Question

Measuring domestic output and national income.

Explain in two paragraphs the two sides of GDP. In two other aditional paragraphs explain what is not included and why?

Answer 1

The two sides of GDP is:

• Expenditure side (Demand side): It comprises of household consumption expenditure (C), Investment expenditure by firms (I), government spending (G) and net exports which is exports less imports (NX= X-M).

Y = C+I+G+NX

• Income side (Supply Side) It comprises of factor income from the factors of production, these are:

wages and salaries (compensation to labor), rent earned on land, interest given on capital and profit earned by the organisation. Also include the mixed income which is the income of self employed people.

Y = Wages & Salary + Rent + Interest + Profit + Mixed income

What is not included ?

The following items are not included in the calculation of GDP:

• The goods produced outside the boundary of a country are not included in GDP because GDP is the production within boundaries of a country.
• Sales of used goods are not included because GDP includes only the sale of newly product goods in a particular year.
• Illegal sale of goods, these are illegal goods which are not included because government does not count it in GDP.
• Transfer payments made by the government are not included in GDP because these are not given in exchange for any productive activity.
• Intermediate goods used in the production process because it can lead to the problem of double counting.