx
GNP at factor cost (G) (E + F)xxx
Net Indirect Tax (H) [Indirect Tax – Subsidy]xxx
GNP at Market Price (I) (G + H)Xxx
NNP at Market Price (J) (I – C)Xxx
NNP at Factor Price (K) (J – H) Xxx

Less:

Social Security Allowance

Retained Earning

Corporate Business Tax

Net Interest

Add:

Transfer Payment

Personal interest income

 
Personal Incomexxx

Less:

Personal tax and non-tax payment

 
Disposable Incomexxx

Personal income includes:
• Wages, salaries, and fringe benefits

• Proprietors’ income 
• Rental income          
• Investment income (interest and dividends)           
• Transfer income (Social Security, Medicare, unemployment benefits, etc.)           
Personal income does not include:     
• Social Security and Medicare contributions
• Capital gains and losses

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