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ThreeApproachestoMeasuringGDP Thenationalincomeaccountsarebasedontheideathattheamountofeconomicactivitythat occursduringaperiodoftimecanbemeasuredintermsof: 1. Theamountofoutputproduced,excludingoutputusedupinintermediatestagesof production(theproductapproach); 2. Theincomesreceivedbytheproducersofoutput(theincomeapproach);and 3. Theamountofspendingbytheultimatepurchasersofoutput(theexpenditure approach). Eachapproachgivesadifferentperspectiveontheeconomy.However,thefundamental principleunderlyingnationalincomeaccountingisthat,exceptforproblemssuchasincomplete ormisreporteddata,allthreeapproachesgiveidenticalmeasurementsoftheamountofcurrent economicactivity. Wecanillustratewhythesethreeapproachesareequivalentbyanexample.Imaginean economywithonlytwobusinesses,calledOrangeIncandJuiceInc.OrangeIncownsand operatesorangegroves.Itsellssomeofitsorangesdirectlytothepublic.

Itsellstherestofits orangestoJuiceInc,whichproducesandsellsorangejuice.Thefollowingtableshowsthe transactionsofeachbusinessduringayear. OrangeIncTransactions WagespaidtoOrangeIncemployees Taxespaidtogovernment Revenuereceivedfromsaleoforanges Orangessoldtopublic OrangessoldtoJuiceInc JuiceIncTransactions WagespaidtoJuiceIncemployees Taxespaidtogovernment OrangespurchasedfromOrangeInc Revenuereceivedfromsaleoforangejuice Whatisthetotalvalue,measuredindollars,oftheeconomicactivitygeneratedbythesetwo businesses?Theproductapproach,incomeapproach,andexpenditureapproacharethree differentwaysofarrivingattheanswertothisquestion;allyieldthesameanswer. $15,000 5,000 35,000 10,000 25,000 $10,000 2,000 25,000 40,000

1. Theproductapproachmeasureseconomicactivitybyaddingthemarketvaluesofgoods andservicesproduced,excludinganygoodsandservicesusedupinintermediatestagesof production.Thisapproachmakesuseofthevalueaddedconcept.Thevalueaddedofany produceristhevalueofitsoutputminusthevalueoftheinputsitpurchasesfromother producers.Theproductapproachcomputeseconomicactivitybysummingthevalues addedbyallproducers. Inourexample,OrangeIncproducesoutputworth$35,000andJuiceIncproducesoutput worth$40,000.However,measuringoveralleconomicactivitybysimplyadding$35,000 and$40,000woulddoublecountthe$25,000oforangesthatJuiceIncpurchasedfrom OrangeIncandprocessedintojuice.Toavoidthisdoublecounting,wesumvalueadded ratherthanoutput:BecauseJuiceIncprocessedorangesworth$25,000intoaproduct worth$40,000,JuiceIncsvalueaddedis$15,000($40,000$25,000).OrangeIncdoesnt useanyinputspurchasedfromotherbusinesses,sotitsvalueaddedequalsitsrevenueof $35,000.Thustotalvalueaddedintheeconomyis$35,000+$15,000=$50,000. 2. Theincomeapproachmeasureseconomicactivitybyaddingallincomereceivedby producersofoutput,includingwagesreceivedbyworkersandprofitsreceivedbyownersof firms.Asyouhaveseen,the(beforetax)profitsofOrangeIncequalitsrevenuesof$35,000 minusitswagecostsof$15,000,or$20,000.TheprofitsofJuiceIncequalitsrevenuesof $40,000minusthe$25,000thecompanypaidtobuyorangesandthe$10,000inwagesto itsemployees,or$5,000.Addingthe$20,000profitofOrangeInc,the$5,000profitof JuiceInc,andthe$25,000inwageincomereceivedbytheemployeesofthetwocompanies, wegetatotalof$50,000,thesameamountdeterminedbytheproductapproach. 3. Finally,theexpenditureapproachmeasuresactivitybyaddingtheamountspentbyall ultimateusersofoutput.Inthisexample,householdsareultimateusersoforanges. JuiceIncisnotanultimateuseroforangesbecauseitsellstheoranges(inprocessed,liquid form)tohouseholds.Thusultimateuserspurchase$10,000oforangesfromOrangeIncand $40,000oforangejuicefromJuiceIncforatotalof$50,000,thesameamountcomputedin boththeproductandincomeapproaches.