How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value added and its importance in the income approach. What are the leakages from and injections into the circular flow? How are leakages and injections related in the circular flow?

Income approach to measuring GDP is to add up all the income earned by households and firms in the year. Income earned are wages, profits, rents, and interest income. You add up all these and you get the GDP.

GDP = Rent + Interest + Profits + Statistical Adjustments + Wages

Statistical Adjustments are corporate income taxes, dividends, undistributed corporate profits.

Expenditure approach is adding up the market value of all domestic expenditures made on final goods and services in a year. These expenditures are consumption expenditures, investments expenditures, government expenditures, and net exports.

GDP = Personal Consumption Expenditures + Gross Private Fixed Investments + Gov't Expenditures and Investments + (Net Exports - Net Imports)