GDP is the measure of

Answer 1

GDP is the market value of all final goods and services made domestically in one year. It's different from GNP, which is the market value of all final goods and services made by a nation in one year.

There are two ways to measure GDP: the expenditure and income approach.

Expenditure approach:

GDP = Consumption + Investment + Government + Exports - Imports

Consumption expenditures include nondurable goods (e.g. food), durable goods (e.g. automobiles), and services (e.g. haircuts by barbers). Investment expenditures include purchasing new equipment, nonresidential houses, or factories. Government expenditures include paying the military and construction workers for building public projects. Government expenditures do not include transfer payments, such as Social Security and welfare, because the people who receive the transfer payments do not offer goods or services in exchange for the transfer payments. In other words, there is no new purchase of goods or services. Exports are goods produced domestically and sold abroad. Imports are goods produced abroad and sold domestically. Imports must be subtracted because they are not made domestically.

Income approach:

GDP = Rents + Wages + Profits + Income + Depreciation + Indirect Business Tax

The rationale behind the income approach is that total expenditure is equivalent to the total income for households and firms received in the form of rents, wages, profits, and income. Depreciation expenditure must be included in the income approach, but not the expenditure approach, because they replace goods that are already existing. Indirect Business Taxes include sales taxes and excise taxes. Remember that indirect business taxes are not included in the expenditure approach, only in the income approach.