Question

Write down the three identities of calculating the GDP of a country by the three methods. Also briefly explain why each of these should give us the same value of GDP. ​

Answer 1

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Answer 2

ANSWER :

❍ The three methods of calculating GDP of a country are :-

• ✠ Value Added Method

• ✠ Income Method

• ✠ Expenditure Method

❒ The three identities of calculating the GDP of a country by the three methods are as follows :-

• ✠ Value Added Method :

★ GDP = GVA₁ + GVA₂ + GVA₃ + . . . . . . . . . . + GVAₙ

⇒ GDP = ᴺ∑ᵢ₌₁ GVAᵢ

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• ✠ Income Method :

★ GDP = ᴺ∑ᵢ₌₁ Wᵢ + ᴺ∑ᵢ₌₁ Pᵢ + ᴺ∑ᵢ₌₁ Iᵢ + ᴺ∑ᵢ₌₁ Rᵢ

⇒ GDP = W + P + I + R

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• ✠ Expenditure Method :

★ GDP = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net exports

⇒ GDP = PFCE + GFCE + GDCF + (X - M)

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❒ These three methods should give us the same value of GDP :-

• ✪ We have three different methods of calculating GDP of a country namely Value Added Method, Income Method and Expenditure Method. All the three methods of calculating GDP of a country give the same of the value of national income because they are used to measure the same physical output at three different phases. Production, income and expenditure are three different phases of circular flow of income and use of a particular method depends on the availability of reliable data. Therefore, all these three methods should give us the same value of GDP.