GDP Essay Example | Topics and Well Written Essays - 1750 words

GDP - Essay Example Measuring GDP is a bit complex, but the most basic form of the calculation can be done in two ways: this is through adding up what everyone earned in a year (income approach) or adding up what everybody spent in a year (expenditure method) (Baumol et al 69). Both methods can give you roughly a similar total. With the income approach, which is also known as (GDP) I is calculated by adding the total compensation to gross profits, employees for both incorporated and non-incorporated firms in addition to taxes without any subsidies. On the contrary, the expenditure method is a more usable or common approach and is calculated by adding investment, total consumption, government spending and net exports. Introduction GDP is termed as the market value of all the final goods and services that are produced domestically in one year. It is also regarded as the single most important measure of macroeconomic performance. It is closely related to the measure of the economy’s total output of products known as gross national product (GNP). This is regarded as the market value of all the final goods and services produced by a nation within a year. The difference between GDP and GDNP is a bit complex. In much more simpler terms, GDP involves only goods and services that are produced by a nations’ own people and their corporations. ... A person can either use statistics to calculate the overall macroeconomic activity. Measuring GDP: The expenditure and income approaches There are two distinct ways of measuring GDP, the income and expenditure approach. In the expenditure approach, we add up the market value of all the domestic expenditure that was made on the final goods and services in a single year. The final goods and services are known as the goods and services that have been purchased for the final use or the goods and services that will not be used in production or resold again in that specific year. On the contrary, the intermediate goods and services are those that can be used in the production of the final goods and services. This type of foods and services are not included in the expenditure approach to obtain the GDP. This is due to the fact that expenditures on intermediate goods and services are included in the market value of expenditures that are made on the final goods and services (Mankiw 89). There fore, including both intermediate and final goods and services using the expenditure approach will lead to double counting thus and exaggeration of the true market value of GDP. The total expenditure of the final goods and services can be broken down into four large types of expenditure categories with reference to the types of goods and services that are purchased. The average total of the four types of expenditure adds up to give us the GDP. These include: a) Investment expenditure: this can be divided into two groups: expenditures on fixed investment goods and that on inventory investment. The fixed investment goods are those that a regarded as useful over a long period of time. Examples of fixed investment