Question

Giving reason explain how the following should be treated in estimation of national income :
(i) Payment of interest by a firm to a bank
(ii) Payment of interest by a bank to an individual
(iii) Payment of interest by an individual to a bank

Answer 1

(i) Payment of interest by a firm to a bank- It is included in national income because it is assumed that loans received by the firm will be used for a production activity which will increase the income of the firm.
(ii) Payment of interest by a bank to an individual- Interest paid by banks on deposits by individuals is included in national income because banks are expected to have used individual, saving for productive purpose.
(iii) Payment of interest by an individual to the bank- Individual borrows to meet his consumption expenditure. Such borrowings are not used for production. Therefore, it is not a factor payment. lt is like a transfer payment, and so it is not included in national income.