Which of the following methods of calculating GDP ensures that Nationa...
All three methods of calculating GDP—Product Method, Income Method, and Expenditure Method—yield the same result because National Product equals National Income which also equals National Expenditure. These methods provide different perspectives on how GDP can be measured, but they all lead to the same value.
Which of the following methods of calculating GDP ensures that Nationa...
Understanding GDP Calculation Methods
Gross Domestic Product (GDP) can be calculated through three primary methods: the Product Method, the Income Method, and the Expenditure Method. Each of these methods serves to measure the economic performance of a country but approaches the calculation from different angles.
1. Product Method
- This approach calculates GDP by adding up the value of all goods and services produced in an economy.
- It emphasizes the output generated by various sectors, including agriculture, manufacturing, and services.
2. Income Method
- This method focuses on the total income earned by individuals and businesses in the economy.
- It includes wages, profits, rents, and taxes, minus subsidies, thereby capturing the earnings generated from production.
3. Expenditure Method
- The Expenditure Method calculates GDP by summing total spending on the nation’s final goods and services.
- It includes consumption, investment, government spending, and net exports (exports minus imports).
Equality of National Product, Income, and Expenditure
- The fundamental principle of these methods is that they should yield the same GDP figure. This equality is based on the circular flow of income in an economy.
- National Product reflects the total output, National Income indicates the total earnings, and National Expenditure represents the total spending.
- Each method captures different aspects of the economy but ultimately accounts for the same economic activity.
Conclusion
- The correct answer is option 'D' because all three methods—Product, Income, and Expenditure—are designed to ensure that National Product equals National Income equals National Expenditure.
- This equivalence provides a comprehensive view of a nation’s economic health, confirming that these methods are interchangeable in measuring GDP.