In this method, national income is measured at the stage when factor incomes are paid out by the production units to the owners of the factors of production. The main steps involved in this method are as follows:
(1) Classify the production units into distinct industrial sectors like agriculture, forestry, manufacturing, banking, trade etcetera.
(2) Estimate the following factor incomes paid out by the production units in each industrial sector:
(a)Compensation of employees (b)Rent (c)Interest (d)Profit
The sum total of the above factor incomes paid out is the same as net value added at factor cost the industrial sector.
(3) Take the sum of factor payments by all the industrial sectors to arrive at the net domestic product at factor cost.
(4) Add net factor income from abroad to the net domestic product at factor cost to arrive at the net national product at factor cost.