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Estimate the economic activity in this economy by using Production Approach, Consumption...

Question:

Estimate the economic activity in this economy by using Production Approach, Consumption Approach, and Expenditure Approach.

Gross Domestic Product:

Gross Domestic product (GDP) refers to the market value of all goods and services, being produced in an economy, during a period of time ( a year). GDP can be calculated using three methods - income method, expenditure method and value added method.

Answer and Explanation:

GDP is calculated, using all three approaches, as follows -

1) GDP from Value added method -

From value added method, GDP is calculated as equal to total value of final goods and services, that a nation produces.

  • GDP = Value of output in particular year - intermediate consumption
  • GDP = Cotton sold to consumers + Fabric sold in market
  • GDP = 50000 + 850000
  • GDP = 900000.

2) GDP from Expenditure method -

Expenditure method equate GDP as equal to total amount spent.

  • GDP = Consumption + Investment + Government Expenditure + Net export
  • GDP = Expenditure on cotton + expenditure on fabric
  • GDP = 50000 + 850000
  • GDP = 900000.

3) GDP from Income method -

  • GDP from income method calculates the total output of a nation as equal to the value of total factor income earned by residents of citizens of nation.
  • GDP = Payment to workers for cotton production + seed bought + fertilizers and pesticide bought + taxes to government + Profit of cotton producing farmers + payment to employee for producing fabric + payment to transport for shipping + payment of taxes + Profit of fabric producers

Where, Profit of cotton producing farmers = Cotton production - (Payment to workers for cotton production + seed bought + fertilizers and pesticide bought + taxes to government)

And

Profit of fabric producers = Textile Production - (payment to employee for producing fabric + payment to transport for shipping + payment of taxes + purchase of cotton)

  • GDP = 25000+10000+25000+5000+(250000-25000-10000-25000-5000)+100000+50000+200000+(850000-100000-50000-200000)
  • GDP = 900000.

Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
59K

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