Question

Use the following information to estimate the GDP of the economy

Compensation of the Employees: $500mn

Self Employed Income: $200mn

Corporate Profits: $300mn

Interest Income: $20mn

Rental Income: $200mn

Indirect Business Taxes: $400mn

Net Factor Payments to the rest of the world: $100mn

Answer 1

GDP of an economy is defined by the market of value of all goods and services produced in an economy during a period of time. There are three approaches for measuring the GDP of an economy; output based, income based and expenditure based. From any of these three approaches the measurement of GDP will be equal. The items given for the calculation of GDP of the economy are all income from different sources. So we will calculate GDP of the economy from income based approach. Also we are to calculate Gross domestic product, which includes income paid to the foreign factors of production by the domestic economy and does not include domestic factors of production from the rest of world income.So we need to include factor payment made to the rest of the world and deduct factor payments made by rest of the world to domestic factors.

Net factor income from abroad = Income paid to domestic factors by rest of world - Income paid to foreign factor from the domestic economy.= Net factor payment to the rest of the world.

Estimation of GDP using Income approach  = compensation of the employees + Self employed income + corporate profits +Interest Income + Rental income + Indirect Business taxes - Net factor payments

   = $(500 + 200 + 300 + 20 + 200 + 400 - 100) mn

= $( 1620 - 100) mn

Total GDP     = $1520mn