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Economics (ECO 314) Md. Saidur Rahman Rahman Kohinoor
GDP and GNP 1) What is your sense about GDP and GNP? Answer:
GDP / GDI: GDP, the gross domestic product is a basic measure of a country’s overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is positively correlated with the standard of living which can be measured by real income per person and poverty rate. [GDI, the Gross Domestic Income] GNP: GNP, the gross national product is the value of all the goods and services produced in an economy, plus imported, and less the goods and services exported. It is a quantitative measure of a nation’s total economic activity, generally assessed yearly or quarterly. GNP = GDP + ( x - m) Where, x = income earned by domestic residents through foreign investments m = income earned by foreign investors in the domestic market.
2.
How can we measure GDP? What are the three approaches to determining GDP?
Answer:
GDP Measurement: GDP can be determined in three ways, where principle should be given the same results. They are: i. Product Approach. ( or Output Method) ii. Expenditure Approach. iii. Income Approach.
Product Approach: In this approach the economy is broken down into classes of enterprise, agriculture, construction, manufacturing, etc. Their outputs are estimated largely. To avoid doublecounting, either only final goods outputs must be counted, or a value added approach must be taken. The value added means difference between the value of its i ts output and the input.
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Depending on the gross value added ( GVA), it may be necessary to make an adjustment to it before it can be considered equal to GDP. Example: If there is a sales tax, then: Producer’s price + Sales tax = Market price If taxes and subsidies have not already been c omputed as part of GVA, then GDP = GVA + Taxes on products – Subsidies on products.
Expenditure Method: In contemporary economics, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. So, GDP = Consumption + Investment + Government Spending + Net Exports That means, Y = C + I + G + (X – M)
C (consumption): It is normally the largest GDP component, consisting of private household expenditures in the economy. I (Investment): It includes business investment in plant, equipment, inventory, and structures, and does not include exchanges of existing assets. G (Government Spending): It is the sum of government expenditures on final goods and services. X (exports): It represents the gross exports. M (imports): It represents the gross imports.
Example: Suppose someone knit himself a sweater, it is production but does not get counted as GDP because it is never sold.
Income Method: (GDI) GDP can calculate by measuring total income. Sometime it is called Gross Domestic Income (GDI) or GDP(I). It performs by Compensation of employees (COE) Gross Operating Surplus (GOS) Gross Mixed Income (GMI) According to income method, GDP = rents + interests + profits + statistical adjustments + wages GDP = R + I + P + SA + W.
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Md. Saidur Rahman Kohinoor |
[email protected]
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