Following are the main steps involved in estimating national income by income method:
(i) Identify enterprises which employ factors of production (land, labour, capital and enterprise).
(ii) Classify factor payments into various categories like rent, wages, interest, profit
and mixed income (or classify factor payments into compensation of employees, mixed income and operating surplus).
(iii) Estimate amount of factor payments made by each enterprise.
(iv)Sum up all factor payments made within domestic territory to get Domestic Income (NDP at FC).
(u) Estimate net factor income from abroad which is added to Domestic Income to derive National Income.
For correct computation of national income by income method, following precautions need to be taken:
(i) Only factor incomes which are earned by rendering productive services are included. All types of transfer income like old-age pension, unemployment allowance, etc. are excluded.
(ii) Sale and purchase of second-hand goods are excluded since they are not part of production of current year but commission paid on sale of second-hand goods is included as it is reward for rendering productive services. Likewise, sale proceeds of shares and bonds are not included.
