Question

Briefly describe the 4 alternative ways to measure total production and total income:

Answer 1

Four alternative ways to calculate total production and total income are:

1. Gross Domestic Product = Gross Domestic Income

GDP is the most appropriate way of measuring the total production and total income in the economy. GDP is the total market value of all the finished goods and services produced in a country in a particular time period. This can be calculated by totaling all the finished products produced by the economy or total income generated by selling these products.

Components of GDI are employee compensation, rent or royalty, interest, profits, depreciation etc. these are the major components which are used to measure the GDP of an economy.

2. Expenditure approach - this approach is typically an output accounting method. This method focus mainly on the expenditure done in the economy. According to this approach, the total product or total income can be calculated by adding the expenditure done in the economy. The main components of such method are the consumption expenditure by private and public sectors, the government expenditure, investments and net exports. Therefore, this means that the total output produced by spending some amount and by adding that amount, total production can be calculated in the economy.

3. Gross National Product - Gross national product (GNP) refers to total value of finished products which are ready for consumption in a given time period produced by the country’s citizen. This is basically calculated by totaling personal consumption expenditures, private domestic investment, government expenditure, net exports and any income earned by residents after deducting the income earned within the domestic economy by foreign residents.

4. National Net Income - NNP is often examined on yearly basis which provides a way to measure a country’s contribution in continuing minimum production standards. It is closely related to GDP and GNP. This is meant to be a useful method of calculating the total production in the economy regardless of where the citizens make their money. And measures the capital used to carry on the production activities in the economy. The NNP is expressed in the currency of that country only. For egg. US NNP is measured in dollars.