Three Ways To Measure GDP

Gross Domestic Product GDP is the aggregate of goods and services produced in a country. There are three ways to compute GDP:

1-The Output Approach: This is calculated by summing up Value Added activities across the production economy, while eliminating instances of double counting. The challenge with this approach is to get right accounting data, which would focus on Value Added activities.

2-The Expenditure Approach: The expenditure approach is measured by adding consumption, investment, exports of goods and services minus imports of goods and services. Consumption is both private and government sponsored. In the developed economies, consumption constitutes 50-70% component of GDP. Investment is undertaken by private investors. The “total final expenditure” equals the sum of Consumption expenditure, investments and exports of goods and services.

3-The Income Approach: The income approach of GDP measurement is based on premise that we total the income of all factors of production. Specifically, these incomes include wages or salaries of employees, self-employment income, profits of companies, rental income and profit of government corporations.

These three approaches never reach the same number. The key reasons for their discrepancy are attributable to black economy, limitations of data, voluntary services and some transactions which cannot be translated in monetary terms. Notwithstanding these discrepancies, another noise that accentuates the GDP variations in different countries is the difference in price levels or inflation rates existing at different places. Purchasing Power Parity method could be one way to smooth out these fluctuations albeit some caveats about how data is obtained. In addition, most economists predict degree of convergence of GDP growth rates between the developing and the developed countries in the next decade. The emerging economies of the world, in particular BRIC nations are catching up fast to reach GDP levels of OECD countries in near future. However, what economists do not take into account is the fact that it is not GDP growth rate per se what matters most, but the quality and per capita trends of GDP growth as well.

More important, GDP might not explain some key intangibles like technological advancement, rule of law and quality of living and education existing in some developed countries. For example, the US Economy has huge intangibles in terms of Technological advancement which would make it a global leader for a long time to come. To conclude, GDP growth standalone is not a strong measure of economic prosperity and has to be analyzed in tandem with other qualitative measures of economic affluence.

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