Answer to Question #318905 in Macroeconomics for Nalyn

Question

Explain the three approaches in measuring GDP: expenditure approach, income approach, production approach.

Answer 1

Expenditure approach measures an economy's GDP by considering the sum of final goods and services purchased in an economy over a set period of time (expenditures): the private sector, government spending, investment and the net exports. Thus, GDP according to this approach is the resulting aggregate demand: GDP = C+IG+I+(X-M)

Income approach to measuring GDP considers the earnings of the factors of production: labor earns wages, capital earns interest, land earns rent and entrepreneurship earns profit. Thus, GDP = total national income + sales + taxes + depreciation + net foreign factor income

Production approach: this approach to measuring GDP considers the monetary value of all the goods and services produced within a nation's borders. It seeks to make GDP accurate by eliminating distortions from price level changes. GDP = real GDP ( this is GDP at constant prices) - taxes + subsidies