Question

a) Give the definition of GDP and explain what items are not included in its calculation?

b) How is GDP calculated using the expenditure approach?

c) How is GDP calculated using the income approach?

Answer 1

(a) GDP is defined as total value of goods and services produced in a country

Item which not included in calculation of of GDP are -

• Sale of goods which are used (second hand sales)
• Goods which are considered intermediate goods and is used for production of other final goods
• Transfer payment which are made by government
• Sale of goods and services , illegally
• Sale of those goods which are sold outside the domestic borders
• Unreported transactios like give a tip to a waiter
• Non marketable transaction like fixing your own vehicle

(b) Calcution of GDP Using expenditure approach

GDP = consumption + Investment + Government spending + Net Exports

(c) Calculation of GDP using income approach

GDP = National income + sales tax + Depreciation + net factor income from abroad