We read about Factor of Production and Factor payments. GDP calculation by income method calculate factor payment of each sector first and then add up all sectors factor payment.
1 = Compensation of Employees
Compensation of employee can be in:
A) Wage and salaries: a) In Cash (@ regular interval) b) In Kind (Mobile bill, transport etc)
B) Social security contribution by employer
2 = Rent & Royalties
Rent – Amount paid by tenant to landlord. Concept of Imputed rent: When the owner herself/himself occupy the house.
Royalties – Royalty from patents, copyrights etc.
3 = Interest Income
Interest received by household through lending their money to firms. Firm use these money & in return pay interest to lender or one who purchased financial asset. example: I purchased abc bonds and abc gives me 5% of bond value each year.
**Government Interest payment or money paid by government when you purchase government bond is seen as transfer, as no production happens.
4 = Profit
It is residual factor income to the entrepreneur. For her service and dedication to the business she runs. She may use it for : a) Paying tax. b) dividend to company shareholders. c) Remaining money for future purpose or her personal expenses.
Now, 1 + 2 + 3 + 4 = Net Domestic product @ fc
To calculate national income (Net national Product @ fc) :
NDP @ fc + NFIA = NNP @ fc