The Income Method

The Income Method measures national income from the side of payments made to the primary factors of production in the form of rent, wages, interest, and profit for their productive services in an accounting year.

Thus, national income is calculated by adding up factor incomes generated by all the producing units located within the domestic economy during a period of account.

From the above explanations, we have;

TDI – Stock app + Stock dep ± R.E = GDP_fc + NPIA = GDP_fc – Dep or C.C = N.I

TDI = Total domestic income which is obtained by adding up;

Income from employment
Self-employment income
rents
Gross trading profits of companies
Interest
Gross trading surpluses
An imputed value for the consumption of non-traded capital

The output method of calculating national income

The output or product method is based on returns made by firms and public corporations concerning the annual value of their output. In most countries these returns are obtained through the census of production.

National income is measured by the output method by calculating the total value of goods and services produced in the country during the year.

GDP_fc + NPIA = GNP_fc – Dep or C.C = NNP_fc or N.I

Here, GDP_fc is obtained by adding up the outputs of the various sectors of the economy. We take either the values added at each stage of production or the values of the final outputs.

We then include an imputed value for the ownership of dwelling, subtract an adjustment for financial services and adjust for residual error if need be so.

General observations

Only in the expenditure method do we have values initially at market prices. The output and income methods give values directly at factor cost except otherwise stated.
The elements for each method are somewhat peculiar and a lot of patience is needed to make the distinctions. Foe example, the R.E is only present in the output method and income method.

Some important N.I accounting relations

1) GNP = GDP + NPIA

⇒ GDP = GNP – NPIA

⇒ NPIA = GNP – GDP

NB: It does not matter whether GNP is at market price or factor cost.

2) NNP = GNP – Dep

⇒ GNP = NNP + Dep

⇒ Dep = GNP – NNP

3) Gross Investment (G.I) = Net Investment (NetI) + Dep

Net investment is the total amount of money that a company spends on capital assets, minus the cost of the depreciation of those assets. This figure provides a sense of the real expenditure on durable goods such as plants, equipment, and software that are being used in the company’s operations.

4) F.c = M.p – T + S , Where F.c is the Factor cost and M.p is the market price.

⇒ M.p = F.c +T – S

⇒ T = M.p – F.c + S

⇒ S = F.c – M.p + T