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
| Particular | Amount |
| 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 Income | xxx |
Less: Personal tax and non-tax payment | |
| Disposable Income | xxx |
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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