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Managerial Economics

Notes For constant price estimation, the same procedure can be used with prices of the base year being
employed for valuation of quantities.

14.2 Income Approach

This approach is also known as the income-distributed method. According to this method, the
incomes received by all the basic factors of production used in the production process are
summed up. The basic factors for the purposes of national income are categorised as labour and
capital. We have three incomes.
1. Labour income which includes wages, salaries, bonus, social security and welfare
contributions.
2. Capital income which includes dividends, pre-tax retained earnings, interest on saving
and bonus, rent, royalties and profits of government enterprises.

3. Mixed income, i.e., earnings from professions, farming enterprises, etc.
These three components of income are added together to get national income.
Following the income approach, national income can be measured by aggregating the annual
flows of factor earnings generated by the production of the final output. Thus the value of
output, say good I (P Q ) is also reflected in the sum of the corresponding factor incomes
i i
generated, i.e., P Q = R + W + I + P.
i i i i i i
Where R , W , I , P denote flow of rent, wages, interest, and profits generated by the production
i i i i
of good i. It follows, therefore, that national income can be measured as the sum of annual flow
of different types of factor incomes in the economy.
In this approach, payments for factor, viz. wages, salaries, rents, interest and profits are directly
aggregated together to obtain estimates of value added. Output or input valuation is not necessary.
This approach is particularly suitable for those activities whose output are difficult to value.

The prime example is services. However, reliable data on factor incomes are available only for
those units which keep proper annual accounts. For others, some indirect method has to be
followed. One such method involves estimation of number of workers employed and of value
added per worker. The product of the two gives an estimate of total value added in the relevant
activity. Number of workers is estimated by extrapolation-interpolation of decennial case figures;
per worker value added is taken from surveys conducted at various times with appropriate
adjustments to bring up the estimates to date.
The approach is used for following activities:

1. Railways
2. Electricity, gas and water supply
3. Transport, storage and communication
4. Banking, finance and insurance

5. Real estate
6. Public administration and defence
For the first three groups almost complete data are available from annual accounts. Such data
are also available for parts of latter three - the part that is in the organised sector. For the rest the
indirect approach has to be employed.

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