So the most likely way you're gonna run into the GDP calculation is the expenditures approach that we went through in other videos. However, you can also use an income approach to calculate GDP. Let's check that out here. So remember G. D. P. It's the value of final goods and services produced during a year. Right? And when we were talking about GDP before with the consumption investment, government purchases net net exports, we're talking about the expenditures, everything that was spent during a year, Right? And we had those four main components. However, we can look at the other side of the coin, right? If we look at everything spent during the year, well every every dollar we spend is earned by someone else, right? So we can look at the expenditures or we can look at the income. So the main thing to take away here is that expenditures equal income. Okay. The expenditures are going to equal income. So we can total up expenditures to find out GDP or we can total up income. Alright, so let's go through the income approach here. And it's like I said, less common and for the most part you're probably just gonna want to know this on a high level. The main reason these textbooks and some professors like to go through the income approach is because of this uh this idea that expenditures equal income. However the main focus is going to be on that expenditures approach. Just you you have this as a reference if your if your professor wants to go through a little more detail with income approach. So let's go ahead and go through it. Remember we're thinking about income approach, we're thinking about all the income that is earned rather when we're doing expenditure, it was everything that was spent here, it's everything that's earned and they're two sides of the same coin. So let's go ahead and go through the income approach. The first thing we want to calculate is national income. So it's the income of the nation. So let's go ahead and see what's included. Their first we have the compensation of employees and naturally this is going to be the largest part of national income. This is all the income of all the all the citizens in in the in the country. So this is wages and salaries paid by businesses and government to employees. So compensation to employees that is going to be um part of the national income. Next we have rents and this is income received by landlords. So when when you pay rent every month, well they're getting income right there, getting income. And that's included in our um income calculation. And sometimes we talk about net rental income which is the gross receipts minus depreciation right? You you buy a rental property, it's not gonna last forever. It's gonna depreciate over time and some of that value is gonna be lost. So net rental income is those actual receipts, the gross receipts, you get minus that depreciation. Next we have interest. That's another way people earn income right? You earn interest. So interest is earned on loans by banks, right? If if you have to pay interest on a loan and you also earn some interest in your savings account. Now, I know those savings account are paying 0.0 whatever interest right now is not so great. You can find some high yield savings online where you might get a little more. But overall interest is, yes, it's income, but it's not such a significant part for our households and our savings account anymore. Unfortunately. Alright, so let's go on to the next one, proprietor's income. So proprietors, this is if you have your own business, your own private business by a sole proprietorship or partnership. Right? When I do my private tutoring and I have my private students um and they pay me directly well, I'm earning income through that and it's not being paid to me through a corporation or a business or something that's being paid directly to me through my sole proprietorship. Well, that would be a proprietor's income there, right, That's money still being earned and it would be included in national income. Next we have corporate profits. So this is profit earned by corporations, right? Corporations are also earning money in, in our nation. So their income is also included here. Now notice that corporate income taxes are included, right? We're going to include these corporate income taxes because they're earned by the government, even though the they're taken away from the corporation and given to the government while they're still earnings of the nation, right there, earned by the government. In that case dividends, we talk we know what dividends are these are profits that are paid out to stockholders. So when the corporate corporation earns profit, pay some of it to the stockholders, well, those stockholders are getting a dividend there and lastly what they don't distribute the undistributed profits. We call them retained earnings in accounting. That's the general name is retained earnings because they're retained by the corporation to reinvest in the corporation. But they're all profits, right? The taxes which are going to the government, the dividends going to the stockholders or the undistributed ones being held by the corporation. It's all profit. They're included in national income. Remember we're calculating GDP here still, this is all a calculation of GDP, we're adding up all the different sources of income in the nation. Finally, is the taxes on production and imports. So this is just general taxes that are levied by the government. While the government is making income, the government is a body in our in our economy and they're earning income. So it's included in our national income. Okay, And these taxes um what do we say here are including GDP income because government purchases are in GDP expenditures. Remember the expenditures approach the government purchases are included. So naturally the government income is included in the income approach. Okay, so that is how we calculate national income. And then we're gonna adjust it. There's a few adjustments that we make that get us to final GDP. So let's go through these adjustments first. We take our national income and we adjust it first for net foreign factor income. Because when we think about GDP, we're thinking about domestic income. However, there's dealing with foreign people that is that uh foreign citizens that is going to influence this calculation first. We must remove the income earned by americans from supplying services abroad, right? Because we're thinking about domestic gross domestic product. So if they're supplying resources abroad, that's not domestic, that's that's happening abroad. And then we must add income earned by foreigners. So remove income of americans abroad and add income of foreigners. That is domestic, right? If they're earning income in the United States, well, that should be in gross domestic product because it's happening here in the US. So that's the first adjustment where we deal with foreigners, we have to deal with the foreign income. Um Our income, U. S. Citizens overseas and foreign citizens happening here next is consumption of fixed capital. So like we talked about with rental income depreciation, there's gonna be some depreciation on our long term assets. And we're gonna have to adjust our national income for that depreciation. And finally everyone's favorite a statistical discrepancy. We've got a little bit of an error here. Let's just call it a discrepancy and move on. Right? Remember that expenditures have the equal income, right expenditures, equal income in the ideal idea of this right? We're gonna have, everything gets spent is earned by someone else. So whatever we come up with from the expenditures approach should equal the income approach. Alright, let's take a quick pause here and then on the next page, we're going to take a look at the United States GDP calculation from both approaches.
Comparison of U.S. GDP Calculation
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Alright so here we have a calculation of the G. D. P. For the United States in 2009. Based on the expenditures approach on the left and the income approach on the right. So notice that at the bottom we reached the same final number 14,256 and that was the G. D. P. During that year. Now this is in billions notice we're talking about in billions so we're gonna add a whole bunch of zeros after that. We're talking about nine zeros after all of these numbers. But let's go ahead and go through each one. Notice on the left, we're going through our consumption. Uh Excuse me. Our expenditures approach we start with consumption which is the biggest part of expense of expenditures. Yeah. Is consumption then we add investment gross our government purchases C. Plus I plus G. Plus net exports. And notice for the United States it's negative. Right? And why is it negative because imports exceed exports? We are running a a trade deficit So we're gonna have a negative number there. And remember net exports is just exports minus imports. So if those imports are bigger we're gonna have a negative number there. Okay so we have a trade deficit because we import more stuff than we export. So we just add those four numbers and we get to our gross domestic product. There we go 14,000 to 56. Let me get out of the way here let's look at the income approach on the right. So the first thing we wanna do is calculate national income. Like we talked about on the previous page, we're gonna add up all the compensation. So remember compensation of employees, that's the biggest portion here. Notice how it's the biggest one and then we add everything else. We've got the rents, the interest proprietor income, corporate profit and taxes on production and imports. That gets us the total national income and then we make our adjustments. We've got our foreign factor income, our consumption of fixed capital or depreciation there and finally our statistical discrepancy, Hey, we made it, we got to make these things equal out. So let's go ahead and use 209. Let's plug that in there so that everything works and looks pretty here. 14,000 to 56 equals 14,000 to 56. The main main takeaway. Remember expenditures, equal income. Okay, that's that's the idea here that expenditures are gonna equal income. Now, like I said at the beginning of the video is that you're not gonna have to spend too much time on the income approach. Generally you're gonna focus on the expenditure approach and focus on this consumption plus investment plus government purchase plus net export throughout this course. Okay, Now some teachers like to go through this and compare the two, but that's because the main takeaway here is that those expenditures equal income. Cool. Alright, let's go ahead and move on to the next topic