Covering the measurement and calculation of Real GDP Assignment

Covering the measurement and calculation of Real GDP - Assignment Example The goods as well as the services produced in a certain country and brought to the market have some price. Some experts regard GDP as the price of the total output. The GDP can be calculated in the following ways. Cumulative figure of all income within an economy or the total spending made by all the participating agents within the same economy is referred to as GDP. Both the spending and the income will roughly be the same. It should be kept in king that Gross Domestic product and Gross National product is not the same thing. The market value of the goods as well as services produced within a particular time period by the residents of a particular country is regarded as the GNP. It allocates the production based on the ownership. Three approaches can be used in order to determine the GDP. They are- the income approach, the expenditure approach and the product approach. The product also called as the output approach sums the total produced within the economy in order to attain the va lue of GDP. The expenditure approach assumes that the products produced must be bought by someone and so the total value of the product must be matched by the total expenditure of the people in purchasing things. The last approach takes into consideration that the value of the products must be equal to the incomes of the factors of production. It determines the value of GDP by calculating the sum of the income of the producers. The expenditure method: Where, C= Consumption, I=investment, G=government expenditure, X=exports, M=imports. The reciprocal circulation of income between the producers as well as the consumers is referred as the circular flow of income. From the circular flow of income the following equation is derived: Leakages=Injections (Tucker, 2010, p.429). i.e. S+T+M=I+G+X where, S= net savings, T=net taxes, M= import expenditure, I=Investment, G=government expenditure, X=export expenditure. It following equation can also be derived from the above: (S-I) + (T-G) = (X-M) . If the value of the left hand side of the equation is negative, then it must have been financed from somewhere. The right hand side of the equation denotes the current account balance. Therefore, (S-I) + (T-G) = (X-M) + foreign savings The production method consists of three stages. In the first step the gross value of the output produced domestically is estimated. The second step involves determination of the value of intermediate consumption while in the third step the value of the intermediate consumption is subtracted from the gross value in order to arrive at the net value. The total of the gross added value in various activities related to the economy is referred to as GDP at factor cost. The sum of the indirect taxes and GDP at factor cost subtracted from subsidies will give GDP at producers’ price. There are two methods to determine the gross output of any sector. The gross output can be determined by multiplying the products of each sector with the respective price s prevailing in the market and add them up. It can also be determined by manipulating data on sales as well as inventories from companies records and again add them up. According to the income approach, GDP is calculated by summing up the incomes that firms are required to pay to the households for providing the production factors namely wages, interest, rents as well as profits.