Factor Income Approach

The factor income approach, or simply income approach, measures gross domestic product (GDP) by adding up employee compensation, rent, interest, and profit.

But wait! Didn’t a previous video state that GDP is the market value of finished goods and services? So why would we use income to calculate GDP?

The idea is that when consumers are spending money on those finished goods and services, that spending is received by someone else as income. We’re basically just looking at the other side of the ledger when we measure GDP using income.

When using the factor income approach, the number we come up with can also be called gross domestic income (GDI). GDI and GDP are very close, but there may be a small difference in the final number.