Answer to Question #121248 in Macroeconomics for 120892

Question

) Give the definition of GDP and explain what items are not included in its calculation? b) How is GDP calculated using the expenditure approach? c) How is GDP calculated using the income approach? d) Research the concept of measuring GDP using the value added approach and provide a working definition? e) Explain the problem of "double-counting" and how it can be avoided in calculating GDP.

Answer 1

a) GDP is the total economic or market value of all the finished goods and services produced within a nation's borders in an explicit time period. The GDP measures the value of economic activity within a country.

The number of items that are not included when calculating the GDP include;

- Sales of goods that were that were imported.

- Sales of used goods

- Illicit sales of goods and services

-Transfer payments made by the government

-Intermediate goods that are used to produce other final goods.

b)  The expenditure approach to calculating GDP takes into consideration the sum of all final goods and services bought in an economy over a fixed period of time. It includes all consumer spending, government spending, business investment spending, and net exports.

The expenditure approach say GDP = consumption + investment +government expenditure +exports – imports

c)  As per the income approach, Gross Domestic Products can be computed as the sum of the total national income (TNI), sales taxes (T), depreciation (D), and net foreign factor income (F). Total national income is the sum of all salaries and wages, rent, interest, and profits.

d)    Value added method is used to measure national income in diverse phases of production in circular flow. This method displays the impact (value added) of each producing a unit in the production process.

Value added = value of output – intermediate consumption.

GDP = P1Q1 +P2Q2 +P3Q3 +…..

GDP = C + I + G + NX

e) Double counting basically refers to the counting of the value of the same product more than once. According to output method of calculating national income, value of only finished goods and services produced by all the production units of the country during a year should be calculated. While during this, some the goods may be counted more than once thus resulting to double counting.

The tricky of double counting can be perfectly solved by value added method. As per this method, instead of taking value of final products, value added by each firm at each stage of production is included.