Question

3. Define GDP. Explain the various methods of calculating GDP.

So, GDP is the total value of goods produced and services provided in a country during one year. For the gross domestic product, “gross” means that the GDP measures production regardless of the various uses to which the product can be put.

I know that one method is the Expenditure method:

GDP = private consumption + gross investment + government investment + government spending + (exports – imports).

I need 1 or 2 more methods, but do not know what they are.

Answer 1

GDP refers to the money value of all goods and services that are produced within the country during specified period of time. GDP is calculated on annual basis as well as on quaterly basis. Higher GDP reflects increase in national output, higher economic growth, more employment and better standard of living. GDP act as a tool for Investors, Businesses, government for investment and strategic decision making.

GDP can be calculated by 3 methods, These are -

1. Expenditure method - The most widely used method to calculate GDP is expenditure method. This method aims to collect data on expenditure side by adding household spending, government spending, business investment and Net exports.

GDP by Expenditure Method = Household consumption + Gross Business Investment + Government Spending + Net Exports (Export - Import)

2. Income method - In income method, we add all income that is generated by production of goods and services and by Businesses ie(land, labour, capital & profit)

GDP by income method = Compensation to Employes (wages & salaries) + Business profits + rental & interest income

3. Value Added Method - In value added method, also known as production method, measures the output of all sectors(Manufacturing, construction, Primary), in form of value added in each part of production process.

GDP by value added method = Value of Production - value of intermediate goods.