Question

Identify and briefly discuss the components of the demand approach, the supply approach, and the income approach. You may choose to create a graphic or to type out your answer. Whatever method you decide to depict the 3 measurement approaches, be sure to address the individual components of each.

Answer 1

1) Components of demand approach -

Consumption spending (C) - Consumption spending is the major component while calculating aggregate demand. Consumer spending depends on consumer confidence in future growth, interest rate, assets or wealth that the consumer holds etc. Consumption spending is the main reason for economic growth.

Investment (I) - Investment made by companies increases demand through purchases made by these companies to meet consumer demand and their want to expand business to meet these consumer demand.

Government spending (G) - State and federal government's buying and spending activities increase demand thoroughly. They spend money to provide public goods and services, pay transfer payments, unemployment benefits etc. They also spend to recover an economy during recession.

Net export (NX) - Net export i.e. export minus import is another important factor of demand. Positive net export ( i.e. export greater than import) increases demand because it creates internal demand. When goods of a country is exported outside and there is nothing left for domestic people, it creates internal demand and aggregate demand increases.

2) Components of supply approach -

Aggregate supply is the national income (Y) of a country. Two major components of national income or aggregate supply are -

a) Consumption - People use a major portion of their income to buy goods or services and it is known as consumption spending.

b) Savings - People save the rest of their income after satisfying their consumption needs.

Since, producers want to meet the money value of final output distributed as rent, wages, interest and profit among factors of production and sum of these four factors income at national level is called national income, Therefore, aggregate supply and national income are same.

3) Components of income approach -

Labor income - This includes salaries, wages, health and other benefits, unemployment insurance, government taxes for social security etc.

Rental income- rental income includes income received by households from renting their property, copyrights and assets, roylities from patents etc.

Interest income - interest received by household for lending their money to corporation, business firms etc.

Profit - The balance that firms have left after paying rent, wages, interest etc. While calculating GDP, only the accounting profit is calculated and not the economic profit.