Question

Discuss the difference in calculating GDP using the expenditure approach and income approach. Be specific; do not just write the formula

Answer 1

The main difference between the expenditure approach and the income approach is their starting point. The expenditure approach begins with the money spent on goods and services. Conversely, the income approach starts with the income earned from the production of goods and services (wages, rents, interest, profits).

There are many ways to measure the total output of economy. The two most commonly used methods to measure GDP are Expenditure Approach and Income Approach

Expenditure Approach

The expenditure approach includes sum total of consumer spending, government spending, business investment spending and net exports.Infact the resulting GDP is same as aggregate demand

Formula

Y = C + I +G + (X-M)

Y = GDP

C = Consumer spending on goods and services

I = Investment on capital goods

G = Government Spending

X = Exports

M = Imports

Income Approach

It takes into account the final income of the economy.It includes total of

wages, salaries, and supplementary labor income; corporate profits interest and miscellaneous investment income; farmers’ income; and income from non-farm unincorporated businesses. Two non-income adjustments are made to the sum of these categories to arrive at GDP:

Indirect taxes minus subsidies are added to get from factor cost to market prices.

Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product

This method is based on the fact that all expenditures in an economy should equal the total income generated by the production of all economic goods and services.