Question

Discuss the three ways in which the gross domestic product (GDP) can be measured? Why does each of them end up with approximately the same value?

Answer 1

There are three way to calculate gross domestic product (GDP) . Those are,

(1) National Output = National Expenditure (Aggregate Demand) = National Income

This is the expenditure method which involves aggregate demand (AD)

The equation for this method is :

GDP = C + I + G + (X-M)

In which ,

• C: Household spending on goods and services
• I: Capital Investment spending
• G: Government spending
• X: Exports of Goods and Services
• M: Imports of Goods and Services

(2) Second method is by the sum of factor incomes.

The Income Method:

Here, GDP is the sum of the incomes earned through the production of goods and services.

That is :

(i)Income from people in jobs and in self-employment (e.g. wages and salaries)

(ii)Profits of private sector businesses

(iii)Rent income from the ownership of land

(iv)Gross Domestic product (by sum of factor incomes)

Now, we will add all and equate it with (iv)

=> (i) + (ii) + (iii) = (iv)

(3) The third method includes the contribution to a nations GDP

Gross Value Added and Contributions to a nation’s GDP

• The three main wealth-generating sectors in an economy –
• manufacturing and construction,
• primary (including oil& gas, farming, forestry & fishing)  
• wide range of service-sector industries.

• This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. .

Value added =  the increase in the value of goods or services as a result of the production process.

Value added = value of production - value of intermediate goods

All the three end up with same value because of the interconnection of approaches of these methods.