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Briefly explain the components used to calculate GDP (be explicit, don't just put the letter).

Question:

Briefly explain the components used to calculate GDP (be explicit, don't just put the letter).

Gross Domestic Product:

The gross domestic product tells us the value of a finished output of goods and services within the country's territories for a certain period. Usually, the GDP is determined every year.

Answer and Explanation:

There are three methods used to compute the GDP.

Expenditure approach: The GDP is based on how much the economy spends as a whole. The formula is:

  • GDP = Consumer spending + Investment + Government spending + Net export

Where,

  • Consumer spending- shows the household spending on personal items.
  • Investment - shows the amount used to acquire capital goods.
  • Government spending - shows the amount spent by the government for public purposes.
  • Net export - shows the difference between the total imports and the total exports.


Income approach: The GDP is based on how much the economy earns revenue as a whole.

  • GDP = Total national income + Sales taxes + Depreciation + Net foreign factor income

The total national income includes salaries and wages, rent income, profit of the business and interest revenue. The net foreign factor income is the difference between the income of a country and a foreign country.


Value-added approach: The GDP is based on output produced by economic sectors. The economic sectors include manufacturing sectors, service sectors and primary sectors like oil and gas.

  • GDP = Value of production - Value of intermediate consumption

Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
66K

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