Question

State and explain any two precautions that must be taken while estimating national income by income method.

Hint:

In the income method, always include only factor incomes (like wages, rent, interest, profit) and exclude transfer payments and illegal earnings.

Answer 1

When calculating National Income using the income method, consider these points:

1. Exclude Transfer Incomes:
   Do not include transfer payments such as pensions, scholarships, and donations, as they are not payments for productive services. Including them would lead to double counting.
2. Exclude Illegal Incomes:
   Illegal earnings, for example, black money from smuggling or gambling, are not part of legitimate economic activity and must be excluded from national income calculations. Only income from legal production activities should be counted.