Answer to Question #289100 in Macroeconomics for Snow

Question

a) 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) Explain the problem of "double-counting" and how it can be avoided in calculating GDP

Answer 1

a)Gross domestic product, which is how this abbreviation should be deciphered– is the main indicator characterizing the total cost of all services rendered and products produced in the country. All non-productive transactions are excluded from the calculation of GDP: financial transactions: state transfer payments, including social insurance payments, unemployment benefits, pensions and payments that the state provides to individual households; private transfer payments, including financial assistance, student scholarships, one-time gifts from wealthy relatives, are not related to production, but simply represent the transfer of funds from one individual to another; transactions with securities, including all transactions of purchase and sale of shares and bonds; sale of used goods, the cost of which was included in the calculation in previous periods.

b)GDP = final consumption + gross capital accumulation (investments in a firm, that is, the purchase of machines, equipment, stocks, production sites) + government spending + net exports (export - import; can be both positive and negative).

c)GDP = National income + depreciation + indirect taxes - subsidies - net factor income from abroad (NDiF) (or + net factor income of foreigners working in this country (NDIF)), where:

National income = wages + rent + interest payments + corporate profits.

d)When calculating GDP, it is very important to exclude double counting of products; this allows you to make an indicator of value added, which is the difference between the sales of firms of their finished products and purchases of materials (i.e., this is the market value of the company's products minus the cost of raw materials consumed). GDP is determined by summing up the added values produced by all firms in the country.