All spending ultimately translates into income. Thus, national output calculated by the expenditure approach must equal National Income.

National Income (NI) is computed by summing all payments to resource owners—wages, rents, interest, and profits.

            Although National Income conceptually sums workers' wages to labor, interest paid to capital owners, landowners' rents, and entrepreneurial profits, the limitations of accounting data cause NI to be measured as the sum of five slightly different categories: (a) wages and salaries, (b) noncorporate proprietors' income, (c) corporate profits before taxes, (d) rental income, and (e) interest. Table 2 presents proportions and trends in these income payments for selected years.

Table 2     The National Income Approach to GDP (Selected Years 1929–1993)
Category	1929		1933		1953		1973		1993
	$ B	%	$ B	%	$ B	%	$ B	%	$ B	%
wages and salaries	51.1	58.9	29.5	73.1	209.1	68.6	812.8	72.6	3,534.3	74.9
proprietor income	15.2	17.5	5.9	14.6	40.5	13.3	116.5	10.4	397.4	8.4
corporate profits	10.5	12.0	-1.2	-3.0	39.6	13.0	116.4	10.4	374.1	7.9
rental income	5.4	6.2	2.0	5.1	12.7	4.2	17.3	1.5	6.4	0.1
interest income	4.7	5.4	4.1	10.2	2.8	0.9	56.5	5.0	407.3	8.6
National Income	86.8	100	40.3	100	304.7	100	1119.5	100	4,719.6	100
Notes: Rounding may cause minor inconsistencies. Rapid tax write-offs of depreciation increasingly understate rental shares.     Source: U.S. Department of Commerce, Economic Report of the President, 1970-94 and Survey of Current Business, January 1994.

 

Wages and Salaries

 

This category covers not only money wages but also all employees' fringe benefits (e.g., bonuses, stock options, health insurance, paid vacations, and firms' contributions to Social Security). Table 2 shows that wages and salaries increasingly dominate U.S. National Income. The share of wages has risen from less than half of National Income in 1900 to roughly three-fourths today.

Proprietors' Income

 

            National Income accountants split accounting profit into two categories: Proprietors' income and corporate profits. Proprietors' incomes are received by sole proprietors, partnerships, certain professional associations, and unincorporated farms. Included in farm income is an estimate of the value of food grown and consumed on farms—or from home gardens. Although not marketed, this clearly represents production.

 

            Much of this income category represents wages, interest, or rent that proprietors would have earned if they had not operated their own firms. Isolating this category according to purely economic concepts to identify opportunity costs is impossible, however, given the limitations of accounting data. Thus, we consider proprietors' income as "profit," but only for purposes of GDP accounting.

 

            Proprietors' shares of National Income were falling until recently, declining from 17.5 percent in 1929 to only 7.8 percent by 1980. Wages grew in part when small "family farmers" were attracted by relatively more remunerative industrial jobs. A recent rebound in proprietors' shares may reflect resurgent entrepreneurship—or it may merely track growing tendencies for firms to rely less on career employees and more on "independent contractors," many of whom may only reluctantly be self-employed.

 

Corporate Profit

 

            Corporations use their accounting profit in three ways. First, they must pay corporate income taxes. Second, they may pay stockholders dividends from their after-tax income. Finally, remaining profits are kept in the firm as working capital or to finance either internal expansion or external acquisitions (mergers and takeovers). Economists call profit kept by firms undistributed corporate profits; to accountants, they are retained earnings. Much of the  category called corporate profit actually represents the interest foregone had stockholders bought bonds instead of stock. Again, because isolating pure economic profit from opportunity costs is not feasible, the convention is to lump all corporate profits with proprietors' income in the accounting term "profit."

 

            Proprietors' income has fallen as a percentage of National Income, so you might expect growth in the share accruing to corporations. A glance at Table 2, however, reveals a trend for corporate profit to shrink relative to National Income. What accounts for the rise in the share of wages and erratic declines in both corporate and proprietor incomes? A partial answer lies in the fact that government outlays as a percentage of total output rose markedly during this century. Most government-provided services require substantial labor, so the share of wages and salaries has grown steadily.

 

Rental Income

 

Accounting rents are usually derived from the leasing of real property (such as land, houses, offices), but can be obtained from renting any asset (e.g., videotapes or U-Haul trailers). Determining what part conforms to economic rent as a payment solely for the use of land is impossible, so again we use accounting classifications. As you see in Table 2, rental income is now the smallest accounting category in National Income.

 

 

Interest

 

            Interest is also rather self-explanatory—payments made for the use of borrowed capital (usually, financial capital). Interest payments are made by borrowers to banks, or to holders of bonds, or by banks to their depositors. (Banks act primarily as specialized intermediaries. A bank arranges loans of its depositors' funds to borrowers. Thus, depositors—not banks—are the ultimate lenders.) National Income accounting conventions treat interest paid to holders of government bonds as a transfer payment and exclude it from the interest component of National Income. If interest on government bonds were included, interest would have been roughly one-seventh of National Income in 1993.