Compare and contrast the two approaches of GDP computation mentioned in the text

Question

Compare and contrast the two approaches of GDP computation mentioned in the textbook. Explain which approach you think is more reliable and gives more accurate estimates of GDP. Provide two examples—one of the U.S. and a second of another nation—to support your viewpoint.

To compare and contrast the two approaches of GDP computation, focus on the following questions:

What are the components of each approach?

What are the major economic activities that each approach covers?

What are the computation methods of each approach?

What are the assumptions each approach make?

Explanation / Answer

Gross domestic product (GDP): This is the monetary value of all finished goods produced in an economy domestically during a year.

There are two approaches of measuring GDP—Income approach, and expenditure approach.

Income approach: This is the accumulation of all incomes in an economy.

Components are employee income, corporate profit, interest income, agricultural income, miscellaneous income, taxes, and subsidies.

Income of nation is the major economic activity in this approach.

Computation method in income approach = Employee income + Corporate profit + Interest income + Agricultural income + Miscellaneous income + Taxes – Subsidies.

Assumption: The aggregate of all finished goods must be equal to nation’s income.

Expenditure approach: This is the aggregate of all expenditures in an economy.

Components are consumption, investment, government spending, import, and export.

Expenditure of nation is the major economic activity in this approach.

Computation method in expenditure approach = Consumption + Investment + Government spending + (Export – Import)

Assumption: The aggregate of all finished goods must be equal to nation’s spending.

Better approach: Whatever approach is followed GDP would equal or near to equal always. But the expenditure approach is more reliable and accurate, since the mistake of double-counting is much lower here.

Supporting point: The country US and India used to follow expenditure approach to calculate their GDP.

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