Question

Q 3. Which of the following is a component of domestic income? Why? a) Old age pension
b) Operating Surplus
c) Unemployment allowance
d) Social security contribution by employees

Answer 1

Answer:

Three sources of domestic income of a country are: (i) Compensation of employees (ii) Operating Surplus (iii) Mixed income of self-employed.

Domestic income is the sum of factor incomes generated by all the producing units located within domestic territory of a country in an accounting year. It is the sum of net value added at FC of all producing units in the domestic economy irrespective of whether the producing unit is owned by a normal resident or a non-resident (foreigner).

It should be understood that sources of domestic income are (i) income from work (i.e., compensation of employees), (ii) income from property (i.e., operating surplus) and (iii) income from self-employed (i.e., mixed income).

ADVERTISEMENTS:

Accordingly, following are the three components of domestic income:

(i) Compensation of employees:

It refers to all payments and other measurable benefits which the employees receive directly and indirectly in return for rendering productive services. It consists of (a) Wages and salaries in cash, (b) Compensation in kind (like rent- free quarter, free ration, etc.) and (c) Employers’ contribution to social security schemes (like Provident fund, maternity benefits, life insurance, etc.).

(ii) Operating Surplus:

Simply put, operating surplus is Net value added at FC minus Compensation of employees (traditionally called wages). In other words, operating surplus is sum of rent, interest and profit. Alternatively, operating surplus is income from property (rent + interest) and income from entrepreneurship (profit). Royalty is included in rent.

(iii) Mixed income of self-employed:

Income of self-employed persons and unincorporated enterprises, which use their own resources (land, labour, capital, etc.), is called mixed income of self-employed. Such income is justifiably called mixed income because it is mixtures of rent, wages, interest and profits

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