GDP INCOME APPROACH

We begin first by adding together five sources of income i.e.

1) compensation to employees + 2) net interest + 3) rental income + 4) dividends + 5) proprietors income.

The sum of these give us: Net domestic income at factor cost. However we need to get to Gross Domestic Product at market
prices.

To do so we make the following adjustments:

1) we have to add indirect business Taxes( i.e. vat as this is included in the market prices, but does not go to households or
firms and therefore is NOT part of their factor income) AND
2) we have to subtract subsidies; as this goes directly to firms who produced the goods, but is not included in the market
prices of goods and services.

Once we make those two adjustments we get: Net domestic product at market prices.

However net income domestic income at market prices does not include depreciation. This means that when firms are
distributing income and profits, to those that helped produce the goods and services it is net of depreciation i.e. it has already
been adjusted for depreciation.

Therefore the final adjustment is to go from net to gross domestic product. We do this by ADDING depreciation:

Recall: GROSS Domestic Product at market prices includes gross investment, (i.e. inclusive of depreciation) i.e. purchasing new
physical capital like machinery, trucks, tools etc. to increase capital stock but also to replace our exiting capital
Other National Accounts
 Consumption
NOTE: GDP at Basic Prices =
+ Ig (gross Investment) GDP at market Prices
+G MINUS Taxes on Products
+ Xn PLUS Subsidies on Products

= Gross Domestic Product (GDP (@ market prices)

- depreciation
= Net Domestic Product (NDP)
- indirect taxes
+ subsidies
= Net domestic income at factor cost
- social security contributions
- corporate income taxes
- undistributed corporate profits
+ transfer payments
= Personal Income
- personal income taxes
= Disposable Income (which can be consumed (C) or saved (S)