Under the expenditure approach, GDP is calculated as follows:
GDP = Personal Consumption + Investment + Government Consumption + (Exports – Imports)
GDP = C + I + G + (X-M)
Under the income approach, GDP is calculated as follows:
GDP = National Income + Capital Consumption Allowance + Statistical Discrepancy
Domestic Income is the total income earned by the people and businesses within a country’s borders. National Income is the total income earned by citizens and businesses of a country, no matter where they are located. National Income includes income received by all factors of production:
- Compensation to employees: Wages, salaries, Social Security benefits, and employee benefit plans plus the monetary value of fringe benefits, tips, and paid vacations.
- Corporate and govt. profits before taxes: All income earned by the stockholders of corporations.
- Non corporate business net income: All forms of income earned by self-employed individuals and the owners of unincorporated business, including unincorporated farmers.
- Interest income: The interest income received by households and government minus the interest they paid out.
- Rent: Income of persons is the income received by individuals for the use of their non-monetary assets.
- Indirect business taxes – subsidies
National Income = Compensation of employees + Non-corporate Business Net Income + Corporate Profits + Rental Income + Net Interest + Indirect Business Taxes
Capital consumption allowance refers to the depreciation on the physical capital. It is the cost to replace capital goods that break or wear down.
Apart from this, statistical discrepancies or pure computational errors often occur, i.e., the difference between GDP under expenditure approach and income approach.
Other National Income Accounting Measurements
Net Domestic Product = GDP – Capital consumption allowance
Personal income is the pre-tax income received by households.
Personal Income = National income – Undistributed Corporate Profits – Social Security Taxes – Corporate Profits Taxes + Transfer Payments
Personal disposable income is the personal income after taxes.
Disposable Income = Personal Income – Personal Taxes