GDP can be defined as:
i) Total expenditure on domestically produced final goods and services over a time-period.
ii) Total income earned by domestically located factors of production over a time-period.
iii) Sum of value added at all stages of production.
Select one: a. i) ii) and iii) b. i) and iii) but not ii) c. ii) and iii) but not i) d. i) and ii) but not iii)
The correct answer and explanation is:
The correct answer is: a. i), ii), and iii)
Explanation:
Gross Domestic Product (GDP) can be measured using three different approaches, each of which provides the same total value but from different perspectives. These approaches are:
- Expenditure Approach (i): This approach calculates GDP by summing the total expenditure on domestically produced final goods and services over a specific period. It focuses on consumption, investment, government spending, and net exports (exports minus imports). This method is based on the idea that the value of all goods and services produced in an economy can be equated to the total spending on those goods and services. It is the most commonly used approach in practice.
- Income Approach (ii): This approach measures GDP by adding up all the income earned by factors of production (like labor and capital) in the form of wages, rent, interest, and profits. The reasoning behind this approach is that the income earned by producers must be equal to the value of the final goods and services they produce. This method focuses on the income distribution within an economy.
- Production (or Value Added) Approach (iii): According to this approach, GDP is calculated by summing the value added at each stage of production. Value added is the difference between the value of a firm’s output and the cost of intermediate goods used in production. This method prevents double counting, as only the value of final goods and services is included, not the value of intermediate goods that are used in the production of final goods.
Each of these methods provides a different angle on the economy, but they ultimately measure the same concept: the total market value of all final goods and services produced within a country during a specific time period. Hence, all three methods are valid ways to define GDP, making the correct answer a. i), ii), and iii).