capital, rent for land, and profit for entrepreneurship. We divide the incomes into two
•Wages, salaries, and supplementary labor income.
•Other factor incomes.
-Wages salaries and supplementary labor income is the payment for labor services. It
includes gross wages plus benefits such as pension contributions.
-Other factor incomes include corporate profits, interest, farmer’s income, and income
from non-farm unincorporated businesses. These incomes are a mixture of interest, rent
and profit and include some labor income from self-employment.
-an indirect tax is a tax paid by consumers when they buy goods and services(In contrast
to direct tax which is a tax paid on income.) An indirect tax makes the market exceed
-A subsidy is a payment by the government to a producer. With subsidy, factor cost
exceeds market price. To get from factor cost to market price, we add indirect taxes and
subtract subsidies. Making this adjustment brings us to net domestic income at market
-Net domestic income at market prices is a net income measure because corporate
profits are measured after deducting depreciation. They are a net income measure. To
get from net income to gross income, we must add depreciation.
-The gap between the expenditure approach and the income approach is called the
statistical discrepancy and is calculated as the GDP expenditure total minus the GDP
- The formula for income approach is as followed:
Wages salaries, and supplementary labor+other factor incomes=net domestic factor at
cost+indirect taxes less subsidies=net domestic income at market
prices+depreciation=GDP income approach.
Nominal GDP and Real GDP
-Real GDP is the value of final goods and services produced in a given year when
valued at the prices if a reference base year.
-Nominal GDP is the value of final goods and services produced in a given year when
valued at the prices of that year. Nominal GDP is just a more precise name for GDP.
-Economists use estimates of real GDP for two main purposes:
•To compare the standard of living over time
•To compare the standard of living across countries
-The Real GDP per person can tell us long-term trends and the short-term cycles in the
standard of living over time.
-Potential GDP is the maximum level of real GDP that can be produced while avoiding
shortages of labor, capital, land and entrepreneurial ability that would bring rising
-Fluctuations around real GDP per person and sometimes-real GDP per person shrinks.
-The fluctuations in the pace of expansion of real GDP is referred to as the business
-The business cycle isn’t a regular predictable cycle like the phases of the moon, but
every cycle has two phases: