Chapter 6, Problem 1P

To determine

To calculate the gross domestic product by using expenditure method and income method and show that they are equal.

Explanation of Solution

The given information:

The consumption is $5,000, investment is $1,000, government purchases are $1,000, exports are $500 , imports are $700, compensation of employees is $5,300, profits are $900 and depreciation is $600.

The gross domestic product can be calculated using the expenditure approach as follows:

$\text{GDP}=\text{Consumption}+\text{Investment}+\text{Government expenditure}+(\text{Exports}-\text{Imports)}$

$\begin{array}{c}\text{GDP}=5,000+1,000+1,000+(\text{500}-\text{700)}\\ =6,800\end{array}$

Thus, by using expenditure approach, the GDP is $6,800.

By using the income approach, the gross domestic product can be calculated as follows:

$\begin{array}{c}\text{GDP}=\text{Compensation of employees}+\text{Profit}+\text{Depreciation}\\ =5,300+900+600\\ =6,800\end{array}$

Thus, by using income approach the GDP is $6,800.

Thus, in both approaches the gross domestic product has the same value.

Economics Concept Introduction

GDP (Gross Domestic Product): GDP refers to the market value of all final goods and services that are produced in an economy during an accounting year. It is equated as follows; $\text{GDP}=\text{Consumption (C)}+\text{Investment (I)}+\text{Government expenditure}\text{}\text{ (G)}+\text{Net export}$