GDP is typically calculated by tallying all final expenditures in an economy, but it can also...

GDP is typically calculated by tallying all final expenditures in an economy, but it can also be calculated by adding income. Pick a product and give an example of how that product's contribution to GDP could be calculated using income

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Expert Solution

GDP can be calculated by three methods: Production method, Income Method and Expenditure method

GDP by income method is the sum total of income of all the people residing in the geographical boundaries of a country. Let us take the example of a cookie.

A baker has to make some cookies. For that he will require some raw materials like milk, flour, sugar etc. He gets the raw materials from a farmer and pays his $10. Now, after making these, he sells these to a wholesaler for $50. Wholesaler sells these to retailer for $80 and finally a consumer pays $100 for the cookies. Now if from the perspective of income for everyone, let's start adding everybody's income. Farmer earns $10, baker earns (50-10) $40. Wholesaler earns $(80-50) = $30. And the retailer earns $20. The total of all these incomes is $(10 + 40 + 30 +20) = $100 which is also equal to the expenditure of the final consumer. Hence, we get equal GDP by every method.

Rahul Sunny answered 9 months ago

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