The Income Approach I

The income approach is one way to measure Gross Domestic Product or GDP.

While the expenditure approach tracks all expenditure in the economy, the income approach recognizes that someone ultimately receives these expenditures, so it measures GDP in terms of who receives this income.

Understanding this approach requires starting with the concept of national income.

National Income is the sum of eight types of income. This lesson focuses on three of them.

One key component is the Compensation of employees, which refers to the income workers receive from firms and the government.

This income includes wages and salaries and supplements to wages and salaries.

The employer's contributions to the employees' pension fund are an example of a supplement to wages.

The next component is the Proprietor's income. It is the income of non-incorporated self-employed. For example, a doctor's earnings from running their clinic fall into this category.

Another component is the Rental income of persons. It represents the earnings individuals receive in the form of rent.

These three components represent some of the key sources of earnings in the U.S. economy and contribute to the broader national income.