Incomes from GDP
The alternative way to break down GDP is to consider the incomes that production of output generates. The largest of these is in the form of employee compensation. The major part of this category is pre-tax wages and salaries, but it also includes employers' payments into the Social Security program and some other items. As the table indicates, compensation of employees has been the largest type of income that is generated in production for as long as data have been collected.
A second, obvious item in computing GDP by looking at incomes is corporate profit. Corporate profit includes the amounts that corporations pay in the form of the corporate income tax, the amounts they pay stockholders in the form of dividends, and the amounts they "save" or retain within the business.
The category proprietors' income captures a class of income that falls between wages or salaries and profits. It is the amount that those who are in business for themselves, but who have not incorporated their businesses, earn. The amount that the owner of a cafe or a farm earns in a year is often considered by the owner of the business as a "profit," yet most of that "profit" is a payment to the owner for his labor. Because it is difficult or impossible to separate the part of this income that is truly a wage to the owner from that which is actually a profit, the folks at the Commerce Department who collect the numbers keep it in the separate account of proprietors' income.
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Compensation of Employees |
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Corporate Profits |
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Proprietors' Income |
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Rental Income |
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Net Interest |
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National Income |
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Indirect Business Taxes and Misc. |
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Net National Income |
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Capital Consumption Allowance |
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Gross National Product |
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(Net Factor Income from Abroad) |
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GDP |
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Sources: Survey of Current Business, August 2001; <www.bea.gov/bea/dn/nipaweb/TableViewFixed.asp>, Tables 1.1, 1.9 and 1.14. |
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The major part of rental payments to persons is in the form of imputed rent of owner-occupied housing. Imputed rent estimates how much rent people who own their homes would pay if they had to pay rent, and assumes that they then pay this amount to themselves. This is the major class of non-market production that GDP includes. The production that housewives contribute in the home is not counted, crops grown for home use in a vegetable garden are not counted, and home repairs that a person does for himself are not counted. In all these cases there is production of goods or services and these goods and services could be purchased in the market. They are not included because estimating their value is too difficult. The Commerce Department does not believe that it is as difficult to estimate the services that a home provides, so does count the value of these services. Also included in rent are royalties and income that comes from the ownership of patents.
The payment of interest includes interest that businesses pay as part of the expense of operating less the amounts businesses receive as interest. Thus this category includes only interest that the business sector as a whole pays out. This category does not include the interest that consumers pay because it is not considered as a payment stemming from the production of output, nor does it include interest that the government pays on its debt. Government interest payments are seen as transfers because no output is produced that the interest supports. In contrast, when General Motors pays interest, this interest is a payment for funds used to purchase machines or other assets necessary to carry on the business.
Adding up these five categories give us National Income, the income that resources earn in the process of production. However, there are additional payments made. Though no services are rendered for it, there is another class of "income" to which production gives rise. This is the class of indirect business taxes, the most important parts of which are sales and excise taxes. This item must be included to make the expenditure or use side equal the income side. A sales tax causes the amount that consumers pay to exceed the amount that businesses receive. Although not a true income because it is not a payment for services, it is part of the value of final output. Adding indirect business taxes and several small items, we arrive at Net National Product or NNP.
The biggest difference between NNP and GDP is Capital Consumption Allowance, which is a measure of depreciation. In the course of producing goods and services, some of the existing capital stock is used up. Factories, trucks, computers, and drill presses all have limited lives and the use of these items uses up some of their lives and thus their value. The concept of depreciation can be explained by a simple example. Suppose a farmer plants 100 bushels of seed and harvests 10000 bushels. His gross harvest is 10000 bushels, but his net harvest is only 9900. If he had planted nothing, he would have had 100 bushels of grain, so he gains only 9900. Part of his cost is the using up of 100 bushels of seed.
You might at this point decide that a better measure of what the economy produces would be to subtract the capital consumption allowances from GDP and use the net figure. While the NDP does make more sense as a measure of the economy's output, economists prefer not to use it because the capital consumption allowance is less reliable than the data used to calculate GDP. Since NNP is computed by subtracting the capital consumption allowances from GDP, it will be a less reliable number than GDP. In addition, depreciation is not as quickly available as are the rest of the data needed to give a good estimate of GDP, so NNP numbers are announced later than GDP figures. In the tradeoff between reliability and theoretical attractiveness, economists have chosen reliability.
Adding the capital consumption allowance to NNP gives Gross National Product or GNP. It differs from GDP because GDP measures the production that occurs within the national boundaries while GNP measures the production attributable to the people who live within those boundaries. If a person in the United States owns a profitable factory in Mexico, the profit counts in US GNP but not in US GDP. To get to GDP we subtract from GNP Net Factor Incomes from Abroad. This item includes payments to Americans who own resources in the rest of the world less payments to foreigners who own resources in the United States.
If you want more details of these data, you need to go to the source, which is what you will be asked to do it you click the Explore button below.
We have gone from National Income to GDP, but the economists who put together the GDP figures know how to break it down into a whole lot of other categories.
Copyright Robert Schenk
