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Gross Domestic Product and everything involved with it?

Economics
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I do not understand Gross Domestic Product

Apr 13th, 2015

I tried to give you best information about GDP so you can understand it completely.

The gross domestic product(GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

1.  The following equation is used to calculate the GDP: GDP = C + I + G + (X - M) or GDP = private consumption + gross investment + government investment + government spending + (exports - imports).

2.  Nominal value changes due to shifts in quantity and price.

Examples of Calculating GDP

Here, we will show you the two different ways of calculating GDP using the information from different factors given in Table 1.

Using the Expenditures Approach

Table 1: Expenditures

Transfer Payments

$54

Interest Income

$150

Depreciation

$36

Wages

$67

Gross Private Investment (I)

$124

Business Profits

$200

Indirect Business Taxes

$74

Rental Income

$75

Net Exports (X-M)

$18

Net Foreign Factor Income

$12

Government Purchases (G)

$156

Household Consumption (C)

$304

By using the data in Table 1 we can calculate the GDP using the expenditures approach. As you can see, the table contains more data than is necessary so you have to look for the parts which make up the expenditures approach to calculating GDP.  The necessary data is highlighted within the table.
Remember:

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

In this case the C is represented by Household Consumption which is $304.
The Grefers to Government Spending which is $156.
 Iis gross private investment and is $124.
 (X - M)is the net exportsand in the table is shown to be $18.

Therefore:

GDP = $304 + $156 + $124+ $18

GDP = $602

Using the Income Approach

Table 1 also contains the data necessary to calculate GDP using the income approach.

Table 1: Income

Transfer Payments

$54

Interest Income (i)

$150

Depreciation

$36

Wages (W)

$67

Gross Private Investment

$124

Business Profits (PR)

$200

Indirect Business Taxes

$74

Rental Income (R)

$75

Net Exports

$18

Net Foreign Factor Income

$12

Government Purchases

$156

Household Consumption

$304

In this case we use the formula:

NI = W + R + i + PR

Wis thewages that are represented by$67 in the table.
Rental income is the R and is$75.
Interest income is i and is$150.PRarebusiness profits and are$200.

Therefore:

NI = $67 + $75 + $150 + $200

NI = $492

GDP = NI + Indirect Business Taxes + Depreciation

GDP = $492 + $74 + $36

GDP = $602


As you can see, in this case, both approaches to calculating GDP will give the same estimate. This is not always what happens and sometimes GDP will differ slightly when the different approaches are used.


Apr 13th, 2015

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