Under the income approach, gross domestic product (GDP) is the sum of all income received by the owners of the factors of production. The factors of production consist of labor, capital, land, and entrepreneurship. Workers receive wages and benefits. The capital owners get the interest, the landowner receives rent. Finally, the entrepreneur receives a portion of the profits.
Please remember, economic actors, involve three sectors: government, households, and government. Hence, we can interpret GDP as the sum of the income received by the three sectors in the economy over a certain period.
Meanwhile, the income approach GDP formula at market prices is as follows:
GDP = national income + capital consumption allowance + Statistical discrepancy
National income consists of:
- Employee compensation, including wages and benefits such as insurance and pensions.
- Profit before tax received by the company.
- Interest income
- Earnings of business owners.
- Indirect business taxes minus subsidies.
Allowance for capital consumption is a minimum investment by businesses to maintain current production levels. That is the same as the depreciation of capital stock.
You need to underline. We also include discrepancy statistics in the formula. This is to equalize the final numbers of two other approaches in calculating GDP:
- Output/production approach
- Expenditure approach
In reality, all three could produce unequal numbers. It was not because of the wrong concept, but because of inaccurate data sources and calculation methods.