Saturday, April 18, 2009

Measurement of National Income - Income Approach

Income Approach:

National income is the summation of all the annual rewards given to the four factors of production in a given time period (one year).
it can be obtained by subtracting indirect business taxes and adding subsidy from NNP. It is also called NI at factor cost.

NI = NNP - Indirect tax + Subsidy

Where,
NNP = GNP - Capital Consumption

We now explain the four categories of payments: wages, rent, interest and profit.

(i) Wages: It includes the wages and salaries paid by the businesses and govt. to suppliers of labour. it also include wage and salary supplements such as, payments by employers into social insurance and into a variety of private pension, health and welfare funds for workers.

(ii) Rent: It consists of income payments receive by household and business which supply property resources.

(iii)Interest: Here interest is expressed in net rather than gross terms. Net interest receive by household is difference between the interest they receive (from saving account ,certificate of deposits and the like)and the interest they pay(to banks for mortgages, credit cards and other loans)

(iv)Profits: It includes total gross corporate profits + proprietors income.proprietors income refers to the net income of sole proprietorship and partnership.corporate profit consist following three items
1.Corporate income tax: A portion will be claimed by the govt.
2.Dividends : A portion pays to stockholder.
3.Undistributed Profit: These retained earnings are invested currently or in future in new plants and equipment.

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