explain the precautions needed to be taken while calculating national income by income method
Answers
Precautions: For correct computation of national income by income method, following precautions need to be taken:
(i) Only factor incomes which are earned by rendering productive services are included. All types of transfer income like old-age pension, unemployment allowance, etc. are excluded.
(ii) Sale and purchase of second-hand goods are excluded since they are not part of production of current year but commission paid on sale of second-hand goods is included as it is reward for rendering productive services. Likewise, sale proceeds of shares and bonds are not included.
(iii) Imputed rent of owner occupied dwellings and value of production for self-consumption is included but value of self-consumed services like those of housewife is not Included.
(iv)Income from illegal activities like smuggling, black-marketing, etc. as well as windfall gains (e.g., from lotteries) are excluded.
v) Direct taxes such as income tax which are paid by the employees from their salaries and corporate tax, which is paid by the joint stock company from its profit, are included. But wealth tax and gift tax are excluded since they are deemed to be paid from past savings and wealth. Similarly, indirect taxes like sales tax, excise duties, which tend to increase market prices, are not included.