The Production Approach
1)
The Expenditure Approach
This method of determining GDP adds up the market value of all domestic expenditures made on final goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of the expenditures together and you determine GDP.
This method of determining GDP adds up the market value of all domestic expenditures made on final goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of the expenditures together and you determine GDP.
2)
The Production Approach
This
method also called the Net Product
or Value added method requires three
stages of analysis. First gross
value of output from all
sectors is estimated. Then, intermediate
consumption such as cost of
materials, supplies and services used in production final output is
derived. Then gross output
is reduced by intermediate consumption
to develop net production.
3)
The
Income Approach
This method of determining GDP is to add up all the income earned by households and firms in the year. The total expenditures on all of the final goods and services are also income received as wages, profits, rents, and interest income. By adding together all of the wages, profits, rents, and interest income, you determine GDP:
This method of determining GDP is to add up all the income earned by households and firms in the year. The total expenditures on all of the final goods and services are also income received as wages, profits, rents, and interest income. By adding together all of the wages, profits, rents, and interest income, you determine GDP:
As
such we will concentrate on the Expenditure Approach which is the
most commonly discussed method of representing GNP particularly in
non-academic examinations of economic activity.
GDP
as examined using the Expenditure Approach is reported as the sum of
four components. The formula for determining GDP is: C + I + G + (X -
M) = GDP
C
= Personal Consumption Expenditures
I
= Gross Private Fixed Investment
G
= Government Expenditures and Investment
X
= Net Exports
M
= Net Imports
Before
moving forward in our discussion, it should be noted, the income
approach is gathering a growing following. This is true particularly
among economic blogs, investment publications and cable news business
programs due to its concentration on the importance of wages. An
alternative method of calculating GNP using the Income Approach is
“RIPSAW.”
The
mnemonic “RIPSAW” breaks
down as follows: GDP = R + I + P + S + A + W
R
= rents
I
= interests
P
= profits
SA
= statistical adjustments (corporate income taxes, dividends,
undistributed corporate profits
W
= wages
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