Fully explain one method of measuring GDP (hint: use one of the components mentioned as an example).
Gross Domestic Product:
Gross domestic product is used to determine the value of all the goods and services produced at a certain period within the country's territory. Usually, the period covered is for one year.
Answer and Explanation:
A method used to measure GDP is the expenditure approach. The formula is:
- Gross domestic product = Consumer spending + Investment + Government spending + Net export
The expenditure approach in GDP uses the perspective of how much the economy spends within a certain period. Let us define each component of the formula.
- Consumer spending - includes items bought for personal consumption. This does not include items previously sold since it is already included in the GDP.
- Investment - items classified as capital goods. Examples are purchase of new residential housing and purchase of new furniture and fixtures in business.
- Government spending - includes spending in any government offices. Examples are construction of public roads and public buildings.
- Net export - items acquired from outside of the country. The total imports are deducted from the total exports.
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from Economics 102: MacroeconomicsChapter 4 / Lesson 3