Measuring economic growth

       The broadest measure of economic growth and activity is the gross domestic product or known as GDP. There are three approaches arrive at the same value for GDP which are the product approach, the expenditure approach or the income approach.

       The product approach to measuring GDP is defines as the market value of final goods and services newly produced within a nation during a fixed period of time. Now I will touch about what is defined as market value. It is all summing across various good and services. As an example, the cost of teacher’s salaries, new schools and equipment are included in GDP of product approach. GDP only include newly produced goods and services because it is based on current produced goods during a period of time. The value of the used house would have been included in GDP for the year it was built but the price paid in the sale of used house is not counted in GDP.

        Besides, only final goods and services will be counted in GDP. For example, the flour that have been produced for making bread is not included in GDP. Only the bread is included in GDP because flour is the intermediate goods. Illegal activities such as drugs and prostitution are not counted in GDP but it is specifically according to each country cause some countries like Amsterdam is considered weeds as a legal item. Thus, they included weeds in the GDP for product approach.

       Besides, expenditure approach is one of the ways to measure GDP. It measures the total spending on goods and services produced within a nation during a fixed period of time. The major categories of spending in GDP are consumption, investment, government purchases and net exports. Consumption is the spending by domestic households on final goods and services including those produced abroad. There are three types of consumption which are on consumer durable (long lived good), non-durable goods (short lived goods) and services.

       Other than that, investment also one of the expenditure. Investment is the spending for new capital goods and increases in firm’s inventories holdings. In addition, government purchases also included in GDP and it will affect the expenditure of the countries. As an example, spending for social security, Medicare, unemployment benefits and welfare. We must know that interest on the government debt is not a government purchases. The last component for expenditure approach is net exports. Net exports are when exports minus imports. Exports are goods and services produced domestically that are purchased by foreigners while imports are goods and services produced by other countries that are purchased by our nation.

       Lastly, income approach measures the total income received by producers, including profits and taxes. A main part of the income approach is a concept known as national income. There eight types of national income which are:

1.       Compensation of employees. It is the income of workers received and includes wages salaries, employee benefits for the future and employee contributions to Social Security.

2.       Proprietor’s income. It is the income of the non-incorporated self-employed including labor and capital.

3.       Rental income of persons. Income earned by individual who own land or structures that they rent to others.

4.       Corporate profits. The profits earned by corporations and the remainder of corporate revenue after wages, interest, rents and other costs have been paid.

5.       Net interest. Interest earned by individuals from business and foreign sources minus interest paid by individuals.

6.       Taxes on production and imports. Including the indirect business taxes.

7.       Business current transfer payments (net). Payments made by businesses to individuals or governments or foreigners but not as wages or taxes or as payment for services.

8.       Current surplus of government enterprises. The profit of businesses that are owned by governments.

       Other than national income, there are three items that must be included to obtain GDP which are statistical discrepancy, depreciation and net factor payments. Hope that this information helps you to understand about how to measure the GDP. In conclusion, the total value of the product approach, expenditure approach and income approach must equal to each other in order to get the right value of GDP.

Thank you

By: Syarah Alya