What is GDP? : The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living, though its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose. GDP = private consumption + gross investment + government spending + (exports −imports), or [pic]
Methods of computing GDP: There three types of methods of computing GDP;
➢ Production Method ➢ Income Method ➢ Expenditure Method
Expenditure Method: This method can be explained by different types of economy sector model. E.g.:
➢ One sector economy model: Y = C ➢ Two sector economy model: Y = C+S = C + I ➢ Three sector economy model: Y = C + I+ G ➢ Four sector economy model: Y = C+ I +G + NX
Where, Y = National Income C = Consumption I = Investment G = Government NX= Net Export.
Four Sector economy model: In four sector economy model national income is measured by adding consumption, investment, government expenditure & net export
Y = C+ I +G + NX
Assumption: The basic circular flow of income model consists of following assumptions:
➢ The economy consists of four sectors: households, firms, govt. & net export. ➢ Households spend all of their income on consumption (C) & saving (S). ➢ All output (O) produced by firms is purchased by households & firms. ➢ There is an existence of financial sector ➢ There is an existence of govt. sector ➢ There is an existence of overseas sector
