National Spending vs Factor Income Components of GDP

… a core concept in Macroeconomic Policy

Click for MRU video

Click for MRU video

Concept description

This concept addresses how GDP is analyzed and used to study a country’s economy using two approaches for analysis: national spending and factor income.

In introducing his video (reference below and link to right) Alex Tabarrok says:

“You’ll see GDP from both sides of the ledger: the spending and the receiving side. With the national spending approach, you’ll see how gross domestic product is split into three categories: consumption goods bought by the public, investment goods bought by the public, and government purchases. You’ll also learn how to avoid double counting in GDP calculation, by understanding how government purchases differ from government spending, in terms of GDP.

“After that, you’ll learn the other approach for GDP splitting: factor income. Here, you’ll view GDP as the total sum of employee compensation, rents, interest, and profit. You’ll understand how GDP looks from the other side – from the receiving end of the ledger, instead of the spending end. Finally, you’ll pay a visit to FRED (the Federal Reserve Economic Data website) again. FRED will help you understand how GDP and GDI (the name for GDP when you use the factor income approach) are used by economists in times of economic downturn.”

National spending approach

This approach rests on the following identity:

GDP = Consumption + Investment + Government + Exports – Imports

It is important to remember that in this formulation, Government refers to Government Purchases, and not to total Government Spending, which includes transfers to people and firms that are then spent on consumption, investment and imports.

Factor income approach

Because one can look at GDP as total receiving as well as total spending, the factor income approach rests on the following identity:

GDP = Compensation + Rent + Interest + Profit

Tabarrok notes that in practice there are some complex accounting issues such as what to do about sales taxes. He also notes that when measuring the factor incomes the term Gross Domestic Income (GDI) is sometimes used, and that because of measurement issues, the measured GDI can differ somewhat from measured GDP.

MRU practice questions

See http://www.mruniversity.com/node/329132, accessed 22 April 2016.

  1. True or False: Government purchases includes all of the following: social security payments, government employee wages, and tanks purchased by the government.

Source

Alex Tabarrok, Splitting GDP, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-macroeconomics/gdp-national-spending-factor-income-approach, accessed 22 April 2016.

Atlas topic and subject

The Study of Macroeconomics (core topic) in Macroeconomic Policy.

Page created by: Ian Clark, last modified on 22 April 2016.

Image: Alex Tabarrok, Splitting GDP, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-macroeconomics/gdp-national-spending-factor-income-approach, accessed 22 April 2016.