Posted by
Anjali Kaur
on
Aug 10, 2020
How to calculate GDP with Income Method?
We have done the basic conversion in national income, which helped us in understanding the GDP calculation under the value-added method. Now, the second method to calculate GDP is the Income method. According to this method, domestic income is calculated as the total factor income or factor payments that are generated within the domestic territory of a country during the period of an accounting year. Let’s learn its formulas and solve some problems related to the income method.
Income Method Formulas
With the income method of national income, we calculate NDPfc. This national income aggregate can be converted into GDP, using the basic conversion of its variables. The below is the image of the Income method formulas, that will be used to calculate GDP under income method, download it, or write it down somewhere for your reference.
These are the formulas used to calculate NDPfc under income method.
Tips to memorize the formulas of Income method:
NDPfc = C+O+M, Just like come, with e silent
C- compensation of employees
O- Operating Surplus
M- Mixed-income of Self Employed
For operating surplus = R+ R+ I + P, just like Rest in peace, use Rest Received in peace.
R- Rent
R- Royalty
I- Interest
P-Profit
For Profit = D+ C+ U , like DC Universe
D- Dividend
C- Corporate profit
U- Undistributed profit
I hope this will help you learn the income method formulas quickly and permanently.
Let’s practice some problems to calculate GDP/ NDP under income method, using the above formulas. Shall we?
How to solve problems on income method?
Question 1. Calculate ‘Net National Product at Factor cost’ :
| Particulars | (Rs in Arabs) |
| Social security contributions by employees | 90 |
| Wages and salaries | 800 |
| Net Current transfers to abroad | (-)30 |
| Rent and royalty | 300 |
| Net factor income To abroad | 50 |
| Social Security contributions by employers | 100 |
| Profit | 500 |
| Interest | 400 |
| Consumption of fixed capital | 200 |
| Net indirect tax | 250 |
Solution: With income method, we get NDPfc,
First, write down all the formulas for income method, it helps in memorizing those formulas, and you get additional marks for writing the formulas:
Now, Calculate compensation of employees first, then find operating surplus, then find NDPfc, and finally, NNPfc that is aked in the question.
Remember, NFIA = Payment from abroad – Payment paid to abroad
- NDPfc = Compensation of Employees (COE) + Operating Surplus (OS) + Mixed Income (MI)
- Compensation of Employees = Wages and salaries + Social security contribution by EMPLOYER
COE = 800 + 100 = 900
COE= 900
- Operating Surplus = Rent + Profit + Royalty + Interest = 300 +500 + 400 = 1200
Operating Surplus = 1200
Mixed income is not given, so it will be considered 0.
So, NDPfc = 900+ 1200 = 2100
- Profit = Undistributed profit + dividends + corporate tax (corporate profit tax) This formula is not used in this question. I have written it for you to memorize it.
NNPfc = NDPfc + NFIA
NFIA = From – To = 0-50 = -50
So, NNPfc = 2100 +(-50) = 2050 (in Arabs)
In the question, they asked us to calculate NNPfc, but with income method we get NDPfc. So, after finding the NDPfc which is also known as the domestic income. We will use the basic conversion and solve it for NNPfc.
The more you practice, the easier it will become. Try another question;
Question 2. From the data, calculate National Income :
| Particulars | (Rs in crore) |
| Compensation of employees | 800 |
| Rent | 200 |
| Wages and salaries | 750 |
| Net exports | (-)30 |
| Net factor income from abroad | (-)20 |
| Profit | 300 |
| Interest | 100 |
| Depreciation | 50 |
Solution: National income is NNPfc that is the net national product at factor cost. With income method formulas we get NDPfc. First, write all the formulas, and fill the information to reach to the final answer.
