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Difficulty: MediumIncome Method of Measurement

The table below shows national income components for a hypothetical economy in a given financial year:

Income ComponentAmount ($ millions)
Wages and Salaries150
Corporate Profits45
Rental Income25
Net Interest20
Government Transfer Payments15
Net Factor Income from Abroad-10

Using the income method of national income accounting, what is the Gross National Product (GNP) at factor cost?

  1. $230 millionAnswer
  2. B
    $240 million
  3. C
    $245 million
  4. D
    $255 million

Answer

$230 million
Under the income approach, national income at factor cost includes only payments made to factors of production: wages (150million),profits(150 million), profits ( 45 million), rental income (25million),andnetinterest(25 million), and net interest ( 20 million), totaling 240millionfordomesticearnings.Transferpayments(240 million for domestic earnings. Transfer payments ( 15 million) are excluded as non-factor receipts. Adjusting for Net Factor Income from Abroad (-10million)yieldsthecorrectGrossNationalProductof10 million) yields the correct Gross National Product of 230 million.

Step-by-Step Solution

1
Calculate Gross Domestic Income (GDI) at factor cost by summing rewards earned by factors of production.
GDI at factor cost = Wages (150m)+Profits(150m) + Profits ( 45m) + Rent (25m)+Interest(25m) + Interest ( 20m) = $240 million.
Government transfer payments ($15 million) are excluded because they are unearned receipts that do not represent current productive services.
2
Convert GDI at factor cost to Gross National Product (GNP) at factor cost by adjusting for Net Factor Income from Abroad (NFIA).
GNP at factor cost = GDI (240m)+NFIA(−240m) + NFIA (- 10m) = $230 million.
GNP accounts for total income earned by national residents regardless of location, requiring the inclusion of net factor income from abroad.

Key Concept

Income Method of Measuring National Income
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Topics

Income Method of Measurement

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