Answer to Question #182399 in Macroeconomics for SYEDA ZAINAB

Question

Explain the three approaches to national income accounting in detail. Why are the three approaches to national income accounting equal? Are the three approaches give the same answer?

Answer 1

GDP can be measured in three ways:

1. On expenses.

2. By income

3. Value added (production approach)

Each of the presented approaches gives the same result:

GDP by expenditure = GDP by income = GDP by value added

This equation is called the fundamental identity of the system of national accounts.

The calculation of GDP by expenditure Measures the results of economic activity by adding up the expenditures of end-users of products and services.

The calculation of GDP by income Measures the results of economic activity by adding all the income received by producers of products and services in the form of wages and profits of the entrepreneur.

The calculation of GDP by value added Measures the results of economic activity by adding up the market value of all goods and services produced in the national economy, with the exception of goods and services used in the intermediate stages of production.