15 Income Approach
While in the Expenditure Approach, the value of GDP was measured by the expenditures of households, firms, governments, and foreigners on goods and services, whereas in the Income Approach, the value of GDP is measured by the earnings of the factors of production.
- Labor earns wages
- Capital earns interest
- Land earns rent
- Entrepreneurship earns profit
Households receive wages, capital, interest, rent, and profit as income, depending of what factors of production they own. (1)
The income approach measures GDP using several steps:
- The income approach starts with the sum of wage income plus interest, rent, and profit income. This sum equals net domestic income at factor cost .
- To change the measure from factor cost to market price, indirect taxes less subsidies are added because these are government taxes and transfers that affect market prices.
- The next step adds depreciation , the decrease in the value of capital that results from its use and obsolescence. (1)