Economics » National Income » National Income Measurements and Their Problems

The Income Method

This method values GDP as the sum of final incomes earned by factors of production located in a country for the production of goods and services for a defined accounting period.

The first stage under the income method is to determine and sum up factor incomes. We account for only factor incomes generated through the production of goods and services. Some of these incomes are wages, salaries, commissions, etc. before taxes, social security and pension deductions which accrue to labour; rent, royalties, etc. which accrue to land; interest and dividends which are earned by capital and profits of private and public businesses which accrue to enterprise.
We therefore exclude from the accounts transfer payments e.g. state pension, private transfer of money from one individual to another. The summation of these relevant incomes before taxes and other deductions gives Gross Domestic Income at factor cost (GDIf).

The next stage is to calculate gross national income at factor cost (GNIf). This is done by subtracting or adding Net Property Income (NPI) to GDIf. That is,

GNIf = GDIf ± NPI

Finally, we determine the net national income. This is done by subtracting depreciation from the GNIf. This is what is referred to as national income.


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