Approaches of Mesurng GDP

There are two types of approaches of measuring GDP, the expenditure approach and the resources approach.Expenditure Approach: GDP is calculated by summing the expenditures on all final goods and services produced.

Under this approach, GDP is a measure of aggregate output. Resource Cost-Income Approach: GDP is calculated by summing the income payments to resource suppliers and the other costs of producing those final goods and services Under this approach, GDP is a measure of aggregate income.

The Expenditure Approach

There are four components of GDP for this approach.

  • Personal consumption expenditures This is the household spending on consumer goods and services.
  • Gross private domestic investment This is the flow of private sector expenditures: Fixed investment (that is, purchases of durable assets),  Inventory investment (that is, the addition to inventories), private investment indicates the the economy’s future productive capacity.
  • Government consumption and gross investment: Note that transfer payments such as social security are not included in GDP.
  • Net exports: Net Exports = Total Exports – Total Imports. Net exports can be either positive or negative.

The Resource Cost-Income Approach

There are different Components of GDP for this approach. Income payments to resource owners:

  • Employee compensation
  • Income of self-employed proprietors
  • Rents
  • Corporate profits
  • Interest

Non-income cost items:

  • Indirect business taxes: These are taxes imposed on the sale of products.
  • Depreciation This component pays for the replacement of the capital used up in the production process.
  • Net income earned by foreigners within the country.