Using factor incomes for calculating national income, Managerial Economics

Using Factor Incomes for Calculating National Income    

A second method is to sum up all the incomes to individuals in the form of wages, rents, interests and profits to get domestic incomes.  This is because each time something is produced and sold someone obtains income from producing it.  It follows that if we add up all incomes we should get the value of total expenditure, or output.  Incomes earned for purposes other than rewards for producing goods and services are ignored.  Such incomes are gifts, unemployment or relief benefits, lottery, pensions, grants for students etc.  These payments are known as transfer income (payments) and including them will lead to double counting.  The test for inclusion in the national income calculation is therefore that there should be a "quid pro quo" that the money should have been paid against the exchange of a good or service.  Alternatively, we can say that there should be a "real" flow in the opposite direction to the money flow.  We must also include income obtained from subsistence output. 

This is the opposite case from transfer payments since there is a flow of real goods and services, but no corresponding money flow.  It becomes necessary to "impute'' values for the income that would have been received.  Similarly workers may, in addition to cash income, receive income in kind; if employees are provided with rent free housing, the rent which they would have to pay for those houses on the open market should, in principle, be "imputed" as part of their income from employment.  The sum of these incomes gives gross domestic product GDP.  This includes incomes earned by foreigners at home and excludes incomes earned by nationals abroad.  Thus, to Gross Domestic Income we add Net property Income from abroad.  This gives Gross National Income.  From this we deduct depreciation to give Net National Income.

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