Question

Giving reasons, explain how are the following treated in estimating national
Income by the income method.
(a) Interest on a car loan paid by an individual
(b) Interest on a car loan paid by a Govt. owned company.

Answer 1

Hey Radhika,

According to the income method, national income is estimated by aggregating all the factor incomes (in the form of wages, rent, interest and profits) paid to the owners of factors of production (land, labour, capital and enterprise) within the domestic territory of a country in an accounting year.

1. Interest on a car loan paid by an individual is included in national income as it forms the income for the bank (assuming loan is taken from the bank).
2. Interest on a car loan paid by a Government owned company is not included in national income as it is not a part of factor income.

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