Question

How do statisticians and economists measure GDP? Specifically, what is the formula used? Define the component parts of the equation. I need 500 words and all the answers of all the parts in the question

Answer 1

GDP is the monetary value of all goods and services produced in an economy in a period of one year.

The economists use multiple ways to calculate the GDP measure like Expenditure Approach, Income Approach, Value Added Approach. The GDP measure obtained from each method is equal.

Expenditure Method to calculate GDP:

Based on the method, the GDP is calculated as GDP = C + I + G + NX

where C = Household consumption expenditure

I = Investment Expenditure

G = Government spending

NX = Net exports = Exports - Imports

The method is based upon adding the expenditure of all sectors.

Investment expenditure refers to expenditure in Residential investment, business investment etc. It also includes the change in the inventory stock which is defined as the difference between the Closing Stock and the Opening Stock.

I = Gross domestic investment - spending by firms on new capital, plant and machinery etc.

C = Personal consumption expenditure - household spending

Income Approach to calculate GDP:

GDP = Wages + Rental rate on capital + Profit of the firm

Profit includes corporate tax, dividend, Undistributed Profit (Retained Earning)

Factor incomes of all producing units are added to arrive at GDP. Factor payments like rent, wages are classified into various heads. Only the income which is earned within the domestic territory of India is considered under this approach.

Value Added Approach:

GDP = Final Value of goods and services - Intermediate costs.

This method is also called Product Method. Each stage of production value is added to arrive at the final measure.

Final Value of goods and services is also called Value of Output which is defined as the market value of goods and services produced in a given one year.

Intermediate costs. also known as intermediate consumption is defined as the value of non-factor inputs which goes into the production of final goods.

Below are the steps to calculate GDP:

- Classificaiton of production units

- Calculate GDP at market price: Gross value added of each sector is summed up to calculate this measure.