How to Calculate GDP With the Income Approach
The income approach finds GDP by adding wages, rent, interest, and profit, then adding depreciation and taxes on production.
The GDP Income Approach formula
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Add wages, rent, interest, profit, taxes on production and depreciation to reach GDP from the income side.
Wages, salaries and fringe benefits paid to workers.
The return to land and property.
The return to financial capital supplied by households.
Income from unincorporated businesses.
The return to entrepreneurship in incorporated firms.
Sales and excise taxes sit inside the market price but are never earned as factor income.
Consumption of fixed capital, built into price but paid to no resource owner.
The income side totals $22,000 billion, which should match the expenditure total apart from the statistical discrepancy.
- Factor income (national income)
- $17,000
- Taxes and depreciation added
- $5,000
- Net domestic product
- $18,600
- Labor's share of GDP
- 50%
- Largest income component
- Compensation of employees
Wages, rent, interest and profit come to $17,000 billion, which is national income.
These sit in the market price of output but are never earned by a resource owner, so they must be added back.
GDP once depreciation is stripped back out.
How much of the value of output is paid out as compensation to workers.
Compensation of employees normally dominates the income side.
How to calculate GDP Income Approach, step by step
- 1Add compensation of employees. Wages, salaries, and fringe benefits paid to workers.
- 2Add rent, interest, and profit. Rental income, net interest, proprietors' income, and corporate profits, the returns to land, capital, and entrepreneurship.
- 3Add depreciation. Consumption of fixed capital is built into the price of output but is not paid out to any resource owner.
- 4Add taxes on production and imports. Sales and excise taxes sit inside the market price of output, so they belong in GDP even though firms never earn them.
- 5Reconcile with the expenditure total. The two approaches should agree, and any small gap is reported as the statistical discrepancy.
Worked example: GDP Income Approach
Compensation of employees is $11,000 billion, rental income $800 billion, net interest $700 billion, proprietors' income $1,700 billion, and corporate profits $2,800 billion, so factor income totals 11,000 + 800 + 700 + 1,700 + 2,800 = $17,000 billion. Adding taxes on production and imports of $1,600 billion and depreciation of $3,400 billion gives GDP = 17,000 + 1,600 + 3,400 = $22,000 billion.
GDP Income Approach questions
Why do the income and expenditure approaches give the same GDP?
Every dollar spent on final output becomes income for someone who helped produce it, so the two sides measure one flow from opposite ends.
Why are depreciation and sales taxes added in?
They are part of the market price of output but are not earned as wages, rent, interest, or profit, so they have to be added back to reach GDP.
What is the statistical discrepancy?
It is the small gap between the two measured totals, caused by imperfect data, and it is reported openly so the national accounts balance.
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