How does the income approach to measuring GDP differ from the expenditure approa

Question

How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value added and its importance in the income approach. Consider the following data for the selling price at each stage in the production of a 5-pound bag of flour sold by your local grocer. Calculate the final market value of the flour.

Stage of Production                      Sale Price

Farmer                                           $0.30

Miller                                              $0.50

Wholesaler                                      $1.00

Grocer                                             $1.50

Explanation / Answer

The expenditures approach calculates the GDP by adding the amount of money spent on final goods and services in the economy in the categories of private household consumption (C), private firm investment spending (I), government expenditures (G) and net exports (Ex-Im). When goods are produced, income is generated (resources get paid). This approach measures GDP by adding up all the income that was generated when the GDP was produced. Value added refers to the amount of value generated at each stage of production. This amount is paid to the producer of an intermediate stage of a good, and if not adjusted for in the income approach calculation of gdp, this can result in "double counting". The final market value of the flour should be what the grocer sells it for, $1.50, though through counting the value at each stage of production under the unmodified income approach you would get $3.30

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