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

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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 employees90
Wages and salaries800
Net Current transfers to abroad(-)30
Rent and royalty300
Net factor income To abroad50
Social Security contributions by employers100
Profit500
Interest400
Consumption of fixed capital200
Net indirect tax250

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 employees800
Rent200
Wages and salaries750
Net exports(-)30
Net factor income from abroad(-)20
Profit300
Interest100
Depreciation50

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 salaries500
Net capital formation100
Exports50
Imports60
Gross capital formation120
Employer’s contribution to social security schemes20
Net factor income from abroad(-)10
Rent and interest250
Profit400
INDIRECT taxes50
Subsidies10

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)
Wages10000
Rent5000
Interest400
Dividend3000
Mixed income of self employed400
Undistributed profit200
Contribution to social security (Employer)400
Corporation profit tax400

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

  1. Calculate GNPmp from the following data:
Particulars(Rs in crores)
Profit220
Compensation of employees350
Interest100
Consumption of fixed capital50
Opening stock30
Subsidies20
Closing stock50
Mixed income of self employed150
Employer’s contribution to social security schemes30
Net factor income from abroad10
Rent80
Indirect taxes90

2. Calculate GNPfc

ParticularsAmount
Gross Fixed Capital Formation100
Change in Stock20
Net Capital Formation110
Mixed Income of Self-employed200
Net Factor Income from Abroad-10
Net Exports-20
Compensation of Employees250
Operating Surplus400
Net Indirect Taxes50

3. Calculate National Income:

ParticularsAmount
Mixed Income of Self employed200
Old age pension20
Dividends100
Operating Surplus900
Wages and Salaries500
Profit400
Employer’s Contribution to Social Schemes50
Net factor income from Abroad-10
Consumption of Fixed Capital50
Net Indirect Taxes50

4. Compute National Income:

ParticularsAmount
Mixed Income of Self-employed2500
Net factor income from abroad-50
Rent500
Consumption of fixed capital400
Corporate Tax700
Profit300
Compensation of employees1600
Net Indirect Taes500
Interest500
Direct Taxes paid by the household300

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.

Feel free to join my Facebook group meant for economics students, and you can also subscribe to us.

Happy Learning!

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