Income Approach to Measuring GOP

GDP stands for Gross Domestic Product. It is the best way to determine a country’s economy and includes everything that is produced by all the people and companies in that country. Some of the components are personal consumption expenditure and business investment plus Government spending including exports minus imports. GDP can be calculated using two approaches, Income and Expenditure approach, for income approach, it calculates National Income (NI) where NI is the sum of labor income, rental income, interest income and profits whilewith expenditure approach, GDP is calculated as the sum of 4 categories of expenditures on output which are gross private consumption expenditure, gross private investment, government purchases and net exports. Value added refers to the addition value to raw material by a firm by virtue of its productive activities. The approach measures national income in different phases of production in the circular flow where it shows the contribution of each producing unit in the production process. In national approach, it enables determination of the contribution of an enterprise to current flow of products also; exports and imports are not separately included during GDP calculation.

Final market value is the difference between capital contributed and final market value of the product. Calculated as shown below;

Stage of                                  Sale (Value-                Value              Value              Market Value

Production                             Price of output)         of Input          added

Farmer                                     0.30                             0.00                 (0.30-0.00)                  0.30

Miller                                       0.50                             0.30                 (0.50-0.30)                  0.50

Wholesaler                              1.00                             0.50                 (1.00-0.50)                  1.00

Grocer                                     1.50                             1.00                 (1.50-1.00)                  1.50

Total Value3.3                                                           1.8                   1.5                   Final = $ 1.50

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