NDPfc= COE+ OS +MI = 800 + 600 + 0 = 1400 (Don’t get confused, Find COE and OS first)
COE= Wages and salaries + SS Contribution by Employer
COE= 800+ 0 = 800
OS = R+R+ I+ P =200+ 0+ 100+300 = 600
Now, Find national income;
NNPfc = NDPfc + NFIA = 1400 + (-20) = 1380 (Rs in crore)
Question 3. Calculate Net Domestic Product at a Market price from the following data:
| Particulars | (rs in lakhs) |
| Wages and salaries | 500 |
| Net capital formation | 100 |
| Exports | 50 |
| Imports | 60 |
| Gross capital formation | 120 |
| Employer’s contribution to social security schemes | 20 |
| Net factor income from abroad | (-)10 |
| Rent and interest | 250 |
| Profit | 400 |
| INDIRECT taxes | 50 |
| Subsidies | 10 |
Solution:
NDPfc = COE+ OS+ MI
NDPfc = 520 + 650 + 0 = 1170
COE = Wages and salaries + SSC by employer
COE= 500 + 20 = 520
OS= R+R+I+P =250 + 0 + 400 = 650
NDPmp = NDPfc + NIT = 1170 + (50-10) = 1170 + 40 = 1210 (Rs in lakhs)
Question 4 Given the following data, calculate Net Domestic Product at factor cost or domestic income:
| Particulars | (rs in crores) |
| Wages | 10000 |
| Rent | 5000 |
| Interest | 400 |
| Dividend | 3000 |
| Mixed income of self employed | 400 |
| Undistributed profit | 200 |
| Contribution to social security (Employer) | 400 |
| Corporation profit tax | 400 |
Solution: Domestic Income = NDPfc, Follow the formula pattern.
NDPfc = COE + OS + MI
NDPfc = 10400+ 9000 +400 = 19800
COE = Wages and salaries + SSC by employer
COE = 10000+ 400 = 10400
OS = R+R+I+P = 5000+0+400+3600 = 9000
Profit = Undistributed profits+ Dividends + Corporate profit tax
Profit =200+3000+400= 3600
Test Yourself
- Calculate GNPmp from the following data:
| Particulars | (Rs in crores) |
| Profit | 220 |
| Compensation of employees | 350 |
| Interest | 100 |
| Consumption of fixed capital | 50 |
| Opening stock | 30 |
| Subsidies | 20 |
| Closing stock | 50 |
| Mixed income of self employed | 150 |
| Employer’s contribution to social security schemes | 30 |
| Net factor income from abroad | 10 |
| Rent | 80 |
| Indirect taxes | 90 |
2. Calculate GNPfc
| Particulars | Amount |
|---|---|
| Gross Fixed Capital Formation | 100 |
| Change in Stock | 20 |
| Net Capital Formation | 110 |
| Mixed Income of Self-employed | 200 |
| Net Factor Income from Abroad | -10 |
| Net Exports | -20 |
| Compensation of Employees | 250 |
| Operating Surplus | 400 |
| Net Indirect Taxes | 50 |
3. Calculate National Income:
| Particulars | Amount |
|---|---|
| Mixed Income of Self employed | 200 |
| Old age pension | 20 |
| Dividends | 100 |
| Operating Surplus | 900 |
| Wages and Salaries | 500 |
| Profit | 400 |
| Employer’s Contribution to Social Schemes | 50 |
| Net factor income from Abroad | -10 |
| Consumption of Fixed Capital | 50 |
| Net Indirect Taxes | 50 |
4. Compute National Income:
| Particulars | Amount |
|---|---|
| Mixed Income of Self-employed | 2500 |
| Net factor income from abroad | -50 |
| Rent | 500 |
| Consumption of fixed capital | 400 |
| Corporate Tax | 700 |
| Profit | 300 |
| Compensation of employees | 1600 |
| Net Indirect Taes | 500 |
| Interest | 500 |
| Direct Taxes paid by the household | 300 |
Drop your solutions at Contact@LearnWithAnjali.com to know whether you performed correctly or not. For more questions drop me an email or get Exam Idea book of Economics for practice.
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Happy Learning!
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