The purpose is to measure national output. The circular flow of income model shows there are three, equivalent ways to do this: income approach, expenditure approach, output approach Income and output approach just add up the respective quantities in the title. Expenditure is slightly more complicated.
Expenditure Approach
Adds up all the spending to buy final goods and services. C = Consumption: All purchases by households. I = Investment: Spending by firms on capital, and housing expenses fall under this category. G = Government spending: Purchases by government of factors of production, including public investment into Public goods (X-M) = Net exports refers to the value of all exports minus all imports. Imports are subtracted since the money goes to foreign producers.
Distinction to make
Gross National Income. The national means the income measures the nation’s residence, regardless of the source. Essentially, it is GDP + net income from abroad.
Nominal is the money value, and Real value accounts for price changes over time. Real GDP measures the output valued at constant prices. There are price deflators, which are equal to .
Per capital means per person.
Purchasing power parity accounts for the quantity of local goods and services that can be purchased with $1 USD.
Hinderances in accuracy of Measurement
- Do not include non-marketed output. For example, your own work in repairing your workshop. These figures are greater in developing countries.
- Underground markets are not accounted for
- Does not account for quality of services
- Does not account for negative externalities, like depletion of resources It also does not measure economic well-being, in many social aspects of economics