The income approach is a way to calculate a nation’s national income by adding up all the money earned by the factors of production used to create goods and services.

Formula components:

• Wages: Includes salaries and extra benefits like pension payments.
• Profits: Earnings kept by businesses and paid to shareholders.
• Rent: Earnings from land and property ownership.
• Interest: Earnings from lending capital.

National Income = Wages + Profits + Rent + Interest

Key features:

• It is one of three main ways to measure national income, alongside the output approach and the expenditure approach.
• In theory, all three methods should produce the same total, which is known as the circular flow identity.
• This approach tracks how money flows to households through the use of resources.
• It is a core part of the circular flow of income model, where money moves between businesses and households through things like consumption, savings, and taxes.
• More technically, GDP via this approach is calculated as: Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports.