Why do we add a statistical discrepancy to GDP when we compute GDP using the income approach?

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The GDP (Gross Domestic Product) calculates several things: government spending, consumer spending, private and government investments, exports to other countries, and so on. We know this data based on products like the federal budget and reports from the Department of Commerce.

The GDI (Gross Domestic Income) calculates total incomes earned...

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The GDP (Gross Domestic Product) calculates several things: government spending, consumer spending, private and government investments, exports to other countries, and so on. We know this data based on products like the federal budget and reports from the Department of Commerce.

The GDI (Gross Domestic Income) calculates total incomes earned and costs. Variables like unemployment rate and increases in national productivity make the GDI rise. Essentially, if people are working and producing goods and services, the GDI is doing well. The GDI information comes from products like income tax reportings.

In a perfect system, the GDP would equal the GDI. However, they are each measured differently, so there will always be some discrepancy. The Statistical Dependency is the NIPA’s (National Income and Product Accounts) way of reonciling the difference.

Taking this one step further, in macroeconomics there are several approaches for how to calculate these numbers: the Production approach, the Expenditure approach, or the Income approach. The income approach simply says the total expenditures must equal the total income generated by that output. The income approach uses a formula that includes the following:

Wages and income tax income +

rents +

Self-employment income +

Total profits from companies +

Taxes and subsidies on imports =

GDP

In summary, there are several ways to calculate the GDP and GDI and various economic approaches. Since there may be differences in calculations, the Statistical Discrepancy exists to help tell the “real” story by providing an average of the different calculations.

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The reason for this is that gross domestic product is such a hugely complicated thing to measure that there are sure to be mistakes made when calculating it.

When you calculate GDP using the income method, you tend to get a different result than you get using the expenditure method.  This is, again, just because of how complicated it is to measure all this data.

The statistical discrepancy is just half of the difference between the two measures.  So, in other words, if one measure said GDP is $10.1 Trillion and the other said it is $10.3 Trillion, we halve the difference and say that it is really $10.2 Trillion.

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