Resource Cost-Income Approach
With this approach:
GNP (Gross National Product) = employee compensation + proprietors' income + rents + corporate profits + interest income
GDP = GNP + indirect business taxes + depreciation + net income of foreigners*
* net income of foreigners = the income foreigner earn domestically minus the income that domestic citizens earn abroad
What is the Gross Domestic Product (GDP)?
Gross Domestic Product or GDP is one of the most important economic measures of a national economy. Sometimes referred to as output, GDP is the expression of economic growth or contraction.
GDP is usually taken on a country-wide basis, but it can be calculated for a region or even a county. The purpose is to show how the economy is doing for the given region. The judgment is made on the basis of increasing or decreasing production and use of services, increasing or decreasing expenditure, or higher or lower wages and income.
Theoretically, irrespective of which approach is taken, the result should be the same. The authority that measures GDP, which in the U.S. is the Commerce Department, use all three approaches to determine a final percentage of growth or contraction.
Growth of more than 2 percent indicates significant prosperous activity in the economy. On the other hand, two consecutive three-month periods of contraction mean an economy is in recession.
How is GDP Measured?
As we have seen, GDP can be measured in three ways:
- Production measure: This is the value of the goods and services produced by all sectors of the economy: Agriculture, manufacturing, energy, construction, the service sector and government.
- Resource cost-income measure: The value of profit and wages added together plus indirect business taxes, depreciation, and net income of foreigners.
- Spending measure: This is the value of the goods and services purchased by households and by government, including investment in machinery and buildings. It also includes the value of exports reduced by the total value of imports.
In U.S., calculating a GDP estimate for all three measures is a major project by the Commerce Department undertaken every three months. Collecting the data involves surveying hundreds of thousands of firms and households. Data is also collected from government departments covering activities such as agriculture, energy, health and education.
Why is GDP data revised?
The amount of data collected in the surveys used to produce a GDP estimate is enormous. As a result, an initial estimate is made on a partial compilation of the data. Usually, a few months later, when all of the data has been sifted, a revised estimate is made.
What GDP doesn't include.
As experts at the International Monetary Fund point out, not all productive activity is included in GDP. For example, unpaid work (such as that performed in the home or by volunteers) and black-market activities are not included because they are difficult to measure and value accurately. That means, for example, that a baker who produces a loaf of bread for a customer would contribute to GDP, but would not contribute to GDP if he baked the same loaf for his family (although the ingredients he purchased would be counted).
Moreover, "gross" domestic product takes no account of the "wear and tear" on the machinery, buildings, and so on (the so-called capital stock) that are used in producing the output. If this depletion of the capital stock, called depreciation, is subtracted from GDP we get net domestic product.
The GDP Calculator permits the use of two of the possible three approaches: Either the expenditure approach or resource cost-income approach.