Question

MEASURING ECONOMIC PERFORMANCE: A) The expenditure approach; B) The Income Approach; C) Problems with GDP as a Measure of Economic Performance

Answer 1

Gross domestic product is the market value of all final goods and services produced within the national borders of a country for a given period of time.

A. Expenditure Approach

The approach to expenditure attempts to calculate GDP by assessing the amount of all final goods and services bought in an economy. The components of U.S. GDP identified as “Y” in equation form, include Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).

Y = C + I + G + (X − M) is the standard equational (expenditure) representation of GDP.

B. Income Approach

The income approach looks at the final income in the country, these include the following categories taken from the U.S. “National Income and Expenditure Accounts”: wages, salaries, and supplementary labor income; corporate profits interest and miscellaneous investment income; farmers’ income; and income from non-farm unincorporated businesses. Two non-income adjustments are made to the sum of these categories to arrive at GDP:

• Indirect taxes minus subsidies are added to get from factor cost to market prices.
• Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product.

C. GDP confines its focus to the value of products or services within a country's real geographic limit, where GNP focuses on the value of products or services specifically attributable to people or nationality, irrespective of where they are produced. GDP has become the normal metric used in national income reporting over time and most national income reporting and country comparisons are carried out using GDP.