What Is Gross Domestic Income (GDI)?

Gross domestic income (GDI) is a measure of economic activity based on all the income earned while engaged in producing all the goods, services, and anything else that constitutes that economic activity.

GDI is another way of measuring the country's economy, with gross domestic product (GDP) being the more commonly used method. In theory, GDI should equal GDP. However, the different sources of data used in each calculation lead to different results.

Generally, GDP tends to be the more reliable metric as it is based on fresher and more expansive data.

Key Takeaways

  • Gross domestic income (GDI) is a measure of economic activity based on all the income earned while engaged in said economic activity.
  • GDI aims to measure what the economy makes or "takes in" (like wages, profits, and taxes) while gross domestic products (GDP) seeks to measure what the economy produces (goods, services, technology).
  • GDI and GDP are conceptually equivalent in terms of national economic accounting, with minor differences attributed to statistical discrepancies
  • One of the core concepts in the field of macroeconomics is that income equals spending, which means that an economy at equilibrium will show that GDI is equal to GDP.
  • The most significant component of GDI is wages and salaries; historically, roughly 50% of all national income has gone to workers.

Understanding Gross Domestic Income (GDI)

GDI is the total income that all sectors of an economy generate, including wages, profits, and taxes.

It is a lesser-known statistic than gross domestic product (GDP), which is used by the Federal Reserve Bank to measure the total economic activity in the United States.

One of the core concepts in the field of macroeconomics is that income equals spending. What this means is that the money spent buying what was produced must equal the source of that money.

Formula and Calculation of Gross Domestic Income (GDI)

  • GDI = Wages + Profits + Interest Income + Rental Income + Taxes - Production/Import Subsidies + Statistical Adjustments
  • GDP = Consumption + Investment + Government Purchases + Exports - Imports

Wages encompass the total compensation to employees for services rendered. Profits, also called "net operating surplus," refers to the surpluses of incorporated and unincorporated businesses. Statistical adjustments may include corporate income tax, dividends, and undistributed profits.

The most significant component of GDI is wages and salaries. Historically, roughly 50% of all national income goes to workers. In Q1, 2021, GDI clocked in at roughly $22.5 trillion with $12.1 trillion coming in the form of "compensation of employees."

Another large component of GDI is the net operating surplus from private enterprises. In Q1, 2021, about $5.6 trillion of the $22.5 trillion in GDI was attributed to that category.

GDI vs. GDP

According to the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce, GDI and GDP are conceptually equivalent in terms of national economic accounting, with minor differences attributed to statistical discrepancies. The market value of goods and services consumed often differs from the amount of income earned to produce them due to sampling errors, coverage differences, and timing differences.

But while the difference between GDI and GDP is usually minimal, they can sometimes vary up to a full percentage point for some quarters. The gap also varies over different periods of time.

GDI differs from GDP, which values production by the amount of output that is purchased, in that it measures total economic activity based on the income paid to generate that output.

In other words, GDI aims to measure what the economy makes or "takes in" (like wages, profits, and taxes) while GDP seeks to measure what the economy produces (goods, services, technology).

GDI calculates the income that was paid to generate GDP. So, an economy at equilibrium will see GDI equal to GDP.

Some economists have argued that GDI might be a more accurate gauge of the economy. The reason is that more advanced estimates of GDI are closer to the final estimates of both calculations.

Research from Federal Reserve economist Jeremy Nalewalk showed that early estimates of GDI captured the Great Recession of 2007-2009 better than GDP, suggesting that policymakers would have been better prepared if GDI was the main indicator used.

Over time, according to the BEA, "GDI and GDP provide a similar overall picture of economic activity." For annual data, the correlation between GDI and GDP is 0.97, according to BEA calculations.

Gross Domestic Income (GDI) Analytics

GDI figures have various analytical uses:

  • One important metric is the ratio of wages and salaries to GDI. The BEA compares this ratio with corporate profits as a share of GDI to see where the constituents, mainly workers and company owners, stand relative to each other with respect to claims on GDI. Workers' share should be higher when unemployment is low, but recent evidence shows that is not necessarily the case, which is puzzling to economists.
  • Employee compensation to GDI is also compared with inflation trendlines. Economists look for signs of a positive correlation between a higher ratio of the former with an upward bias in the latter.