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# Income and expenditure views of GDP

In this video we explore an alternative method of calculating GDP: the income approach. The intuition behind the income approach is pretty straightforward because every time you spend money, that spending is someone else's income. Learn more about the income approach and its categories: wages, interest, rent, and profit. Created by Sal Khan.

## Want to join the conversation?

• Hi guys, i had a question based from an MCQ from an econ quiz i had today so, ill re-phrase it this way: if i purchase a car from someone else (not a firm and not mentioned whether its a new or an old car) will my expenditure be a part of the GDP or not? and why?
• no, your car was counted when you bought it off of the lot. counting it again would be double counting the car. when you sold your car there are still the same number of cars in the world. You didn't produce a new car so you did not add to GDP.
• the video shows a view that the income is equal to the expenditure of a household ..isnt that too much of a simplification ...what if i save money and then spend ??...then will we have different GDPs??
• This is a very simplified version, the more advanced ones will account for savings
• I have a question! Must total income equal total expenditure?
or will income be less than expenditure because some people don't spend all their income
or will expenditure will be greater than income because people can borrow money
• Total income must match total expenditure in an economy, but differences can arise due to saving or borrowing.
(1 vote)
• Will GDP be same if calculated from both(income/expenditure) model ??
• Technically, yes.
Because both methods represent two different approaches to calculating the same thing (i.e. a country's GDP), their results SHOULD (in a perfect world) be equal. HOWEVER, in practice the results are never equal (but usually pretty close). This happens because, well, measuring GDP is VERY, VERY HARD!

And, as EJON noted, the expenditure approach is often considered more reliable than the income approach.

(There's also a third approach, the "Output" approach--measured as Net Value Added of all business in a country over a given time period--which is usually considered to be the most reliable of the three, but I imagine Khan will mention that in a future video.)
• What is expenditure?
• Spending.
It's as simple as that.

In the next video, Khan will break down GDP into three parts (ignoring imports and exports):
1.) (Private) Consumption
2.) Investment
3.) Government spending
When people refer to total expenditure they are referring to the sum total of all spending (over a given time period) by consumers, investors, and the government.
• How is saving accounted for? If the households save their income does not equal their expenditures.
• Yes, but all of your expenditures are income for somebody else. When you spend money, someone else is getting that money as income. When you receive money as income, then that means that someone else is spending that money on you. So, even though an individual's income may be different from that individual's expenditures, aggregate income is equal to aggregate expenditures.
• Question again! are governmental transfer payments included in GDP and fall under Governmental purchases?
or not included in GDP because goods and services were not produced and transferred.
• GDP in layman terms, is the overall expenditure on all finished goods and services produced in the economy. It's components are Consumer Expenditure, Government Expenditure, Investment and Net Exports. Government transfer payments like a welfare benefit is not included in the component Government Expenditure, because it's final transaction is by the consumer who spends the payment on goods and services. This would fall under Consumer Expenditure, otherwise if you included it in Government expenditure as well, it would be counted twice and this is not prudent.
• Suppose,in an ultra developed country,there is no space or sector left for more growth,then how the country grow its GDP further and why it is a must to grow GDP for that country?
• What would you consider to be ultra developed? Can you imagine the citizens of a country will say, this is just too much money, I cannot spend it all, so I will not try to make more money in the future.

If this ever happens, people will stop thinking about more efficient ways to produce goods and services. This will be the time, when a country will be ultra developed and its economic growth will stop.

I do not thing economic growth will ever stop since people will always want to have more wealth and their creativity will always be there for them to think of new and better ways of creating wealth.

Just think of what we see today. We have such a high standard of living which was unimaginable a few hundred years ago. We still feel we want more.