Question

Explain the expenditure and income approaches to tabulating GDP.

Short answer

The money spent on products and services is the starting point for the expenditure approach. The income approach, on the other hand, begins with the revenue generated by the production of goods and services (wages, rents, interest, and profits).

Step-by-step solution

Content Introduction

The expenditure method seeks to compute GDP by summing all final goods and services purchased in a given country. The income approach considers the country's final income.

Content Explanation

The income approach compares a country's overall output to the total factor income obtained by its population or citizens. The following are the most common types of factor income:

Employee remuneration (costs of ancillary benefits such as unemployment, health, and retirement);

Interest earned after interest paid is deducted;

Net of landlord expenses, rental income (mostly for the use of real estate);

Royalties are fees paid for the use of intellectual property and natural resources that can be extracted.

The expenditure method is essentially a technique of output accounting. It focuses on determining a country's overall output by determining the total amount of money spent. The basic formula for calculating domestic output takes all of the different areas where money is spent within a region and then adds them together to get the overall production.