The Expenses, Income Approach (EGD) is a four step process to achieving a sustainable economic growth. It has been developed by a group of eminent economists including Robert Kaplan, Nobel Prize winner Professor Hilaire Belloc, Frankcks, David Norton. The purpose of the Approach is to show that there are three primary factors controlling the level of income and prosperity in a nation. These include monetary policy, social policy and the political system. As long as this policy is not chosen and implemented correctly, the incomes will not rise. The aim is to ensure that the policies are chosen and implemented correctly so that income reaches and exceeds the potential.
The four steps are termed as Incentives, Sales Costs, Incentives and Benefits and Deficiencies. In the sales tax and the expenditure approach GDP are treated as separate entities. In the sales tax, the income generated from the sales tax is taken for further consumption, leaving the expenditure approach untouched. However, the benefits and disadvantages of both the sales tax and the expenditure approach are the same.
The concept of GDT is relatively new. The concept of Sales taxes are very old and can be traced back to colonial days. The idea was to assess how much of the income of a nation is generated from the sale of goods and services produced by its people and then allocate the income in terms of consumption. Goods and services produced by an individual include money, capital and fixed assets. Fixed assets include machinery, buildings, plant and property. By taxing only income derived from production of fixed assets, the income generated by the people is omitted.
The concept of income approach (IHI) is meant to remedy the problems related to the IHI. The theory of IHI suggests that if you consume more than you earn, your income will automatically come down. If you are able to consume less than your income and if your fixed capital is low, then the net worth will go down. Hence, the notion of surplus transfer payments arises out of this basic principle.
According to the GDT theory, if the value of the total value of the nation’s wealth is increasing at a steady rate, then the income of the nation will also increase at a steady rate. Now the GDT equation has a number of variables incorporated into it to make it work. The first component of the equation is the concept of surplus transfer payments. The second component is the concept of depreciation. The third component is the concept of inflation.
In the GDT analysis, surplus transfers are not considered as flows but as returns on savings and investment made over time. Hence, the analysis is also known as the circular flow analysis or the constant factor approach g DP. The GDT incorporates a number of different theories like the reverse auction theory, the relative value concept, the elasticity of the production function, the capital structure and the business cycle. Each of these theories are examined in order to determine the actual returns on investment made by the government in the form of gross domestic product (gdp).
The circular flow process of the GDT requires two variables for measuring total spending, one being the gross domestic product and the other being the current consumption level. The gross domestic product is measured by calculating the value of goods and services produced in relation to the size of the economy. It is calculated on the basis of current prices minus depreciation. The consumption level is measured using a fixed measurement scale.
The other important component of the GDT is the concept of depreciation. This is measured as the percentage change in the value of a good from its purchase price to the sale price. The other two concepts, the elasticity of the production function and the capital structure are not directly reflected in the GDT. In fact, the existence of a capital structure is based on assumptions regarding the behavior of firms within the industry and changes in the rate of return. Changes in the real estate and the level of overall income make demands for changes in tax laws, regulation of financial institutions and the central bank.