What adjustments need to be made to go from national income to GDP?
What will be an ideal response?
National income shows the amount of income paid as compensation of employees, rents, interest, proprietors’ income, corporate profits, and taxes on production and income. This amount will be less than GDP, which shows the total expenditures on all final goods and services. To get to GDP, three adjustments must be made to national income. First, there is an allocation for the consumption of fixed capital (depreciation) that must be added. Second, a statistical discrepancy is added. Third, net foreign factor income is subtracted. This net foreign factor income is the difference between what foreign-owned resources earned in the United States minus what U.S-owned resources earn abroad. GDP represents “domestic” production, regardless of whether the domestic production with the United States was foreign or U.S.-owned. So, national income plus consumption of fixed capital, plus a statistical discrepancy, and minus net foreign factor income equals GDP.
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