Factor Income Approach

Under this approach, national income is calculated by taking the summation of rewards of factors of production for their services to produce output both inside and outside the national border of an economy during a year

Thus according to this method, national income is obtained by summing up of the income of all individuals in the country. Individuals earn income by contributing their own services and the services of their own factors like land, capital etc. in the production national.

Factor Income Approach Symbolic Representation

Y = r + w + i + π


Y = National income

r = Rent, i.e. reward of the services of land

w = Wages, i.e. reward of use of labor

i = Interest , i.e. reward of use of capital

π = Profit, i.e. reward of the services of entrepreneur.

These rewards are basically income of individuals of a country. By summing up all these rewards earned during a year, we find national income.

Precautions Using Factor Income Approach

Barter Transactions

Barter transactions should be avoided.

Free services

The services without monetary reward like caring of child by mother, treatment of parents by a doctor etc should not be included.

Illegal income

Income earned through illegal resources should not be included.

Net income from Abroad

Net factors payment from abroad should be included in national income accounting.

It is also known as ameasurement of national income factors prices / costs.

If goods are exchanged by goods and money is not involved as medium of exchange, it is called barter transactions.

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