Explain the different methods of calculating or measuring Gross domestic product (GDP) of a country (Dec’13)

Q. Explain the different methods of calculating or measuring Gross domestic product (GDP) of a country (Dec’13).

Three Approaches to Measuring GDP

1. Expenditures Approach: The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M))

GDP = C + I + G + (X-M)

2. Income approach (NY = National Income): Using the Income Approach GDP is calculated by adding up the factor incomes to the factors of production in the society. These include National Income (NY) + Indirect Business Taxes (IBT) + Capital Consumption Allowance and Depreciation (CCA) + Net Factor Payments to the rest of the world (NFP)

In this approach, NY = Employee compensation + Corporate profits + Proprietor's Income + Rental income + Net Interest

CCA = Investment gross + Investment net

NFP = Payments of factor income to the ROW minus the receipt of factor income from the rest of the world.

Thus, GDP + NFP = GNP （GROSS NATIONAL PRODUCT)

GNP - CCA = NNP (NET NATIONAL PRODUCT)

NNP - IBT = NY (NATIONAL INCOME)

3. Value added Approach: The value of sales of goods - purchase of intermediate goods to produce the goods sold.

Distinguish between the GDP deflator and the consumer price index

a. The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket.

b. GDP deflator frequently changes weights while CPI is revised very infrequently.

c. CPI will consider imported goods because they are still considered as consumer goods while GDP deflator will only contain prices of domestic goods.