WEBVTT

00:00:00.186 --> 00:00:03.884
♪ [music] ♪

00:00:13.238 --> 00:00:15.620
- [woman] What is
the "factor income approach"?

00:00:16.066 --> 00:00:20.185
It describes one approach
to calculating GDP through income.

00:00:20.475 --> 00:00:22.686
Also known
as the "income approach,"

00:00:22.686 --> 00:00:25.456
the factor income approach
measures GDP

00:00:25.456 --> 00:00:30.316
by adding up employee compensation,
rent, interest, and profit.

00:00:30.793 --> 00:00:32.943
Now this may seem a little bit odd.

00:00:33.185 --> 00:00:34.395
Didn't we define GDP

00:00:34.395 --> 00:00:37.474
as the market value
of final goods and services?

00:00:37.676 --> 00:00:39.891
How can we measure it
by looking at incomes?

00:00:40.442 --> 00:00:42.662
The reason is that
when a consumer spends money

00:00:42.662 --> 00:00:44.643
on final goods and services,

00:00:44.643 --> 00:00:47.147
that money ultimately
is received by someone --

00:00:47.397 --> 00:00:52.160
namely by workers, landlords,
lenders, and entrepreneurs.

00:00:52.655 --> 00:00:55.564
So we can measure GDP
by looking at the spending

00:00:56.114 --> 00:00:59.394
or the other side of the ledger --
by looking at the receiving.

00:00:59.816 --> 00:01:02.752
Now, in practice, there are
some tricky accounting issues,

00:01:02.752 --> 00:01:05.986
such as what to do
about sales tax and depreciation,

00:01:06.228 --> 00:01:08.249
but we're going to leave that
to the accountants.

00:01:08.455 --> 00:01:11.256
The basic idea here
is that we can compute GDP

00:01:11.256 --> 00:01:13.788
by looking at the spending
or the receiving,

00:01:14.100 --> 00:01:15.709
and, in fact, we do both.

00:01:15.996 --> 00:01:19.212
When we calculate GDP
by the factor income approach,

00:01:19.212 --> 00:01:23.163
by adding up employee compensation,
rent, interest, and profit,

00:01:23.494 --> 00:01:26.723
we call it "gross domestic income,"
or GDI.

00:01:27.195 --> 00:01:28.584
Why the different name?

00:01:28.845 --> 00:01:32.987
Well, in theory, GDP and GDI
are exactly equal.

00:01:33.276 --> 00:01:35.945
But since they're calculated
in very different ways,

00:01:36.218 --> 00:01:38.588
they usually give
slightly different results,

00:01:38.588 --> 00:01:40.006
hence the different names.

00:01:40.243 --> 00:01:42.215
Let's take a look
at the FRED database.

00:01:42.684 --> 00:01:45.446
Here we graphed GDP and GDI.

00:01:45.877 --> 00:01:47.455
Hard to see a difference, right?

00:01:47.719 --> 00:01:49.973
But zoom in a little bit, however.

00:01:49.973 --> 00:01:52.560
We can now see
that they're not perfectly identical,

00:01:52.825 --> 00:01:55.885
and in a recession, economists
often look at both figures

00:01:56.151 --> 00:01:58.215
since one of them
might sometimes give us

00:01:58.215 --> 00:02:01.737
an earlier or more accurate picture
of the economic situation.

00:02:02.241 --> 00:02:04.672
Keep in mind, however,
the key idea.

00:02:04.875 --> 00:02:07.504
We can split or measure GDP
in many different ways,

00:02:07.504 --> 00:02:09.370
depending on the questions
we're asking.

00:02:09.625 --> 00:02:11.750
Regardless of what
we choose to measure,

00:02:11.750 --> 00:02:15.928
GDP is always the market value
of all finished goods and services

00:02:15.928 --> 00:02:18.873
produced within a country in a year.

00:02:20.649 --> 00:02:23.456
If you want to learn more
about GDP, click here.

00:02:24.033 --> 00:02:26.824
Or, if you want to test yourself
on the factor income approach,

00:02:26.824 --> 00:02:27.846
click here.

00:02:28.067 --> 00:02:30.235
♪ [music] ♪

00:02:30.485 --> 00:02:31.504
Still here?

00:02:31.504 --> 00:02:34.907
Check out Marginal Revolution
University's other popular videos.

00:02:35.195 --> 00:02:38.805
♪ [music] ♪