Peter Cooper— Short & Simple 8 – Measuring GDP

In part 7, we arrived at a fundamental National Accounting identity:

 GDP = Total Output = Total Income = Total Spending

This identity suggests various ways of measuring GDP.

The income method takes advantage of the fact that GDP is defined to be equal to total income. By adding up the various categories of income – most notably, wage income and profit income – it is possible to arrive at a measure of GDP.

The value added approach adds up the new output that is created at each stage of production. This works because GDP is also defined to be equal to total output. In this method, it is necessary to subtract the value of ‘intermediate goods’ from the value of output at each stage of production. This is to avoid double counting. For example, flour is used to make bread, and so is an intermediate good in the production of bread. When bread output is added to total output, the value of flour used in its production is subtracted, since it is counted as part of flour output.

Here, we will focus on the expenditure method of measuring GDP. This makes use of the fact that GDP is defined, in a third way, as being equal to total spending.

This method involves adding up all the spending on domestically produced goods and services that has occurred over the year:

GDP = Domestic Private Spending + Domestic Government Spending + Foreign Spending on Domestically Produced Goods and Services

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Short & Simple 8 – Measuring GDP
Peter Cooper