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Fully explain one method of measuring GDP (hint: use one of the components mentioned as an example).

Question:

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.

Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
65K

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