Q:

How do you measure GDP in income and expenditures?

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Quick Answer

The income approach to calculating GDP measures the total amount paid to produce goods and services, while the expenditure approach to calculating GDP measures the total amount spent purchasing goods and services, according to Investopedia. In theory, the GDP should be the same regardless of which approach is employed.

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Full Answer

The expenditure approach adds together four components to determine GDP: consumption (C), investment (I), government spending (G) and net exports (x-m), explains Investopedia. Consumption includes all personal consumption of durable and non-durable goods. Investment includes all gross private investment. Government includes all government spending, from office supplies to major capital projects such as highways. Net exports are calculated by subtracting the nations imports from its exports. The formula is written C + I + G + (X-M) = GDP, in which X represents exports and M represents imports.

In contrast, Investopedia notes that the income approach adds together pay for labor, including wages and self-employment; pay for the use of fixed resources, such as land and buildings; pay in the form of return on capital, such as interest; pay for the replenishment of raw materials; and business cash flow, including profits. The formula is written: wages + self-employment income + rent + interest + profit + indirect business taxes + depreciation + net income of foreigners.

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