According to healthknowing, the distribution calculation is a method for calculating economic indicators. It is based on the national income and in addition to the production approach and the expenditure approach a way to calculate the gross domestic product.
Distribution calculation in the national accounts
In this lesson we explain the importance of the distribution calculation and how you can use it to determine the gross domestic product (GDP) and other key figures from economics. You will then have the opportunity to check your knowledge with a few exercise questions.
Why should you know the distribution calculation?
The distribution calculation plays an essential role in the calculation of economic indicators such as gross domestic product, national income as well as net and gross value added.
Since the distribution calculation aims at the distribution of income within an economy, it can be used to measure the relationship between the labor income and capital income and who benefits from the gross domestic product and in what way. In addition, it is possible to measure the extent to which the state exerts an influence on income through taxes and subsidies.
Significance and application of the distribution calculation
By means of the distribution calculation, the gross domestic product and other key figures of high economic relevance (primarily for the national accounts) can be calculated. In addition to the production and use calculation, it represents one of three calculation methods for GDP.
Calculation of GDP
In contrast to the other two methods, the distribution calculation is based on the income generated and determines who participates in what way and to what extent in GDP. The first question that arises is who will actually receive GDP or who can benefit from it.
In most economies, GDP is mostly made up of labor income, regardless of the type of activity. For example, the wages of auxiliary workers are recorded in the same way as those of senior executives.
It should be noted, however, that this earned income only includes income from employment. In addition to income from work, a large part of income falls on income from investment income. These consist primarily of profits and income from investments (e.g. price gains or dividends ).
Calculation of national income
Both types of income (income from capital investments + income from employment) add up to the national income. Labor income and capital income are usually in a ratio of 2: 1.
In order to get from the national income to the gross domestic product, production and import taxes, which flow to the state, as well as subsidies and depreciation have to be taken into account. In addition, the balance of primary incomes from the rest of the world must also be taken into account in the calculation. This is capital that flows from Germany to other countries or comes to Germany from other countries.
Consequently, income generated by residents abroad must be added and income generated domestically by foreigners must be subtracted.
Schematic representation of the distribution calculation
The first step is to calculate the national income:
|Compensation of employees|
|+||Entrepreneurship income and wealth|
In the second step, net national income and gross national income are determined:
|=||Net national income|
|=||Gross national income|
In the third and last step, the gross domestic product is calculated:
|Gross national income|
|–||Income earned by residents abroad|
|+||Income earned by foreigners in Germany|
|=||gross domestic product|
Application of the distribution calculation in Germany
A closed distribution calculation cannot be carried out in Germany because there is no complete database available for this with regard to operating surpluses and company income. This is compensated by deriving the necessary data from the macroeconomic cycle.
It is possible to show the relationship between labor income and capital income (mostly 2: 1 in large industrialized nations), but no statement can be made about how labor income is distributed among the population.