Question

State and explain any two precautions that must be taken while estimating national income by income method.

Hint:

In the income method, always include only factor incomes (like wages, rent, interest, profit) and exclude transfer payments and illegal earnings.

Answer 1

While using the income method to estimate National Income, the following precautions must be taken:

1. Transfer Incomes Should Not Be Included:
   Transfer payments like old-age pensions, scholarships, and donations are not payments for any productive service and hence should not be included in national income. Including them would result in double counting.
2. Illegal Incomes Must Be Excluded:
   Illegal earnings such as black money from smuggling or gambling do not form part of legitimate economic activity and must be excluded from national income estimation. Only income generated from legal production activities should be counted.