1. Discuss the difference between the expenditure approach to GDP and the income approach to GDP.

GDP may be measured either by the expenditure approach or the income approach. The expenditure approach simply adds up all the expenditures on final goods and services. In its basic form, it combines four categories of expenditures: Consumption expenditures by households; investment expenditures by businesses; government purchases of goods and services; and foreign purchases of goods and services.

The income approach to GDP adds up all components of income that arise from producing final goods and services. This number should add up to the same number found in the expenditure approach. It adds up wages, rents, interests, profits, and then is statistically adjusted to balance with the expenditure approach.

2. How will the experimental measure being consider by the Bureau of Economic Analysis change the breakdown or allocations in the income approach to GDP?

2. Since the income approach finds GDP by adding up the components of income, the experimental approach being tested by the Bureau of Economic Analysis will change the proportions of income reported as wages and profit. Reclassifying research and development expenditures as capital investment will increase the proportion of national income going to profit and decrease the amount going to workers as wages.

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