Comparing the expenditure and resource cost-income approachesfor calculating GDP The expenditure and resource cost-income approaches to calculating GDP arrive at the same final number, but they calculate that number in different ways. To illustrate, consider the possible effects of the following transactions on GDP: 1. Alex pays Awesome Foods Market $1,000 to cater his daughter's engagement party. He's attracted by Awesome Foods Market's guarantee that he'll be happy with the catering, or he'll get his money back.
2. Awesome Foods Market pays JoAnn's Catering $900 to cater the party. 3. JoAnn's Catering buys plasticware worth $150 from Kostko.
3. Al's Lawn Care buys grass seed worth $200 from Green Center Nursery.
Compute contributions to GDP, using the expenditure approach. Assume that Green Center Nursery receives the grass seed at no charge and that other costs are zero.

Hint: Add the amount of money spent by buyers of final goods and services.

Which of the following would be included in the expenditure method of calculating GDP? Check all that apply.

a. The Home Station spends $850.
b. Ralph spends $1,200.
c. Al's Lawn Care spends $200.

The total contribution to GDP, measured by the expenditure method, is $
Now use the following table to compute contributions to GDP, employing the resource cost-income approach. In particular, indicate the costs of intermediate goods and the value added at each stage of production.

Stage of Production Sale Value Cost of Intermediate Goods Resource Cost-Income
Green Center Nursery $200
Al's Lawn Care $850
The Home Station $1,200

The contribution to GDP that you found using the expenditure approach corresponds to the sum of the at each stage of production.

Comparing the expenditure and resource cost-income approaches for calculating GDP

1. Computation of contributions to GDP, using the expenditure approach

1. Alex spends  for catering his daughter's party $1,000

3. Al's Lawn Care buys grass seed                         $200

Total GDP = $1,200

2. Expenditure included in calculating GDP:

b. Ralph spends $1,200.

3. The total contribution to GDP, measure by the expenditure method, is $1,200.

4. Computation of Contributions to GDP, using the resource cost-income approach:

Stage of           Sales Value        Cost of                   Resource Cost-Income

Production                              Intermediate Goods

Primary            $200                        $0                             $200

Intermediate   $850                     $200                            $650

Final                $1,200                   $850                            $350

The contribution to GDP that you found using the expenditure approach corresponds to the sum of the___$1,200 at each stage of production.

Explanation:

Three different methods can be used to measure a country's GDP (Expenditure, Income and Production), which produce the same amount.

The expenditure method is calculated by adding total amount spent on total consumption, government purchases, net exports and investments by firms, households and government.To compute GDP under this method, all of the expenditures made on final goods and services are added up.   It is widely used to estimate GDP.

The income approach calculates GDP by adding income from various production factors, including such income components as interest on capital, rent, wages, profit and salaries.

The production approach (output approach), measures GDP as the difference between value of output less the value of goods and services used in producing these outputs during an accounting period.

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