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Difficulty: EasyIncome Method of Measurement

An economy recorded the following national income components for a given fiscal year:

ComponentAmount (₦ million)
Wages and salaries450450
Rent on property120120
Net interest8080
Corporate profits200200
Transfer payments (Social pensions)5050

Using the income method of measuring national income, what is the Gross Domestic Product at factor cost (in ₦ million)?

Answer: 850 million Naira

Answer

The Gross Domestic Product at factor cost using the income method is 850 million Naira.
Under the income method of national income accounting, GDP at factor cost is calculated by summing all rewards accruing to the factors of production: Wages and salaries (labour) + Rent (land) + Interest (capital) + Profits (entrepreneurship). Transfer payments such as social pensions are unearned receipts and must be omitted. Thus, National Income = ₦450m + ₦120m + ₦80m + ₦200m = ₦850m.

Step-by-Step Solution

1
Identify valid factor incomes under the income approach
Earned incomes are Wages (450450 million), Rent (120120 million), Interest (8080 million), and Profits (200200 million).
The income method aggregates rewards paid to factors of production (land, labour, capital, and enterprise) for producing current goods and services.
2
Exclude transfer payments from calculation
Transfer payments (5050 million) are excluded.
Transfer payments are receipts for which no corresponding productive service is rendered in the current period, so including them would cause double counting.
3
Calculate total GDP at factor cost
450+120+80+200=850450 + 120 + 80 + 200 = 850 million Naira.
Summing all constituent factor income components yields the total national income at factor cost.

Key Concept

Calculation of National Income using the Income Method
Estimated Time:1m 0s
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Topics

Income Method of Measurement

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