Question

The expenditure approach to calculating GDP adds up spending only on final goods and services to:

a. get an accurate measure of changes in the price level during the time period in question.

b. account for the fact that domestic resources may work and produce in foreign countries.

c. avoid the problem of double counting, and this overstating the value of production in the economy.

d. eliminate the effect of inflation on the value of output.

Please add why!

Answer 1

The correct answer is (c) avoid the problem of double counting, and this overstating the value of production in the economy.

Suppose a bread making company produces a bread and sells it to another firm who produces grilled sandwiches at rate of $1. A firm who produces grilled sandwich will use this bread as a raw material and other material and will produce a grilled sandwich which it sells to a consumer at rate of $3.

In this case the addition to GDP is $3(final good). As value of Bread i.e. $1 is already included in $3(grilled sandwich rate), if we again add $1 then This $1 will be counted twice. Hence, instead of only final goods and services if we add intermediate good(bread) as well then this will result in double counting, as value of bread will be added twice(which result in addition to total GDP of $4 but correct addition to total GDP will be $3). Hence, The expenditure approach to calculating GDP adds up spending only on final goods and services.

Hence the correct answer is (c) avoid the problem of double counting, and this overstating the value of production in the economy.