Question

10. Comparing the expenditure and value-added approaches for calculatingGDP

The expenditure and value-added approaches to calculating GDP arrive at the same final number, but they reach that number in different ways. To illustrate, consider the possible effects of the following set of transactions on GDP:

1.	Raphael pays Better Buy $800 for a new high-definition television (HDTV) and its installation. He's attracted by Better Buy's guarantee that he'll be happy with the new HDTV or get his money back.
2.	Better Buy pays Firedog $650 to install the HDTV.
3.	Firedog buys hardware worth $50 from The Home Station.

Compute the contribution to GDP of this set of transactions, using the expenditure approach, i.e., by assuming expenditures of buyers of final goods and services. Assume that The Home Station receives the hardware at no charge and that other costs are zero.

Which of the following would be included in the expenditure method of calculating GDP? Check all that apply.

Better Buy spends $650.

Raphael spends $800.

Firedog spends $50.

The total contribution of these transactions to GDP, as measured by the expenditure approach, is   .

Now use the following table to compute the contribution of these transactions to GDP by summing the values added at each stage of production.

Stage of Production	Sale Value	Cost of Intermediate Goods	Resource Cost-Income
The Home Station	$50	—
Firedog	$650
Better Buy	$800

The contribution to GDP that you found using the expenditure approach corresponds to the sum of the   at each stage of production.

Answer 1

Raphael spend $800 would be included in the expenditure method of calculating GDP:

Raphael spend $800

The total contribution of these transactions to GDP, as measured by the expenditure approach, is $800.

Stage of Production	Sale Value	Cost of Intermediate Goods	Value added ( Sales value - intermediate cost) Resource Cost-Income
The Home Station	$50	—	$50
Firedog	$650	$50	650-50 = $600
Better Buy	$800	$650	$800-$650 = $150
TOTAL			$800

The contribution to GDP that you found using the expenditure approach corresponds to the sum of the VALUE ADDED   at each stage of production