Measuring GDP - Three Approaches To Measuring GDP

Three Approaches To Measuring GDP

1. Expenditures Approach:

The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M))

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

2. Income approach (NY = National Income)

Using the Income Approach GDP is calculated by adding up the factor incomes to the factors of production in the society. These include

National Income (NY) + Indirect Business Taxes (IBT) + Capital Consumption Allowance and Depreciation (CCA) + Net Factor Payments to the rest of the world (NFP)

In this approach,

NY = Employee compensation + Corporate profits + Proprietor's Income + Rental income + Net Interest

CCA = I + I (I= Investment)

NFP = Payments of factor income to the ROW minus the receipt of factor income from the rest of the world.

Thus,

GDP - NFP = GNP （GROSS NATIONAL PRODUCT)

GNP - CCA = NNP ( NET NATIONAL PRODUCT)

NNP - IBT = NY (NATIONAL INCOME)

3. Value added Approach:

The value of sales of goods - purchase of intermediate goods to produce the goods sold.