National Income Calculation

Overview

• Discussed methods of calculating national income.
• Focus on numericals to strengthen understanding.
• Three primary methods: Value Added Method, Income Method, Expenditure Method.
• Today's lecture focuses on the Income Method.

Income Method

• Calculate national income by summing up all sources of productive income in the nation.
• Non-productive incomes (e.g., lottery) are excluded.

Key Components (PRIME)

• P: Profits
  • Dividend: Distributed to shareholders.
  • Retained Earnings: Saved for future use.
  • Corporate Tax: Paid from profits.
• R: Rent and Royalty
  • Income from rental properties and royalties from assets (e.g., books, patents).
• I: Interest
  • Income received from lending money or other financial investments.
• M: Mixed Income
  • Income generated by self-employed individuals engaged in various businesses.
• E: Compensation of Employees
  • Includes wages, salaries, and employer's contributions to social security schemes.
  • Paid in cash or kind (e.g., education fees, rent-free accommodation).

Calculations

• Domestic Income (NDP at FC): National Domestic Product at Factor Cost.
• National Income (NNP at FC): Net National Product at Factor Cost.
  • Adjust NDP at FC by adding Net Factor Income from Abroad (NFIA).

Example Calculation 1

Given Data: Profits: 30,000; Rent: 30,000; Interest: 10,000; Mixed Income: 80,000; Compensation of Employees: 120,000

• NDP at FC = Sum of all components.
  • Profit = Dividend + Retained Earnings = 30,000
  • Rent = 30,000
  • Interest = 10,000
  • Mixed Income = 80,000
  • Compensation of Employees = 120,000
  • Total (NDP at FC) = 270,000
• NNP at FC
  • Domestic to National: Add NFIA.
  • If NFIA is not given, assume it as zero.
  • NNP at FC = 270,000

Example Calculation 2

Given Data: Mixed Income: 220,000; Subsidies: 11,000; Operating Surplus: 95,000; NFIA: -2,500; Compensation of Employees: 144,000; Indirect Taxes: 88,000; Depreciation: 40,000

• Step 1: NDP at FC = Sum of components (P, R, I, M, E)
  • Profit = Operating Surplus = 95,000
  • Mixed Income = 220,000
  • Compensation of Employees = 144,000
  • Total (NDP at FC) = 519,000
• Step 2: GDP at MP (Gross Domestic Product at Market Prices)
  • Transition NDP at FC to GDP at MP:
    • Net to Gross: Add Depreciation
    • Factor Cost to Market Price: Add Net Indirect Taxes (NIT)
      • NIT = Indirect Taxes - Subsidies = 88,000 - 11,000 = 77,000
  • GDP at MP = 519,000 + 40,000 + 77,000 = 636,000
• Step 3: GDP at FC
  • Remove NIT from GDP at MP:
  • GDP at FC = 636,000 - 77,000 = 559,000
• Step 4: NNP at FC
  • Adjust GDP at FC to NNP at FC by NFIA:
  • NNP at FC = 519,000 - 2,500 = 516,500

Summary

• Understand and memorize the key income components using PRIME mnemonic.
• Use the correct formula to calculate national income based on given data.
• Practice with examples to reinforce understanding.

This is the method to solve national income numericals via the Income Method. Focus on understanding each component and how they contribute to the total income.

Next Steps

• Review related videos and practice more numericals.
• Stay consistent with studies and utilize the provided playlist for revision.