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Calculating Gross Domestic Product GDP is the value of all goods and services produced by an economy in one year. There are three ways of calculating GDP.

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Presentation on theme: "Calculating Gross Domestic Product GDP is the value of all goods and services produced by an economy in one year. There are three ways of calculating GDP."— Presentation transcript:

1 Calculating Gross Domestic Product GDP is the value of all goods and services produced by an economy in one year. There are three ways of calculating GDP

2 Farmer (wheat) Miller (flour) Baker (bread) Shop Calculating Gross National Product The value of what firms create. To do this, only the value added by each producer is counted. This is to avoid the problem of double counting goods that are used in the production of other goods and services. Eg: a loaf of bread ($1.80) Price ($) A farmer grows some wheat and sells it for $0.20 A miller buys the wheat for $0.20 and grinds it into flour. She sells the flour for $0.80. A baker buys flour and turns it into bread which is sold to a shop for $1.40 Finally, a shop buys bread and sells it for $1.80 $0.20is added to GDP $0.60is added to GDP $0.60is added to GDP $0.40is added to GDP

3 Calculating Gross National Product The value of what firms create. To do this, only the value added by each producer is counted. This is to avoid the problem of double counting goods that are used in the production of other goods and services. Eg: a loaf of bread ($1.80) $0.20 $0.60 $ = $1.80

4 Calculating Gross National Product Spending on goods and services by each of the four sectors of the economy will reflect the value of goods and services it has produced. onsumer Expenditure: spending by HOUSEHOLDS on final goods and services nvestment: spending by FIRMS on capital goods overnment Expenditure: spending by GOVERNMENT on goods and services (this excludes transfers such as benefits). verseas expenditure: the balance of receipts from EXPORTED goods and services less payments for IMPORTED goods and services.

5 Calculating Gross National Product Spending on goods and services by each of the four sectors of the economy will reflect the value of goods and services it has produced. +++= NZSA accounts record this spending as: Exports minus Imports Final Consumption Expenditure - government Gross Fixed Capital Formation Final Consumption Expenditure - private

6 Calculating Gross National Product Measuring the value of resources used in production will indicate the value of goods and services that have been produced. ent is the return to LAND (natural resources) ages will reflect the value of LABOUR used nterest is paid on CAPITAL goods employed rofits paid to ENTERPRISE will show their input into production NZSA accounts record this spending as: Indirect taxes and subsidies Operating surplus Consumption of fixed capital Compensation to employees

7 Calculating Gross National Product The circular flow model shows us that the three approaches should give us the same value for GDP. HouseholdsFirms Incomes Production Expenditure The reality is that they rarely do. An item Statistical Discrepancy is always added to the Expenditure Approach to make them balance.


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