Question

Gross domestic product measures: Select one:

a. the total income of everyone in the economy

b. the total expenditure on goods and services

c. both A and B

d. neither A nor B

Answer 1

Gross Domestic Product (GDP) is the sum of the values of all final goods and services produced within the domestic territory of an economy during a specified time period. The income method and expenditure method are two of the standard methods of calculating GDP.

The Income method adds up incomes earned by households, with wages, rent, interest and profit forming the main sub segments. Symbolically,

GDP = Rent + Wages + Interest + Profit

And,

The Expenditure method adds up the money spent on goods and services. The four main categories of expenditure are:

1. Personal consumption expenditure (C): household spending on consumer goods.

2. Gross private domestic investment (I): spending by firms, households on new capital, i.e., plant, equipment, inventory, machinery and new residential structures.

3. Government Expenditure (G)

4. Net exports (EX-IM): exports (EX) minus imports (IM)

The expenditure method calculates GDP by adding altogether these four components of spending.

Symbolically,

                                GDP= C+I+G+ (EX-IM)

Hence, the right answer is Option c - both A and B.