Question

National income is smaller than GDP mainly because

a. Much of the income from domestic production is paid to foreigners
b. National income subtracts out the depreciation of capital
c. GDP includes income that U.S. firms earn in other countries
d. Income is harder to measure than spending

Answer 1

The national income is smaller than GDP mainly because much of the income from domestic production is paid to foreigners.

Step-by-step explanation:

GDP is a measure of what is produced in a nation. The primary way GDP is estimated is with the Expenditure Approach, but there is another way. Everything a firm produces, when sold, becomes revenues to the firm. Businesses use revenues to pay their bills: Wages and salaries for labor, interest and dividends for capital, rent for land, profit to the entrepreneur, etc.

So adding up all the income produced in a year provides a second way of measuring GDP. This is why the terms GDP and national income are sometimes used interchangeably. The total national income is smaller than GDP mainly because much of the income from domestic production is paid to foreigners.