The Income Approach (LM 6 Part 2)

Profits and Losses

Entrepenurial Ability -Proprietors Income -Capital Income *Profits are the second highest part of National Income, with labor being the first

GDP Income Approach Calculation

GDP = National Income + Indirect Business Taxes + Net Foreign factor income + depreciation

Wages

(labor) labor compensation dominates national income. Historically, labor compensation has been approximately two-thirds of total income—which makes sense, given that consumption is also approximately two-thirds of total expenditures. Since 1950, labor compensation's share of income has risen and then fallen back to around 60%. Notice also that wages are now a lower proportion of labor compensation, mainly due to the increasing importance of employer-provided health care insurance.

The Income Approach

Calculation of GDP through the determination of the national income Measures the values of all final goods and services in an economy using the income they generate

Interest

Capital

National Income

Total payments to owners of resources plus profits and losses; the sum of rent, wages, interest, and profits and losses to sole proprietors and firms

Rent

Land

National Income Formula

National Income = Rent +Wages + Interest + Profits and Losses

Propreiters Income

Profits and losses earned by individual proprietors.

Capital Income

Profits and losses of corporations (as opposed to those of individual proprietors).

Four types of Income

Rent (land) Wages and Benefits (labor) Interest (Capital) Profits and Losses (Entrepenurial Ability)

Indirect Business Taxes

Taxes paid by businesses, such as property taxes, sales taxes, excise taxes, license fees, and tariffs. These taxes are paid by firms and then are passed on to consumers as part of the price of the good or service produced. Indirect business taxes are differentiated from corporate income taxes on business profits.

Net foreign factor income

The difference between payments received from resources owned in foreign countries and income earned by people in foreign countries from resources owned domestically

The Income Approach Summary

The income approach to calculating GDP measures the value of all final goods and services in an economy using the income they generate. National income is the sum of wages (and other labor compensation), rent, interest, and profits. The final numbers will be the same in the income approach and in the expenditures approach (income will equal expenditures). But the income approach provides a different perspective on the economy. The expenditures approach tells us "who bought what." The income approach tells us "who earned what." Most of national income goes to pay labor, either as wages or as other benefits like health insurance.