GROSS DOMESTIC INCOME: The total market value of all final goods and services produced within the political boundaries of an economy during a given period of time, usually a year, as calculated using the income approach to measuring gross domestic product. Gross domestic income (GDI) is virtually identical to gross domestic product (GDP), with one minor difference, the statistical discrepancy. As a matter of fact, the statistical discrepancy is calculated as the difference between GDP and GDI.The good folks at the Bureau of Economic Analysis who maintain the National Income and Product Accounts actually measure gross domestic product in two different ways. The first way from the demand side of market transactions, in which total expenditures (consumption expenditures, investment expenditures, government purchases, and net exports) on production are identified. The second way is from the supply side of the market transactions, in which the income earned by resources (which are the costs of production) are identified. The expenditure method leads to gross domestic product. The income method leads to gross domestic income. In a perfect world, where every calculation is accurate, no mistakes are made, and all production and income are correctly identified, gross domestic product and gross domestic income are EXACTLY equal. But in the imperfect real world, there is almost always a discrepancy between these two measures. This discrepancy is generally quite small, less than 1 percent of GDP. Two Sides of the MarketEvery market exchange is a two-way process. The buyer trades money for a good. The seller trades a good for money. The market exchange, and the value of the good traded, can be identified from either side of the market--from the expenditure made by the buyer or from the income received by the seller.The overall value of production, which is what GDP seeks to measure, is determined mutually by buyers and sellers through such market exchanges. On one side of market exchanges is the suppliers, producing and selling goods. On the other side is demanders, purchasing and using goods. For each good sold, someone buys. For each good bought, someone sells. The number crunchers at the Bureau of Economic Analysis use this two-sided notion to derive a relatively accurate estimate of total production (that is, gross domestic product) using total income. To illustrate, consider the purchase of a Hot Momma Fudge Bananarama Ice Cream Sundae by Duncan Thurly for $2. His demand-side of the transaction involves giving up $2 and getting (and presumably enjoying) a Hot Momma Fudge Bananarama Ice Cream Sundae. However, from the supply-side of this transaction, the Hot Momma Fudge Bananarama Ice Cream Shoppe receives the $2 in payment for producing the Hot Momma Fudge Bananarama Ice Cream Sundae. If the store does not produce, then Duncan does not buy. And if Duncan does not buy, the store does not produce. As such, a reasonable estimate of Hot Momma Fudge Bananarama Ice Cream Sundae production can be derived by adding up the revenue received by the Hot Momma Fudge Bananarama Ice Cream Shoppe and how the revenue becomes income of the productive resources. This is gross domestic income, which in principle is equal to gross domestic product. What Makes Up GDIGross domestic income (GDI) can be divided into an array of different components. First, consider a summary equation of GDI, then next a more detailed discuss of each item.Now consider each of the components:
The first five items listed are the factor payments that make up national income. The next five items reflect differences between gross domestic product and national income. Of course, the only adjustment item NOT included in this list is the statistical discrepancy. The Statistical DiscrepancyIn principle, gross domestic product SHOULD be exactly equal to gross domestic income. In reality, these two measures do not yield identical results. They should, but they do not. The statistical discrepancy is used to ensure that everything balances. It is the official adjustment factor in the National Income and Product Accounts that ensures equality between the gross domestic product and gross domestic income and it is usually relatively small, less than 1 percent of gross domestic product.The statistical discrepancy is officially "added" to gross domestic income when calculating gross domestic product, but the actual value can be positive or negative. The value of the statistical discrepancy is whatever it needs to be to equate the income and expenditure approaches to measuring gross domestic product. This equation summarizes the connection between gross domestic product (GDP), gross domestic income (GDI), and the statistical discrepancy (SD):
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