Question

1.There are two approaches to measuring gross domestic product (GDP), expenditures approach and income approach. Expenditures approach is comprised of consumption expenditures, investment expenditures, government expenditures plus net exports (exports minus imports). Households create income by supplying their labor to the firms. What items is the incomes approach comprised of? Hint: one item is compensation of employees.

2.Factor incomes are comprised of wages, interest, rent and capital. GDP does not measure certain items, what are they and why? What constitutes gross private domestic investment? Give examples and explain.

3.What are the uses and limitations of real GDP?. The components of GDP can be seen from the income, expenditure identity expressed as Y = C + I + G + X - M. Please give a brief description of what each letter represents. How does one calculate the GDP deflator what does it measure? Why is it important to take the effects of inflation out of GDP to reveal the rate of growth of our economic well-being?

Answer 1

1)Income approach measures the income received from different sources by production of goods and services.

One of them is compensation of employees ie the wages, salaries etc that employees receive in return of their services provided for production.

Next is rent from the income of ownership of land or property where the goods are being produced.

The next factor is profits generated from the private businesses.

The last factor or element is interest received from the loans given to the corporations etc.

Hence the items are interest, compensation of employees, rent and profits.