Question

Which approach to measuring the GDP is based on the accounting reality that all expenditures in an economy should equal the total income generated by the production of all economic goods and services.

• A. Income Approach
• B. Production Approach
• C. Expenditure Approach
• D. None of the Above

Answer 1

The correct option is A Income Approach

<!--td {border: 1px solid #ccc;}br {mso-data-placement:same-cell;}--> The income approach calculates the income earned by all the factors of production in an economy, including the wages paid to labor, the rent earned by land, the return on capital in the form of interest, and corporate profits.

The income approach factors in some adjustments for those items that are not considered payments made to factors of production. For one, there are some taxes—such as sales taxes and property taxes—that are classified as indirect business taxes. In addition, depreciation—a reserve that businesses set aside to account for the replacement of equipment that tends to wear down with use—is also added to the national income. All of this together constitutes a nation’s income.