Question

3. What are the alternative GDP measurement methods? What is the main difference between the methods? (15 pts.)

Answer 1

There are three ways to measure GDP of a nation. Their explanation and differences in the three approaches is as follows:

a. Expenditure Method : In this approach, we sum all final goods and services produced in an economy. It is given by the sum of consumption expenditure, investment expenditure, government spending and net exports.

b. Income Approach : In this case, national income is calculated by the sum of the factor incomes paid to the factors of production who are residents or citizens of the country. This is the sum of wages and salaries, profits and rental income. It excludes transfer payments and income not registered by the tax authorities.

c. Output Method : This measure of GDP adds together the value of output produced by each of the productive sectors of the economy using the concept of value added where value added= value of Production - value of all intermediate goods.