Question

What are the three approaches to GDP measurement? Explain why, in a simple economy, the three approaches would yield the same figure for the value of total production.

Answer 1

Gross domestic product (GDP) is the total value of output produced in a given time period.

There are 3 ways to measure GDP -

1) The Expenditure method - Expenditure method is calculated by adding household spending on goods and services,capital investment ,government spending ,exports of goods and services and by deducting imports of goods and services.hence expenditure method mesure what amount is spend on goods and services.

2) Income method - This is the sum of all income earned through production of goods and services.income method includes income from people by way of jobs and self employment like wages and salaries,profit,rent income.

Hence this included all incomes that are come from production of goods and services but excludes all transfer payments,private transfers of money,income not registered with tax authorities.

3) gross value added or output approach - this is the increase in the value of goods or services as a result of production activity. Value added is calculated by deducting of value of intermediate goods from value of production.

In a simple economy gdp produce same estimate because what we pay is revenue for others .hence when a person do expenditure then its revenue for other.in that case income is equal to expenditure.these quantities are equal .all spending that is channeled to firms to pay for purchases of domestically produce final .goods.and this service is revenue for firms