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• Juice business example – all three approaches are equalThe Product Approach: measure economic activity by adding the market final values of good & services produced while excluding the any goods and services used in intermediates stages of production.
–Important concept in product approach: value added =
value of output – value of inputs purchased from other producers. Firm A output worth RM35,000 of oranges and Firm B output worth RM40,000 of oranges juice. Firm B has to first buy the oranges worth RM25,000. Thus, firms B final output worth RM15,000 (RM40,000- RM25,000). Final output is RM35,000 (Firm A) + RM15,000 (Firm B) = RM 50,000
• Juice business example – all three approaches are equalThe Income Approach: measure economic activity by adding all income received by producers of output, including wages received by workers and profits received by owners of firms.Firm A profits worth RM20,000 after taking into account of it wage cots of RM15,000 (remember the output is RM35,000).Firm B profits worth RM5,000
:. RM40,000(output worth) – [RM25,000 (input of oranges) +
RM10,000 (costs of wage)] The income approach is RM20,000 (profit of Firm A) + RM5,000 (profit of Firm B) + RM25,000 (wages received) = RM 50,000.
National Income Accounting Firm A profits worth RM20,000 after taking into account of it
wage cots of RM15,000 (remember the output is RM35,000). Firm B profits worth RM5,000
:. RM40,000(output worth) – [RM25,000 (input of oranges) +
RM10,000 (costs of wage)] The income approach is RM20,000 (profit of Firm A) +
RM5,000 (profit of Firm B) + RM25,000 (wages received) = RM 50,000.
If taxes is imposed RM5,000 for Firm A and RM2,000 for Firm B.
So, The income approach RM15,000 (profit of Firm A) + RM3,000 (profit of Firm B) + RM25,000 (wages received by the labor) + RM7,000 (taxes received by the govt.) = RM 50,000.
• Juice business example – all three approaches are equalThe Expenditure Approach: measure economic activity by adding the amount spent by all ultimate user of output.
Firm A output worth RM35,000 of oranges and Firm B output worth RM40,000 of oranges juice.
Remember that Firm B bought the oranges worth RM25,000 form Firm A. Thus, the ultimate user purchaser by Firm A is RM10,000
The ultimate user purchaser is RM10,000 (Firm A) + RM40,000 (Firm B) = RM 50,000
• GNP vs. GDP– Example: Engineering revenues for a road built by a U.S.
company in Saudi Arabia is part of U.S. GNP (built by a U.S. factor of production), not U.S. GDP, and is part of Saudi GDP (built in Saudi Arabia), not Saudi GNP
– Difference between GNP and GDP is small for the United States, about 0.2%, but higher for countries that have many citizens working abroad
• The expenditure approach to measuring GDP– Government (G): purchases of goods and services:
spending by the government on goods or services• About 1/5 of U.S. GDP• Most by state and local governments, not federal government• Not all government expenditures are purchases of goods and
services– Some are payments that are not made in exchange for current
goods and services– One type is transfers, including Social Security payments,
welfare, and unemployment benefits– Another type is interest payments on the government debt
• Some government spending is for capital goods that add to the nation’s capital stock, such as highways, airports, bridges, and water and sewer systems
Table 2.2 Income Approach to Measuring GDP in the United States, 2005
Statistical Discrepancy: the amount that would have to be added to the sum of the current and capital and financial account for this sum to reach its theoretical value of zero, arises because of errors in measurements and incomplete reporting.