- GDP can be calculated by three methods.
Value-Added Method (Product Method)
- Sums the value of all goods and services produced by all firms.
- Value added by a firm is its production value minus intermediate goods used.
- Example: Farmer’s value added + Baker’s value added = Total GDP.
Expenditure Method
- Sums expenditures by all four sectors on final goods and services.
- Sectors include household (C), private (I), government (G), and external (X-M).
- Formula: GDP = C + I + G + (X - M).
- C, I, G are expenditures on domestically produced final goods.
Income Method
- Sums the incomes received by all four factors of production.
- These incomes are profit, interest, rent, and wages.
- Formula: GDP = Profit + Interest + Rent + Wages.
- This reflects the distribution of revenue from production.
Diagram: Gross Domestic Product
- Income Method: This method calculates GDP by summing the incomes received by factors of production.
- Product Method: This method calculates GDP by summing the value of all goods and services produced.
- Expenditure Method: This approach calculates GDP by adding expenditures from household, government, private, and external sectors.