a. Define Gross Domestic Product (GDP)
b. Describe the output approach as a method of computing national income
c. Identify any three problems associated with the expenditure approach of calculating national income
Explanation
a.
GDP is the total money value of all final goods and services produced within the geographical boundaries of the country during a year. This is calculated at market prices and is known as GDP at market prices. GDP is used to measure the rate of growth in an economy. Exports are included in the GDP while imports are excluded. GDP is calculated as:
GDP = GNP - Net Income from abroad
Where: net income from abroad is the difference between exports and imports i.e. (X M and it is also known as Net factor income from abroad net foreign investment net property income from abroad.
GDP = NDP + Depreciation
GDP = C + I+ G
Where C = Consumption, I = Investment and G = Government expenditure
b.
Output Approach Also known as value added basis. In this method national income is measured in terms of the monetary value of goods and services produced in the country i.e the value of output (Sales) less cost of inputs. It measures national output called gross domestic products in terms of the values added by each of the sectors of the economy.
The outputs can be grouped into certain product categories corresponding to industries or to sectors such as the primary sector, secondary sector and the tertiary sector. When the output approach is used, one problem arises. This is known as the problem of double counting. It arises due to the fact that the industry's output is often the input of another industry. This is why when we add up the values of all sales, the same output is counted again and again as it sold by one firm to another. This problem is avoided by using the concept of value added which is the difference between output value and input at each stage of production.
c.
- No accurate records for expenditure are kept especially in the private sector
- expenditure for the subsistence sector can only be mere approximations are due to lack of records in the sector
- differentiating between final expenditure and intermediate expenditure may be difficult
- it suffers the problem of double counting
- fluctuating exchange rates may pose challenges especially in valuation of exports and imports.