Question

GDP is a key concept in Macroeconomics.

a. What is the definition of GDP?

b. List and explain in detail, the 3 different approaches to calculating GDP and explain how they are different. List and explain the approaches and how you would use each to calculate GDP.

c. List and explain 3 types of transactions that would not be included in GDP and why they should be omitted.

d. Thoroughly explain the components of GDP and relate those components to the Circular Flow model with government and international trade. List and explain the 4 components of GDP. Relate each of them to the components of the complete circular flow model.

Answer 1

a) GDP refers to the money value of all final goods and services produced within a nation in an accounting year.

b) Product method/ value added method - It estimates the contribution of each producing enterprice to production in the domestic territory of the country. VAlue added is calculated as value of output minus intermediate consumption. The value added of each sector is summed over to get the GDP mp, which can be then converted to get the national income.

Income method - It measures national income in terms of factor payments to the owners of factors of production. It calculates NDPfc by adding compensation of employees , operating surplus and mixed income. It is also refered to as domestic income. Adding net factor income from abroad we get national income.

Expenditure method measures national income by expenditure on the purchase of final goods and services produced in an economy in an accounting year. It adds private private final consumption expenditure, governmnet final consumption expenditure, investment expenditure and net exports to get GDP mp.

c) Value of second hand good is not included as it is already included in the year it was produced.

Services for self consumption is not taken into account because it is difficult to estimate their market value.

income from windfall gain is not included as there is no value addition corresponding to it.

d) GDP includes private consumption expenditure, government final consumption expenditure, private investment expenditure and net exports.

private consumption expenditure is the demand for all goods and services by the households of a country in a year.It depends positively on the disposable income.

spending by firms on capital is called private investment expenditure. Rate of interest is its principal determinant.

government final consumption expenditure includes both government consumption expenditure and investment expenditure.

net exports is the value of export minus imports.