<p>In the income approach, accounting profits is used, which has depreciation subtracted. Without adding back depreciation, the value of production would be understated.
E.g. supposed a firm has revenue of 1000 and pays its employees 300, and used a machine in production that lasts 10 years and it bought for 2000 (i.e. depreciation is 2000/10 = 200). Profit will then be 1000 - 300 - 200 = 500.
Simply adding wages and profits would give a total income of 500 + 300 = 800.
But the value of production is 1000, so we need to add back the 200 of depreciation to ensure the income approach to GDP gives the correct value of production.</p>

CC BY-SA 4.0
2024-06-18T10:58:51.910Z
2024-06-18T10:58:51.910Z
R.S.
<p>When calculating GDP using the expenditure approach, depreciation is not added because it is not considered a part of the total spending on goods and services in an economy. The expenditure approach measures GDP by adding up the total spending on goods and services by households, businesses, and the government. Depreciation is not included in this measure because it is not a purchase of a good or service, but rather a way of accounting for the reduction in value of a capital good over time.</p>
<p>In contrast, the income approach to calculating GDP includes depreciation because it represents the income earned from the use of capital goods. This approach measures GDP by adding up the total income earned by households, businesses, and the government from the production of goods and services. By including depreciation in this measure, the income approach takes into account the value of the capital goods used in the production of goods and services and provides a more accurate measure of an economy's total output.</p>

CC BY-SA 4.0
2022-12-04T05:56:21.480Z
2022-12-04T05:56:21.480Z
adijsad
<p>In my economics textbook, it states that when calculating GDP using the income approach, depreciation should be added. Specifically, GDP = Employee Compensation + Taxes less subsidies on businesses + Net operating surplus on businesses + Depreciation.</p>

<p>The example it provides is that if some people are running a fruit stand, their capital will endure some wear and tear. As a result,"some of their income is implicitly a compensation for this wear and tear", which is depreciation.</p>

<p>I am confused about how adding depreciation fits into the idea of the income approach. How does the capital stock depreciating fit into the incomes of households? It seems like depreciation has nothing to do with the income of the fruit stand, for example. </p>

<gdp>
Why is depreciation added to the GDP with the income approach?
Vasting
# Why is depreciation added to the GDP with the income approach?

(Asked by: username_0 on 2019-01-26)

In my economics textbook, it states that when calculating GDP using the income approach, depreciation should be added. Specifically, GDP = Employee Compensation + Taxes less subsidies on businesses + Net operating surplus on businesses + Depreciation.

The example it provides is that if some people are running a fruit stand, their capital will endure some wear and tear. As a result,"some of their income is implicitly a compensation for this wear and tear", which is depreciation.

I am confused about how adding depreciation fits into the idea of the income approach. How does the capital stock depreciating fit into the incomes of households? It seems like depreciation has nothing to do with the income of the fruit stand, for example.

**Tags:** gdp

---

## 2 answers

### Answer by username_1 on 2024-06-18. Score: 0

In the income approach, accounting profits is used, which has depreciation subtracted. Without adding back depreciation, the value of production would be understated.
E.g. supposed a firm has revenue of 1000 and pays its employees 300, and used a machine in production that lasts 10 years and it bought for 2000 (i.e. depreciation is 2000/10 = 200). Profit will then be 1000 - 300 - 200 = 500.
Simply adding wages and profits would give a total income of 500 + 300 = 800.
But the value of production is 1000, so we need to add back the 200 of depreciation to ensure the income approach to GDP gives the correct value of production.


---

### Answer by username_2 on 2022-12-04. Score: 0

When calculating GDP using the expenditure approach, depreciation is not added because it is not considered a part of the total spending on goods and services in an economy. The expenditure approach measures GDP by adding up the total spending on goods and services by households, businesses, and the government. Depreciation is not included in this measure because it is not a purchase of a good or service, but rather a way of accounting for the reduction in value of a capital good over time.

In contrast, the income approach to calculating GDP includes depreciation because it represents the income earned from the use of capital goods. This approach measures GDP by adding up the total income earned by households, businesses, and the government from the production of goods and services. By including depreciation in this measure, the income approach takes into account the value of the capital goods used in the production of goods and services and provides a more accurate measure of an economy's total output.


---

