Question

What are the two methods for calculating GDP? Write the formula for both. Which method do economists typically use, and why?

Answer 1

Two important method to measure gross domestic product (GDP) are,

1. Income Approach
2. Expenditure Approach

Income Approach : This approach considers all the income or return generated from factors of production such as rent, wages, profit, interest etc... The formula for calculating GDP using income approach is as follows:

GDP = Total national income + Depreciation + Sales tax + Net Foreign Factor income

While calculating national income, transfer payments such as gift etc... and the income generated from sale of debentures and share are excluded from it.

Expenditure Approach : The expenditure method give importance to the expenditures made in order to produce the goods an services. The expenditures are classified in two two categories in the expenditure method. They are;

• Consumption expenditure
• Investment expenditure

The formula for calculating the GDP using expenditure approach is as follows;

GDP = Consumption Expenditure + Investment Expenditure + Government Expenditure + Net Exports

Thus, Income approach focus on income earned and expenditure method focus on money spend. The most common and widely used approach to calculate gross domestic product is expenditure approach. This is because it is very practical way to calculate GDP from economist's pint of view.