Read the passage carefully and answer the questions based on the passage:
Macroeconomics: Economy as a whole
The founding father of modern economics, had suggested that if the buyers and sellers in each market take their decisions following only their own self-interest, economists will not need to think of the wealth and welfare of the country as a whole separately. For various purposes macroeconomists had to study the effects in the markets of taxation and other budgetary policies, and policies for bringing about changes in money supply, the rate of interest, wages, employment, and output. Macroeconomics has, therefore, deep roots in microeconomics because it has to study the aggregate effects of the forces of demand and supply in the markets.
In a simplified economy, the households may dispose off their earnings by spending their entire income on the goods and services produced by the domestic firms as other channels of disposing their income are closed. The factors of production use their remunerations to buy the goods and services which they assisted in producing. The aggregate consumption by the households of the economy is equal to the aggregate expenditure on goods and services produced by the firms in the economy.
In which of the following method the flow is measured as the sum total of all factor payments?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Income Method.
Measuring the flow as the sum total of all factor payments is the income method. Factor payments are the earnings of the factors of production: wages, profits, rents and interest.
The same flow can be measured at different points of the economy, and each point gives one method.
Option (1) Product Method. — Incorrect. This method adds up the value of final goods and services produced by all the firms. It measures the flow at the point of production.
Option (2) Expenditure Method. — Incorrect. This method adds up the spending that firms receive for the final goods and services they produce.
Option (3) Income Method. — Correct. This method adds up what the firms pay out to the factors of production.
Option (4) First in First out Method. — Incorrect. This is a rule in accounting for valuing stock: goods bought first are treated as used first. It does not measure national income.
Note: This question is based on the chapter ‘National Income Accounting’. However, since it is a case-study based question, all the questions on this case study are tagged to the chapter ‘Introduction’.
NCERT (2026-27): “2.2 Circular Flow of Income and Methods of Calculating National Income … Since the same amount of money, representing the aggregate value of goods and services, is moving in a circular way, if we want to estimate the aggregate value of goods and services produced during a year we can measure the annual value of the flows at any of the dotted lines indicated in the diagram. We can measure the uppermost flow (at point A) by measuring the aggregate value of spending that the firms receive for the final goods and services which they produce. This method will be called the expenditure method. If we measure the flow at B by measuring the aggregate value of final goods and services produced by all the firms, it will be called product method. At C, measuring the sum total of all factor payments will be called income method.…”
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