Question

The two sector flow model represents a good way to see how GDP is counted. What are the two methods or approaches to counting GDP?

a. The incomes and expenditures approaches
b. The income and saving approach
c. The expenditures and saving approaches
d. The real and the nominal approaches

Answer 1

The correct answer is A) The income and expenditure approach

Step-by-step explanation:

The income approach is based on the principle that income equals production. It adds up the following categories of income:

1. Wages
2. Corporate profits
3. Income from interest
4. Farmer's Income
5. Income from non-incorporated businesses (small businesses)

The expenditure approach is based on the principle that all income must be spent. It adds up the following categories of expenditure:

1. Consumption (from households)
2. Investment (from firms)
3. Government spending
4. Net exports (exports minus imports)