GDP = Sum of expenditure from all firms and individuals on consumption of any goods or services
- Output of goods and services that have a value in terms of money results in expenditure for the consumer. GDP can hence be derived by measuring the overall expenditure in the market.
- C + I + G +(X-M)
- C…..Private consumption from households (for eg; goods and services such as food, clothes, laundry etc)
- I…..Investment from firms to increase productive capacity (for eg; purchasing machines, office buildings etc) This also includes unsold goods in the inventory of firms.
- G….. Spendin from Government (for eg; to build hospital, school, infrastructure etc)
- (X-M)….. Spending from foreign consumer on goods and services produced within our country. This is calculated by measuring net exports (subtracting the value of imports from the value of exports of goods and services)
- This method works on the presumption that all the goods and services that the country is producing are consumed amongst these four groups of people. So if one adds up the total expenses by each of these groups, the total GDP can be measured.
Final GDP = Private Consumption + Firms’ investment + Govt. Spending + Net Exports
Calculation of GDP: Income Method
GDP = Sum of income of all firms and individuals engaged in production of any goods or services
- Economy is broadly divided into two groups of people
o Those who contribute their labor
o Those who contribute their capital
Cost or production leads to income for both these groups of people. (for eg: a mechanic for cars earns a monthly salary, the shareholders of the car company earn money from dividends, owners of the manufacturing premises earn lease rent and so forth)
If we add income of all firms and individuals engaged in the production of any goods and services within the premises of a country, we can measure the GDP at Factor Cost (which does not reflect the impact of taxes or subsidies)
Taxes distort (¯) the income form production; hence they need to be added back into the income.
Subsidies also distort () the income from production, hence they need to be subtracted from the income.
Final GDP = GDP Factor cost + Taxes – Subsidies
- Output of goods and services that have a value in terms of money results in expenditure for the consumer. GDP can hence be derived by measuring the overall expenditure in the market.
- C + I + G +(X-M)
- C…..Private consumption from households (for eg; goods and services such as food, clothes, laundry etc)
- I…..Investment from firms to increase productive capacity (for eg; purchasing machines, office buildings etc) This also includes unsold goods in the inventory of firms.
- G….. Spendin from Government (for eg; to build hospital, school, infrastructure etc)
- (X-M)….. Spending from foreign consumer on goods and services produced within our country. This is calculated by measuring net exports (subtracting the value of imports from the value of exports of goods and services)
- This method works on the presumption that all the goods and services that the country is producing are consumed amongst these four groups of people. So if one adds up the total expenses by each of these groups, the total GDP can be measured.
Final GDP = Private Consumption + Firms’ investment + Govt. Spending + Net Exports
Calculation of GDP: Income Method
GDP = Sum of income of all firms and individuals engaged in production of any goods or services
- Economy is broadly divided into two groups of people
o Those who contribute their labor
o Those who contribute their capital
Cost or production leads to income for both these groups of people. (for eg: a mechanic for cars earns a monthly salary, the shareholders of the car company earn money from dividends, owners of the manufacturing premises earn lease rent and so forth)
If we add income of all firms and individuals engaged in the production of any goods and services within the premises of a country, we can measure the GDP at Factor Cost (which does not reflect the impact of taxes or subsidies)
Taxes distort (¯) the income form production; hence they need to be added back into the income.
Subsidies also distort () the income from production, hence they need to be subtracted from the income.
Final GDP = GDP Factor cost + Taxes – Subsidies
 |
Subscribe to Ashwin Group |
Visit this group |
No comments:
Post a Comment