Question

The following are two equivalent ways to measure GDP:

1) total income earned in an economy in a given time period, and
2) total spending on the final goods and services produced in an economy in the same time period.
True or False?

Answer 1

ANSWER : TRUE

EXPLANATION :

GDP denotes the total (gross)value of goods & services produced by an economy, during a period of time (financial year) .

This total value of goods can be calculated by both Income & Spending approach , based on assumption that 'one person expenditure is other person income'. Because both reflect the total value of goods produced .

This is evident from two methods to calculate GDP :

1. Expenditure Method

NDP (net value) = Compensation of Employees + Opereating Surplus + Mixed Income ;

Where - 1st COE is income of labour , 2nd OS (Rent + Interest + Profit) income of other factors - land , 3rd MI income from self employed .

2. GDP = Private Final Consumption Expenditure + Govt. Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports ;

Where - 1st PFCE is expenditure by private households , 2nd GFCE expenditure by govt , 3rd GDCF investment expenditure by firms , 4th expenditure by Abroad .