4.
Explanation
There are three primary methods for measuring national income or Gross Domestic Product (GDP):
1. Production Approach (Value Added Method): This approach calculates GDP by summing the value-added at each stage of production. It focuses on the value created at each level of production, subtracting the value of intermediate consumption to avoid double-counting. It’s often used for manufacturing or industrial sectors.
2. Income Approach: This method calculates GDP by summing all incomes earned within an economy, including wages, profits, rents, and interest. It’s based on the idea that all economic expenditures eventually become income for someone.
3. Expenditure Approach: This is the most commonly used method and calculates GDP by summing all expenditures within an economy. It includes four main components:
- Consumption : Household spending on goods and services.
- Investment (I): Business spending on capital goods and changes in inventories.
- Government Spending (G): Government expenditure on goods and services.
- Net Exports (Exports – Imports): The balance of trade, considering the value of goods and services exported and imported.
These three approaches should ideally yield the same GDP figure, known as the “income-expenditure identity.” The choice of method depends on the availability of data and the specific economic characteristics of the country in question. In practice, GDP is often calculated using the expenditure
approach because it is relatively easy to obtain the necessary data on consumer spending, investments, government spending, and net exports.