Income Approach to GDP
The ability to engage in consumption, investment, government spending, and net exports derives from the income earned producing domestic output. Again, income includes all of the rent, wages, interest, and profits earned by selling the factors of production in the factor market. Measuring income is more complex than measuring spending, and this requires some mental gymnastics on the part of economists. One reason is that profits flow to corporations, shareholders, and proprietors. Also, taxes and subsidies distort the difference between the price paid in the market and the income earned by producers. In the end, measuring income is a bit more complex for economists than measuring expenditures, but for now it is sufficient to conclude that income equals the sum of rent, wages, interest, and profits. Let the economists at the BEA fret over the details. One last practical problem arises when measuring income versus spending. Producers and households have an incentive to underreport income in order to reduce their tax liability.