Question

explain the income method of calculating national income. assume that a farmer sells wheat to miller for rs. 15. the miller turns wheat into flour, which she sells to a baker for rs. 35. the baker turns the flour into bread and sells to consumer for rs. 60. calculate the gdp in this case? which method do you use to calculate gdp in this case? what precautions should be taken in that method?

Answer 1

The income method calculates the GPD by adding all the income generated by each production stage included in the GDP.

In this case, using the income method:

Farmer sells wheat income = 15

Miller produces flour income = 35 - 15 = 20

Baker makes bread income = 60 - 35 = 25

total GDP 15 + 20 + 25 = 60

If you use the expenditures method, you just account for the price of bread = 60. Both methods should yield the same result.

When using the income method, you must be very careful with depreciation and foreign factors.