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AD-AS ANALYSIS: An economic model relating the price level and real production that is used to analyze business cycles, gross domestic product, unemployment, inflation, stabilization policies, and related macroeconomic phenomena. The AS-AD model, inspired by the standard market model, captures the interaction between aggregate demand (the buyers) and short-run and long-run aggregate supply (the sellers).

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GROSS DOMESTIC INCOME:

The total market value of all final goods and services produced within the political boundaries of an economy during a given period of time, usually a year, as calculated using the income approach to measuring gross domestic product. Gross domestic income (GDI) is virtually identical to gross domestic product (GDP), with one minor difference, the statistical discrepancy. As a matter of fact, the statistical discrepancy is calculated as the difference between GDP and GDI.
The good folks at the Bureau of Economic Analysis who maintain the National Income and Product Accounts actually measure gross domestic product in two different ways. The first way from the demand side of market transactions, in which total expenditures (consumption expenditures, investment expenditures, government purchases, and net exports) on production are identified. The second way is from the supply side of the market transactions, in which the income earned by resources (which are the costs of production) are identified.

The expenditure method leads to gross domestic product. The income method leads to gross domestic income. In a perfect world, where every calculation is accurate, no mistakes are made, and all production and income are correctly identified, gross domestic product and gross domestic income are EXACTLY equal. But in the imperfect real world, there is almost always a discrepancy between these two measures. This discrepancy is generally quite small, less than 1 percent of GDP.

Two Sides of the Market

Every market exchange is a two-way process. The buyer trades money for a good. The seller trades a good for money. The market exchange, and the value of the good traded, can be identified from either side of the market--from the expenditure made by the buyer or from the income received by the seller.

The overall value of production, which is what GDP seeks to measure, is determined mutually by buyers and sellers through such market exchanges. On one side of market exchanges is the suppliers, producing and selling goods. On the other side is demanders, purchasing and using goods. For each good sold, someone buys. For each good bought, someone sells. The number crunchers at the Bureau of Economic Analysis use this two-sided notion to derive a relatively accurate estimate of total production (that is, gross domestic product) using total income.

To illustrate, consider the purchase of a Hot Momma Fudge Bananarama Ice Cream Sundae by Duncan Thurly for $2. His demand-side of the transaction involves giving up $2 and getting (and presumably enjoying) a Hot Momma Fudge Bananarama Ice Cream Sundae. However, from the supply-side of this transaction, the Hot Momma Fudge Bananarama Ice Cream Shoppe receives the $2 in payment for producing the Hot Momma Fudge Bananarama Ice Cream Sundae. If the store does not produce, then Duncan does not buy. And if Duncan does not buy, the store does not produce.

As such, a reasonable estimate of Hot Momma Fudge Bananarama Ice Cream Sundae production can be derived by adding up the revenue received by the Hot Momma Fudge Bananarama Ice Cream Shoppe and how the revenue becomes income of the productive resources. This is gross domestic income, which in principle is equal to gross domestic product.

What Makes Up GDI

Gross domestic income (GDI) can be divided into an array of different components. First, consider a summary equation of GDI, then next a more detailed discuss of each item.
GDI=Compensation of Employees + Net Interest + Rental Income of Persons
+ Corporate Profits + Proprietors' Income
+ Capital Consumption Adjustment + Indirect Business Taxes
+ Business Transfer Payments - Net Foreign Factor Income
- Government Subsidies less Current Surplus of Government Enterprises
Now consider each of the components:
  • Compensation of Employees: The official measure of wages earned by the household sector for supplying labor services. It includes standard wages and salaries paid directly to employees, as well as fringe benefits paid on behalf of employees to third parties.

  • Net Interest: The official measure of interest earned by the household sector for supplying capital services. It is revenue generated from borrowed funds but is considered payment for the productive services of capital.

  • Rental Income of Persons: The official measure of rent earned by the household sector for supplying land and related services. It includes payments for the use of land, natural resources, and capital goods attached to the land.

  • Corporate Profits: The total accounting profits received by corporations, which is the official measure of profit earned by the household sector for supplying entrepreneurship services through corporations.

  • Proprietors' Income: The excess of revenue over explicit production cost of owner-operated businesses which includes payments to all factors of production--labor, capital, land, and entrepreneurship.

  • Capital Consumption Adjustment: The portion of revenue set aside by the business sector to compensate for the depreciation of capital resulting from the production of final goods.

  • Indirect Business Taxes: The official term for sales taxes. They are termed INDIRECT business taxes because the business sector is only acting as the "collection agency" for the government, collecting the taxes from the household sector.

  • Business Transfer Payments: Subsidies, or gifts, made from the business sector to the household sector. It includes outright gifts (such as student scholarships), and more importantly, accounting adjustments for unpaid debts of the household sector.

  • Net Foreign Factor Income: The difference between factor payments received from the foreign sector by domestic citizens and factor payments made to foreign citizens for domestic production is termed net foreign factor income. This is also the key difference between gross DOMESTIC product and gross NATIONAL product.

  • Government Subsidies Less Surplus of Government Enterprises: Government subsidies are transfer payments from the government sector to the business sector which are NOT payments for current production. These subsidies are adjusted by the current surplus of government enterprises, which is the "profit" of government run business activities.
As suggested by the number of items presented here, calculating gross domestic income is very much a bottom-up approach. In essence, the measurement of GDI is based on identifying the individual expenses incurred by the business sector in the production of good and services.

The first five items listed are the factor payments that make up national income. The next five items reflect differences between gross domestic product and national income. Of course, the only adjustment item NOT included in this list is the statistical discrepancy.

The Statistical Discrepancy

In principle, gross domestic product SHOULD be exactly equal to gross domestic income. In reality, these two measures do not yield identical results. They should, but they do not. The statistical discrepancy is used to ensure that everything balances. It is the official adjustment factor in the National Income and Product Accounts that ensures equality between the gross domestic product and gross domestic income and it is usually relatively small, less than 1 percent of gross domestic product.

The statistical discrepancy is officially "added" to gross domestic income when calculating gross domestic product, but the actual value can be positive or negative. The value of the statistical discrepancy is whatever it needs to be to equate the income and expenditure approaches to measuring gross domestic product.

This equation summarizes the connection between gross domestic product (GDP), gross domestic income (GDI), and the statistical discrepancy (SD):

GDP=GDI+SD

<= GRAPHICAL ANALYSISGROSS DOMESTIC PRODUCT =>


Recommended Citation:

GROSS DOMESTIC INCOME, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 21, 2017].


Check Out These Related Terms...

     | compensation of employees | net interest | rental income of persons | corporate profits | proprietors' income | personal income | disposable income | net domestic product | capital consumption adjustment | indirect business taxes | net foreign factor income | business transfer payments | government subsidies less current surplus of government enterprises | statistical discrepancy |


Or For A Little Background...

     | gross domestic product | gross domestic product, income | gross domestic product, expenditures | national income | circular flow | production | resource markets | National Income and Product Accounts | Bureau of Economic Analysis | National Bureau of Economic Research |


And For Further Study...

     | business cycles | gross domestic product, ins and outs | gross domestic product, welfare | gross national product | real gross domestic product | national income and gross domestic product | national income and net domestic product | personal income and national income | disposable income and personal income | aggregate market | Keynesian economics |


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