Match each economic receipt or transaction associated with national income accounting via the income method to its correct accounting classification or treatment.
- Old-age pensions received by retired public servantsExcluded from national income calculations because it is a transfer payment
- Undistributed corporate profits retained for expansionIncluded in national income as a component of total profit earned by capital
- Royalty payments received by landowners for mineral extractionIncluded in national income as rental income derived from land and natural resources
- Dividends paid to foreign equity investors from local productionDeducted from GDP when calculating Gross National Product as a factor outflow abroad
Answer
Old-age pensions match with exclusion as a transfer payment; Undistributed corporate profits match with inclusion as corporate profit; Mineral royalties match with inclusion as rent/property income; Dividends paid to foreign investors match with deduction from GDP to arrive at GNP via Net Factor Income from Abroad.
Under the income method of national income measurement, total national income is computed by summing all factor rewards (wages, rent, interest, profit) earned by residents for productive services rendered during the year. Transfer payments like old-age pensions are excluded because no productive service was rendered. Retained corporate profits form an integral part of earned corporate profits. Royalties paid for land or mineral rights are treated as rent. Income accruing to foreign residents (dividends paid abroad) must be deducted from GDP to derive GNP.
Step-by-Step Solution
Key Concept
Classification of Factor Incomes, Transfer Payments, and Net Factor Incomes under the Income Method