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Question

Difficulty: EasyIncome Method of Measurement

When estimating a country's national income using the income method, which of the following receipts must be excluded because it does not represent payment for factor services rendered?

  1. Unemployment benefits paid by the governmentAnswer
  2. B
    Wages and salaries earned by factory employees
  3. C
    Net rental income received by property owners
  4. D
    Corporate profits retained by public companies

Answer

Unemployment benefits paid by the government must be excluded when estimating national income using the income method.
Under the income method of national income accounting, only factor incomes earned through contribution to current economic production (wages, rent, interest, and profit) are included. Unemployment benefits are transfer payments made by government to individuals without any corresponding exchange of goods or factor services. Thus, they must be excluded to prevent overstating national income.

Step-by-Step Solution

1
Identify the basic principle of the income method of national income measurement.
The income method sums all earned factor rewards (wages, rent, interest, and profits) paid to factors of production for contributing to current productive activity.
National income measures only the value of economic production generated within a given period.
2
Evaluate each transaction to distinguish between factor incomes and transfer payments.
Wages, rent, and profits are payments for factor services rendered. Transfer payments, such as unemployment benefits, pensions, or student grants, are gifts or relief payments involving no current exchange of goods or services.
Including transfer payments would result in double counting income that was already earned and taxed elsewhere.
3
Select the item that must be excluded.
Unemployment benefits paid by the government must be excluded.
It represents a unearned transfer of income rather than factor earnings from current production.

Key Concept

Exclusion of Transfer Payments in the Income Method of National Income Accounting
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Income Method of Measurement

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