The correct option is 1 and 3 only.
Explanation
National Income Accounting utilizes three primary methods to calculate GDP: the Product (Value Added) Method, the Income Method, and the Expenditure Method. In the circular flow of income model, the aggregate value calculated by all three methods is theoretically identical (Output = Income = Expenditure).
Statement-wise Analysis:
- Statement 1 is Correct: The Income Method calculates GDP by aggregating the payments made to the factors of production for their productive services. These factor payments consist of wages (compensation of employees), rent, interest, and profits.
- Statement 2 is Incorrect: The sum of all final expenditures received by firms represents the Expenditure Method (calculated as $C + I + G + X - M$). While the final GDP figure is identical to that of the Income Method, the methodology and components described here belong to the expenditure approach.
- Statement 3 is Correct: Based on the fundamental identity of the circular flow of income, the income generated is essentially the monetary value of the goods and services produced. Therefore, the total factor income is theoretically equivalent to the sum of Gross Value Added (GVA) by all firms (the Product Method).
Key Takeaway:
The Income Method estimates GDP at the distribution stage by summing factor incomes (Wages + Rent + Interest + Profit), distinguishing it from the Expenditure Method (spending stage) and the Product Method (production stage).