II.

Compilation of GDP by
income approach

Vu Quang Viet
Consultant to UNSD
 GDP by income approach
• GDP by income approach looks very similar to GDP by production
approach, but they are different.

• Production approach derives GDP by subtracting intermediate

consumption (in purchasers’ prices from output (in basic prices).

GDP = Output – Intermediate consumption + Taxes less subsidies

on products

• Income approach adds components of value added to derive GDP.

Value added = Compensation of employees + Mixed income +

Other taxes less subsidies on production + Gross operating
surplus

GDP = Value added + taxes less subsidies on products

 Types of accounts
Corporations Household Government
sector unincorporated sector / NPISHs
enterprises
sector
Business
accounts (profit
and loss Yes No
statement and
balance sheet)
Revenue and
expenditure Yes
account
 Value added by sectors by direct income
approach
COE Mixed Other net GOS or VA/GDP
income taxes on CFC
production
GOS
Corporations ð ð
CFC only
Households ð ð
CFC only
Market ð ð
Own CFC only
consumption
Owner- CFC only
occupie
d
housing
CFC only
Government/ ð ð
NPISHs

Cannot be directly estimated, must rely on

by production approach
 Limit of income approach
• In principle, even though, income approach
adds components of value added to derive Value added
GDP. at basic prices
=
• In practice, only value added of
corporations and general government can
Compensation
be derived directly. of employees
– Operating surplus of corporations can be
derived from corporations profits after
adjustments for conceptual differences.
– Net operating surplus of government sector is Other taxes
zero. less subsidies
on production

• It is not possible to derive operating surplus

Gross
of household unincorporated enterprises as operating
they do not keep business accounts. surplus
Production approach must be used for
these cases.
 Corporate income statement
Sales or revenues

Sales or revenues
Other income (income from supplementary activities, capital
gains)
Less Cost and expenses
Cost of goods sold
Operating expenses (Intermediate consumption, depreciation,
compensation of employees)
Other expenses (interest payable less interest receivable,
payment of rent and royalties, debt allowances, other current
transfers, etc.)
Equal Net income before income taxes
Less Income taxes
Equal Net income (which is also called profits)
Less Dividends payable
Equal Addition to retained earnings
 Compile gross operating surplus for
corporations (preliminary)
Depreciation
Plus Addition to retained earnings
Plus Dividends payable
Less Property income receivable
Plus Property income payable
Less Current transfer receivable (Non-life insurance claims, etc.)
Plus Current transfer payable (Non-life insurance premium, etc.)
Less Net capital gain from selling financial and non-financial
assets
Plus Depletion, write-down of inventory, bad debt allowance
Adjustment of preliminary GOS for capitalized cost
• Adjustments of own-account research and
development (R&D) and own construction, etc. which
are treated as capital expenditures by both business
accounting and national accounting (SNA2008 only).
– In national accounting, these expenditures must also
treated as output from which value added are
generated.
– In business accounting, capitalized costs are
recorded only in the balance sheet as the concept of
output is non-existent.
• Adjustments for SNA:
– Add in output for R&D as sum of costs
(IC+COE+COF), thus add in value added for this
component.
– Add in consumption of fixed capital (COF) for this
addition value of capital for the current and future
periods.
 Cost capitalization
Depreciation in 10 years

No capitalized Capitalized

Revenues 100 Revenues 100

R&D 20 R&D depreciation 2

Other cost 60 Other cost 60

Net income 20 Net income 38

SNA treats this as output which is then Higher income allows for
consumed as GCF when capitalized the purchase of R&D as assets
 Adjustment to treat bank and
insurance service charges as IC
• These adjustments are similar in GDP by
production approach: fisim on interest and
service charges on insurance are estimated
and imputed as intermediate consumption

• Lower Operating surplus

 Summary of approaches
• Gross operating surplus and value added of
corporations can be estimated directly by using
information from business accounts.
• Gross operating surplus and value added for
nonmarket producers are similar for production
and income approaches as net operating surplus
are zeros.
• Gross operating surplus and value added for
households must be derived by production
approach as households by definition do not
keep business accounts.
 Data sources on corporations
• For the corporations sector, annual surveys of
enterprises are needed to get compensation of
employees and additional information to compile gross
operating surplus.
• For quarterly accounts, COE can be estimated by data
on employment and wage rates collected by monthly
labor force survey, corporate profits of all corporations
are available from tax returns to tax authority.
• Up-to-date information but limited in scope on
corporations whose shares are traded in the stock
exchanges are available from their income statements,
which can be used as indexes for quick and preliminary
estimation of profits.
Advantages of income approach for
policy formulation
• Corporations as indication of development: Although every
sector is important to the economy but the growth in the
contribution to GDP of the corporations signifies especially
for developing countries the growing modernization of the
economy.
• Tax base expansion together with corporate growth:
Compensation of employees in the corporate sector and
corporate profits can be easily subject to taxation than in
the incorporated enterprises, thus the growth of this sector
expands the tax base of the economy.
• Social policy expansion made possible with increase in
labor employed in corporations: growth of compensation of
employees also allows for the introduction or expansion of
social policy with respect to health insurance, pension and
contribution to social security.
Disadvantages of income approach
• GDP by income approach is applied only
at the total economy level.
• It does not provide value added by
industry for structural and productivity
analysis like the production approach.
 Conclusion
• For monitoring economic development and development
of tax and social policy, it is recommended that countries
should prepare value added and its components by
institutional sectors which include:
– Corporations
– Households
– Government
– NPISHs
• The income approach that distinguish clearly institutional
sources of income would also allow policy makers to
have a better view of business profits within the context
of national accounting.