Income Method in CUET Economics: Definition, Formula & Components

Q: What is the formula for NDPfc income method?

The formula for calculating NDPFC is Compensation of Employees + Profit + Rent &amp; Royalty + Interest + Mixed Income. To calculate National Income(NNPFC), Net Factor Income from Abroad(NFIA) is added to domestic income (NDPFC).

Q: What is NDPFC also known as?

NDPFC is also known as domestic income. It is the net money value of all the final goods and services produced within a country's domestic territory during a one-year period. The income of non-residential companies and foreign banks that operate within India's domestic (economic) territory is also included in the domestic income.

Q: Who declares national income in India?

The National Statistical Office (NSO), Ministry of Statistics and Programme Implementation, is the primary agency for estimating and declaring the National Income and other related macroeconomic aggregates of India.

Q: What is the formula for GDP using the income method?

Under the income approach method, GDP is calculated based on the income earned by all factors of production in an economy. These factors are the inputs to create the final products or services, such as land, labour, capital, and entrepreneurship. So, GDP = Wages + Rent + Interest + Profits.

Q: What is the difference between GDP and GNP?

The total value of finished domestic goods and services produced inside a country's boundaries is its gross domestic product (GDP). However, the value of all completed goods and services generated by a nation's domestic and international population is known as its gross national product (GNP).

Q: What are the three methods of calculating national income?

There are three other ways to calculate a nation's national income: the Value-Added Method, the Income Method, and the Expenditure Method.

Author : Paakhi Jain

August 21, 2024

Overview: National income can be calculated in various ways. The Income Method in CUET Economics is one of the best methods for calculating national income (NNPFC). Learn the formula, components and exclusions in detail for better clarity.

The income Method in CUET Economics helps understand a country's progress. It includes income (Wages, rent, interest, and profit) from all factors of production in a country, such as:

Capital & Land
Labour & Entrepreneurship

CUET 2025 Economics Measurement of National Income Syllabus: Definition

Economics is one of the significant domain subjects in the CUET exam. In this, National Income is one of the major topics to study.

National income, often known as gross national income, is the total amount of money earned by all businesses and residents in a nation over a specific period.

An alternate definition of national income would be the total value of all goods and services generated over a certain period.
It is, therefore, the culmination of all economic activity within a nation during a year.
It includes the earnings of all production components, such as rent, interest, and profits, received by a nation's labour force, capital, and land.
The number comprises both money from foreign sources and the nation's gross domestic product (GDP).
It helps to comprehend the nation's advancement as well.

There are several methods for calculating the national income. The standard 3 are:

Value-added method
Income method
Expenditure method

CUET 2025 Economics Measurement of National Income Syllabus: Income Method

The income method in CUET Economics syllabus calculates national income based on the flow of factor revenues. Four factors are associated with every production activity: land, labour, capital, and entrepreneurship.

Labourers receive their wages, the land gets rent, capital accrues interest, and entrepreneurship gets profit, each earning through individual means.
Apart from that, self-employed individuals like doctors, CAs, advocates, etc., employ their capital and labour. Thus, their income is regarded as mixed income.

Therefore, the income method measures national income through these factor payments. Thus, it is also known as the ‘factor payment method.’

How to calculate National Income using the Income Method in CUET Economics?

To arrive at national income using this method, you must sum up all the individual income in a country within a specific period.
It includes wages and salaries, land rent, interest gained on capital and income of self-employed individuals.
This method conclusively indicates the distribution of national income among every income group of a country.

Formula for Income Method

Your CUET Economics preparation is highly dependent on conceptual understanding and strong memorization. You must learn the formulas carefully to solve questions quickly and accurately.

The formula to solve CUET 2025 Economics measurement of national income income method questions is:

National Income (NNPFC) = Net Domestic Product at Factor Cost (NDPFC) + Net Factor Income from Abroad(NFIA)

NDPFC = Compensation of Employees + Operating Surplus + Mixed-Income
Operating Surplus = Rent + Interest + Profit

Components of Factor Income

Factor income is an essential part of the income method in CUET Economics. Summing up all the factor incomes within a country for a period results in Domestic Income or NDPFC. There are three components of employee factor income compensation: operating surplus and mixed-income.

1- Compensation to Employees (COE)

Employee compensation refers to the remuneration paid by an employer to his/her employees for their productive services. It includes all monetary and non-monetary employee benefits, directly or indirectly.

COE comprises of 3 elements:

Wages in Cash: This includes every monetary benefit, such as wages, bonuses, commissions, and dearness allowance.
Wages in Kind: This includes every non-monetary benefit that employees receive from their employers, like home, car, medical and educational facilities.
Employer’s Contribution to Social Security Schemes: It includes the contributions employers make to social security plans, such as employees' provident funds, gratuities, pension plans, etc.

2- Operating Surplus

Operating surplus is also divided into 3 categories:

Rent: Rent arises from the ownership of properties. Income under this head comprises both actual rent and imputed rent.
Interest: It refers to the interest amount received for loaning funds to a manufacturing unit. This interest comprises interest paid on loans taken for production units, actual interest, and imputed interest.
Profit: This is the entrepreneur's residual income after paying other production factors.

3- Mixed-Income

Self-employed individuals and unincorporated businesses generate this form of income.
Mixed income arises when elements of factor incomes cannot be separated, such as when a doctor runs his/her clinic.

Exclusions in the Income Method in CUET Economics

The following measures must be taken to calculate national income correctly using the income method:

All forms of transfer income, such as old-age pensions, unemployment benefits, etc.
Capital gains, second-hand products, and selling of stocks and bonds are excluded.
Wealth, gift taxes, and indirect taxes, such as sales tax and excise duties, are also excluded.
Smuggling, black-marketing, other unlawful operations, and windfall income (e.g., from lotteries) are not included.
The value of self-consumed services such as those provided by housewives is not included.

Key Takeaways

The income method in CUET economics is one of the simple methods that captures the contribution of various economic sectors in the country.

The components of the income method are Wages, rent, interest, and profits.
Solve different types of questions from CUET economics national income questions and answers pdf regularly.
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