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Calculating Gross Domestic Product

Calculating Gross Domestic Product. GDP is the value of all goods and services produced by an economy in one year. There are three ways of calculating GDP. Calculating Gross National Product. No.1. The Production Approach.

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Calculating Gross Domestic Product

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  1. Calculating Gross Domestic Product GDP is the value of all goods and services produced by an economy in one year. There are three ways of calculating GDP

  2. Calculating Gross National Product No.1 The Production Approach The value of what firms create. To do this, only the value added by each producer is counted. This is to avoid the problem of double counting goods that are used in the production of other goods and services. Eg: a loaf of bread ($1.80) A baker buys flour and turns it into bread which is sold to a shop for $1.40 A farmer grows some wheat and sells it for $0.20 Finally, a shop buys bread and sells it for $1.80 A miller buys the wheat for $0.20 and grinds it into flour. She sells the flour for $0.80. Price ($) $0.40 is added to GDP $0.60 is added to GDP $0.60 is added to GDP $0.20 is added to GDP

  3. Calculating Gross National Product No.1 The Production Approach The value of what firms create. To do this, only the value added by each producer is counted. This is to avoid the problem of double counting goods that are used in the production of other goods and services. Eg: a loaf of bread ($1.80) $1.80 + + + = $0.40 $0.60 $0.60 $0.20

  4. Calculating Gross National Product No.2 The Expenditure Approach Spending on goods and services by each of the four sectors of the economy will reflect the value of goods and services it has produced. C onsumer Expenditure: spending by HOUSEHOLDS on final goods and services I nvestment: spending by FIRMS on capital goods G overnment Expenditure: spending by GOVERNMENT on goods and services (this excludes transfers such as benefits). O verseas expenditure: the balance of receipts from EXPORTED goods and services less payments for IMPORTED goods and services.

  5. Calculating Gross National Product No.2 The Expenditure Approach Spending on goods and services by each of the four sectors of the economy will reflect the value of goods and services it has produced. NZSA accounts record this spending as: GDP C + + + = I Final Consumption Expenditure - private Gross Fixed Capital Formation G Final Consumption Expenditure - government (X-M) O Exports minus Imports

  6. Calculating Gross National Product No.3 The Income Approach Measuring the value of resources used in production will indicate the value of goods and services that have been produced. NZSA accounts record this spending as: r ent is the return to LAND (natural resources) Compensation to employees Consumption of fixed capital w ages will reflect the value of LABOUR used Operating surplus Indirect taxes and subsidies i nterest is paid on CAPITAL goods employed p rofits paid to ENTERPRISE will show their input into production

  7. Incomes Households Firms Production Expenditure Calculating Gross National Product The circular flow model shows us that the three approaches should give us the same value for GDP. The reality is that they rarely do. An item “Statistical Discrepancy” is always added to the Expenditure Approach to make them balance.

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