Question

Explain any two precautions to be kept in mind while estimating National Income by the Income method.

Hint:

Two precautions: do not include income from the sale of financial assets, as these are only paper claims, and do not include transfer incomes, as these are not earned from productive activity.

Answer 1

Step 1: Understand the method:
Under the income method, national income is found by adding up the factor incomes earned by residents of the country in one year: wages, rent, interest, profit and mixed income.
To avoid a wrong total, we must include only incomes earned by producing goods and services in the year. So some precautions are needed.
The question asks for any two, so we explain two precautions fully.

Step 2: Precaution 1: Do not include income from the sale of financial assets:
Sale and purchase of shares, bonds and debentures only changes the owner of a paper claim.
No new good or service is produced in this transaction, so it adds nothing to the current flow of goods and services.
Therefore, the gain or sale value of financial assets is left out of national income.

Step 3: Precaution 2: Do not include transfer incomes:
Transfer incomes are receipts for which nothing is given in return. Examples are old age pension, scholarship and gifts.
They are not earned by any productive activity, and they are one-sided (unilateral) in nature.
If we included them, the same income would be counted twice, once with the giver and once with the receiver. So they are not included.

Final Answer:
Two precautions under the income method: (1) leave out income from the sale of financial assets, and (2) leave out transfer incomes.