Income Approach (GDP)

With the Income Approach, we're going to focus on the total income earned by all members of the economy.

GDP = Wages & Salaries + Income of Capital (K) + Depreciation + Indirect Business Tax

Think...

  • Wages
  • Salaries
  • Any income earned abroad (don't forget this one!)

Think: anything "earned" from assets like...

  • Rent payments
  • Interest earned

Depreciation is subtracted from income as an expense... but it's not an expense that's going towards income to another individual / business. Rather, it represents devaluing of our assets.

Therefore, we need to add it back!

Indirect Business Taxes (sales tax, excise tax, etc.) are subtracted from income as an expense... but it's not an expense that's going towards income to another individual / business. Rather, it's going back to the government. (Think: income, but for the government!)

Therefore, we need to add it back!

Given a scenario...

Scenario: Given the following values, calculate GDP with the Income Approach.

Wages & Salaries$400
Rent$100
Interest$50
Profits$150
Gross Investments in Capital$60
Changes in Inventory$20
Depreciation$70
Indirect Business Taxes$50
Net Foreign Factor Income$30

Wages & Salaries
Wages & Salaries = $400
Net Foreign Factor Income = $30 (can't forget income earned abroad!)

Income of Capital (K)
Rent = $100
Interest = $50
Profits = $150

Depreciation
Depreciation = $70

Indirect Business Taxes
Indirect Business Taxes = $50

GDP = Wages & Salaries + Income of Capital (K) + Depreciation + Indirect Business Tax
GDP = ($400 + $30) + ($100 + $50 + $150) + ($70) + ($50)
GDP = ($430) + ($300) + ($70) + ($50)
GDP = $850

Answer: By focusing on the income earned in this economy, we found a GDP of $850.

Don't get tricked by the items we didn't include in GDP!

  • Gross Investments in Capital & Changes in Inventory - These would be used in the Expenditure Approach. They're "expenditures"... a.k.a. expenses. Not income!

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