Under which method, national income is estimated as the sum total of factor incomes of normal residents of a country during an accounting year?

income method

The correct answer is Option 2: income method

Income method is also known as factor cost method as in this method, national income is estimated by aggregating all the factor incomes (in the form of wages, rent, interest and profits) paid to the owners of these factors of production (land, labour, capital and enterprise) within the domestic territory in an accounting year. Income is distributed in form of wages, rent, interest and profit.

Lets look at other options.

Option 1: Value Added Method: It is one of the approaches used to estimate national income. It calculates national income by summing up the value added by each firm at every stage of production. This method focuses on the value added to goods and services at each stage of production, which is calculated by subtracting the value of intermediate goods and services used in production from the value of the final goods and services produced. While valuable for understanding the contribution of each stage of production to national income, it does not directly focus on factor incomes of residents.

Option 3: Product Method :  It is also known as the output or expenditure method, estimates national income by summing up the final value of all goods and services produced within a country's borders over a specific period. It focuses on aggregating the total value of final goods and services produced, without directly considering factor incomes. While useful for understanding the total value of production in an economy, it does not directly measure factor incomes earned by residents.

Option 4: All of the Above :This option implies that all three methods—value-added method, income method, and product method—are used for estimating national income. While all three methods are indeed used in national income accounting, each method serves a different purpose and focuses on different aspects of economic activity. The income method specifically addresses the factor incomes of residents, making it the appropriate choice for estimating national income based on factor incomes. Therefore, while all methods are important in economic analysis, the income method is the most relevant for estimating national income as the sum total of factor incomes of normal residents of a country during an accounting year.