a) Why did you select this example?Answers
a) This is a magnificent example of GDP calculation. The case study given shows the expenditure and income methods of GDP estimation respectively.
b) The author tries to explain the expenditure and income methods of GDP estimation of a nation. The table 5.1 and 5.2 clearly shows what are the different components when we calculate income through these different methods. The author, through this example, tried to show that the income and expenditure methods are two sides of the same coin. Estimation of GDP by either of these methods will give you the same results.
The author also tries to introduce the concept of per capita GDP. He clearly says that when we divide total GDP by the total population, we get the GDP amount per person in the country which is an indicator of prosperity status of the economy.
c). The following are the most important concepts discussed in the example;
Per Capita Income: Per capita Income is the total economy's income when we equally distribute it across the country's population. It is simply the GDP divided by the total population. It is an indicator of the economic status of the country.
The equivalency of the income and expenditure methods of GDP calculation: As we noted above, the income and expenditure methods are two sides of the same coin.
It is based on the concept of the circular flow of income. As per the expenditure method, GDP= Consumption (C)+ Investment (I)+ Government Expenditure (G)+ Net Exports (Nx). The final component in the equation, next exports, shows the external connection of the economy. If the exports are greater than imports, it becomes an addition to GDP. If the export is less than imports, a negative amount is added to the GDP.
The income method of GDP calculation is based on the income flows of the circular flow of income.
It conceives GDP as the sum of different flows of income in the economy. Here, we also take into account government income. Governments income is total taxes collected minus the total subsidies paid. If the taxes collected are greater than subsidies paid, the government has surplus which is recorded as an addition to GDP. If the reverse is the case, the amount is recorded as negative value in the calculation.
d).
The example is attempting to lay out some concepts. It does not give any challenges or problems.
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