Question

1. There are three ways of conceptualizing and measuring GDP. What are these? Which is the most often used? Why?
2. What are the components of GDP in the total spending approach? Explain what each one is and what it means

Answer 1

GDP is the monetary value of all goods and services produced in an economy over a period of time. GDP does not take into account the value of intermediate goods and services. It also doesn't take into account the net factor income from abroad as well. There are three methods to measure the GDP as:-

Expenditure method.

Income method and

Production method.

The expenditure method measures the GDP by taking into account the expenditure made by households, government and business organization. The expenditure method is expressed by an equation as , GDP = C+I+G+X-M.

The income approach takes into account the total income earned by factors of production. The production method takes into account the total production of goods and services in an econnomy. It is also termed as output method. It measures the total output of an econnomy.

The expenditure method is the most important mdthod of measuring GDP. It is widely used method.

Components of Gross domestic product.

The GDP is expressed through an equation as

GDP = C + I + G + X-M. There are four main components of GDP as expressed in the equation.

C is the Consumption of goods and services by the households. The households are consuming goods and services to satisfy there wants. They pay for this Consumption.

I is the investment. Investment is the excess of production over Consumption. The investment is made when there is more money available after full filing consumption needs. The investment is made by households, firm's and government as well.

Gnis the government spending. The government spending is very important. The government spends for the welfare of the people. The government spends for national defense, health, education, to pay debt and so on.

X-M is the net exports. X is exports and m is imports. When the value of exports is more than the value of imports we have a positive trade balance in the GDP. The gap between exports and Imports is called the trade balance. If country's exports are more than it's Imports than a country have a trade balance.

Hope you got the answer.

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