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Difficulty: Very hardIncome Method of Measurement

The following financial data (in millions of dollars) was extracted from the national income accounting records of a nation for a given fiscal year:

Economic ComponentAmount ($ million)
Wages and salaries420
Employers' social security contributions40
Rental income of households75
Net business interest payments60
Interest on government public debt25
Dividends paid to shareholders90
Corporate profit taxes40
Undistributed corporate profits30
Mixed income of self-employed individuals115
Transfer payments (social welfare grants)55
Capital gains from asset sales35
Depreciation of capital assets50
Factor income earned by citizens abroad45
Factor income earned by foreigners domestically65
Indirect business taxes40
Government subsidies15

Based on the information provided above, calculate the Net National Product at factor cost (NNPFCNNP_{FC}) in millions of dollars.

Answer: 850 $ million

Answer

The Net National Product at factor cost (NNPFCNNP_{FC}) is $850 million.
The Income Method sums all factor payments earned by owners of factors of production for providing current productive services. Combining compensation of employees (460M),rentalincome(460M), rental income ( 75M), net business interest (60M),totalcorporateprofits(60M), total corporate profits ( 160M), and mixed income of self-employed (115M)yieldsNetDomesticProductatfactorcost(115M) yields Net Domestic Product at factor cost ( NDP_{FC} = \870 million870\text{ million}). Adding Net Factor Income from Abroad (NFIA=$45M−$65M=−$20 millionNFIA = \$45\text{M} - \$65\text{M} = -\$20\text{ million}) yields Net National Product at factor cost (NNPFC=$850 millionNNP_{FC} = \$850\text{ million}). Non-factor receipts (transfer payments, public debt interest, capital gains) and depreciation are excluded.

Step-by-Step Solution

1
Calculate Compensation of Employees
$460 million
Compensation of employees includes both direct wages/salaries (420M)andnon−wagebenefitssuchasemployers′socialsecuritycontributions(420M) and non-wage benefits such as employers' social security contributions ( 40M).
2
Calculate Total Corporate Profits
$160 million
Total corporate profits equal the sum of distributed profits (dividends of 90M),corporateprofittaxes(90M), corporate profit taxes ( 40M), and retained earnings (undistributed profits of $30M).
3
Calculate Net Domestic Product at factor cost (NDPFCNDP_{FC})
$870 million
NDPFCNDP_{FC} is the sum of factor earnings within the domestic economy: Compensation of Employees (460M)+Rent(460M) + Rent ( 75M) + Net business interest (60M)+Corporateprofits(60M) + Corporate profits ( 160M) + Mixed income of self-employed ($115M). Non-factor payments (transfer payments, public debt interest, capital gains) are strictly excluded.
4
Determine Net Factor Income from Abroad (NFIANFIA)
-$20 million
NFIANFIA is calculated as factor income received from abroad (45M)minusfactorincomepaidtoforeignersabroad(45M) minus factor income paid to foreigners abroad ( 65M).
5
Calculate Net National Product at factor cost (NNPFCNNP_{FC})
$850 million
NNPFC=NDPFC+NFIA=870+(−20)=850NNP_{FC} = NDP_{FC} + NFIA = 870 + (-20) = 850. Depreciation is not added because the target aggregate is Net, and indirect taxes/subsidies are not added/subtracted because the evaluation is at factor cost.

Key Concept

Income Method of Measuring National Income
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Income Method of Measurement

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