Income Approach
Definition: Add up all the income that resulted from selling all final goods and services produced in a given year.
- Income approach is not used often because the general population will lie about their incomes.
Formula:
Wages + Rent + Interest + Profits(AKA Proprietor's Income) + Statistical Adjustments
Expenditure Approach
Definition: Add up all the spending on final goods and services produced in a given year.
Formula:
GDP= C + IG + G + Xn
Vocabulary:
- Compensation of Employees- Could include wage and salary supplements such as pensions, health insurance, and welfare.
- Rents - Income received by the households and businesses that supply property resources.
- Ex: Monthly payment of rent
- Interest - Money paid to suppliers of loans
- *You owe the lender money*
- Proprietor's Income - This comes from sole proprietorship and partnerships.
- Corporate Profits - Could include dividens, corporate income taxes, and undistributed corporate profits.
It is interesting to know how everything centers around calculating GDP whether it is through the income or expenditure approach. It is important to know how to calculate whether it goes up or down, It has a significant effect on the economy. It determines whether the economy is growing or in a recession.
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