Question

What is the expenditure approach to measuring GDP? (1 Mark) Write the formula for GDP when using the expenditure approach. (1 Mark) Define, explain and give a real-world example of each of the five variables included in the formula. (2 Marks each = 10 Marks).

What is double counting? (1 Mark) What are intermediate goods? (1 Mark)

Explain how the expenditure approach avoids double counting.

Answer 1

The GDP is defined as the gross domestic product of a nation which is the overall value of all final goods and services which are produced in a country over a period of time, which usually is one year. There are different measures of measuring the Gross Domestic Product of a country, but one thing which always remains the same is the fact, that it is widely adopted as a measure of growth and success of a country respectively.

The expenditure approach of measuring the GDP measures it by analysing the total amount of money which is spent by people and the government to purchase these goods and can then be back tracked to the fact that the actual value of the goods is the same as the money spent by people on it.

The expenditure method uses the following formulae: -

Gross Domestic Product = Final Consumption + Investments+ Government Expenditure+(Exports-Imports)

An example of all of the available option is as follows: -

• Final Consumption is conducted by us as consumers in any market for our personal consumption. Everyday consumption such as that on milk and groceries and rare consumption as on cars are all counted under final consumption category.

• Investments are those which are done by corporations and companies at large and are used as a tool to increase production capacity. For example, when apple spends money on purchasing a capital good through which it can produce more goods, it is known as investment expenditure.

• The government procures various materials for its institutions such as defines procurement of arms and ammunition all of which gets counted in the gross domestic product if produced locally.

• Exports are the sale of goods to other countries which bring in money into the economy. Imports on the other hand drain money from a country. For example, America exports phones and other technological equipment to India and takes agricultural products from them. The net of these transactions positive or negative is included in the calculation of the gross domestic product.

The problem of double counting takes place, when those goods that are used in the production of final goods is also counted in the GDP which over inflates the same. For example, a piece of wood may be used in the production of a bed however, we cannot count both bed and a piece of wood to be a part of the GDP and it should only include the final goods in place. The wood is an intermediate good which is used towards producing the final product.

The intermediate goods are not a part of the expenditure approach which does not include inventory but only counts final consumption in the measurement process and thus avoids the problem of double counting.

Please feel free to ask your doubts in the comments section if any.