Measures of national income, output and expenditure Flashcards
Describe the output method of measuring GDP
Add up all the outputs produced by the firms in the economy
How do you avoid double counting of intermediate transactions when using the output method
Use value added by each firm to work out the gross value added GVA which will show the gross value of the output
What is the difference between GVA and GDP and how do you go between
GVA is measured at base prices whereas GDP is measured at market prices
To go from GVA to GDP you must add indirect taxes
GDP = GVA + (taxes - subsidies)
Describe the income method of calculating GDP
Value of total output can be measured by adding up the incomes received in the production of those outputs
Most often this includes wages and salaries alongside operating surplus which is the pretax profit
What are mixed incomes and how may they cause a problem within the income method
Mixed incomes are incomes earned by self-employed people which could cause a problem as they can be computed as either wages or profit
What is another potential problem for the income method
Some incomes are made by people working overseas and so are not domestic
Describe the expenditure method of calculating GDP and what is the key formula
The expenditure method measures all expenditures on the outputs of firms because all value added must be accounted for
GDP = C + I + G + NX
How does G split up and give examples
Individual final government consumption - health spending, education, services for individuals
Collective final government spending - national defence, public goods
How does I split up and give examples
Fixed capital formation - production of new capital goods like housing
Changes in inventories - stocks of inputs and unsold outputs held by firms
Net acquisition of valuables - productive activity creates goods that aren’t consumed in the process - art and jewellery
What is the formular for net investment
I(net) = I - depreciation
How is NX or net exports calculated
NX = X - IM
What is the formula for GNP (gross national product)
GNP = GDP + NIA (net income from abroad)
