Question

What are the three main approaches to measuring GDP ?

Answer 1

GDP refers to the money value of all goods and services that are produced within the country during specified period of time. GDP is calculated on annual basis as well as on quaterly basis. Higher GDP reflects increase in national output, higher economic growth, more employment and better standard of living. GDP act as a tool for Investors, Businesses, government for investment and strategic decision making.

GDP can be calculated by 3 methods, These are -

1. Expenditure method - The most widely used method to calculate GDP is expenditure method. This method aims to collect data on expenditure side by adding household spending, government spending, business investent and Net exports.

GDP by Expenditure Method = Household consumption + Gross Business Investment + Government Spending + Net Exports (Export - Import)

2. Income method - In income method, we add all income that is generated by production of goods and services and by Businesses ie(land, labour, capital & profit). Only those incomes that are come from the production of goods and services are included in the calculation of GDP by the income approach.

GDP by income method = Compensation to Employees (wages & salaries) + Business profits + rental & interest income.

3. Value Added Method - In value added method, also known as production method, measures the output of all sectors(Manufacturing, construction, Primary), in form of value added in each part of production process. Value added refers to the addition of value to the raw material (intermediate goods) by a firm, by virtue of its productive activities.

GDP by value added method = Value of Production - value of intermediate goods.