Gross Domestic Product
(a) Analyse the methods by which Gross Domestic Product (GDP) may be measured. (10 marks)
In order to effectively analyse the ways in which GDP is measured and why this is, we must first identify what GDP is. Gross domestic product (GDP) is the total value of output in an economy and is used to measure change in economic activity. GDP includes the output of foreign owned businesses that are located in a country following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wear and by foreign owned restaurants and banks all contribute to the UK’s GDP. There are three ways of calculating GDP - all of which should sum to the same amount. These are; the expenditure method, the output method and the income method. The Expenditure Method is the most commonly used method of measuring GDP as it the most clear and simple method of the 3. This method of determining GDP adds up the market value of all domestic expenditures made on final goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of the expenditures together and you determine GDP. The full equation for GDP using this approach is GDP = C + I + G + (X-M) where;
C: Household spending
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services.
The following photo is a table of the United States GDP split up into 4 categories using the expenditure method. It also shows how much of the total GDP each section takes up as a %.
As you can see, expenditures can be broken down into the four components given in the equation above. The largest is personal consumption spending by households on final goods and services. Households can buy durable goods, those that last for some period of time, such as cars and furniture, as listed in the table. In addition, households can purchase non-durable goods, which are goods not
In order to effectively analyse the ways in which GDP is measured and why this is, we must first identify what GDP is. Gross domestic product (GDP) is the total value of output in an economy and is used to measure change in economic activity. GDP includes the output of foreign owned businesses that are located in a country following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wear and by foreign owned restaurants and banks all contribute to the UK’s GDP. There are three ways of calculating GDP - all of which should sum to the same amount. These are; the expenditure method, the output method and the income method. The Expenditure Method is the most commonly used method of measuring GDP as it the most clear and simple method of the 3. This method of determining GDP adds up the market value of all domestic expenditures made on final goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of the expenditures together and you determine GDP. The full equation for GDP using this approach is GDP = C + I + G + (X-M) where;
C: Household spending
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services.
The following photo is a table of the United States GDP split up into 4 categories using the expenditure method. It also shows how much of the total GDP each section takes up as a %.
As you can see, expenditures can be broken down into the four components given in the equation above. The largest is personal consumption spending by households on final goods and services. Households can buy durable goods, those that last for some period of time, such as cars and furniture, as listed in the table. In addition, households can purchase non-durable goods, which are goods not