In every economy there is need to measure its overal performance, to assess if there is growth, recession or the economy is constant and this helps in the formulation of policies to improve in the areas of concern for the betterment of its citizens. To derive formulations of these policies there is need to sum up or aggregate total output of a country .Total output or Gross Domestic Product (GDP) is the total aggregate of goods and service produced and supplied in an economy or income accruing from economic activites annually.It can be measured in monetary value of final good and service produced.
Total output or Gross Domestic Product includes the output of foreign owned firms that are situated in a country following foreign direct investment. There are three methods of measuring country’s total output that has same result, that is GDP = National Product = National Income = National ExpenditureThe Income ApproachThe income approach sums up the incomes generated by production thus total output from people in who are self employed or in jobs for an example; the salaries ;wages to employees , profits from private owned companies or busineses thus interest earned,income from leasing or rentals.The method approaches national income from distribution side therefore, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs (including undistributed corporate profits) and incomes of self-employed people.
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Incomes received in the form of transfer payments ,illegal money from smuggling,lotteries and prizes won are not included. Receipts from the sale of second-hand goods are not be treated as a part of national income because the sale of second-hand goods does not create new flows goods and services in the current year.The Output ApproachThe Output Approach measures the value added at each stage of production in the economy. The value added by business is obtsined byAdding up the value of output presents two conceptual problems.
The first is the valuation of inventories of goods produced but unsold and valued at market prices which has the effect of recording as part of current output(and income)the profits that will only be received by the firm when and if the goods are sold. The second problem is double counting (or multiple-counting depending on the number of market values of the outputs of firms added up) which occurs when we add up market values of outputs of all firms. According to the output approach, each firm’s value added is the value of its output minus the value of inputs that it purchases from other firms for example a flour miller buys grain, diesel and electricity for 80 dollars to produce a finished product worth 150dollars.
To calculate GDP we use 150 dollars.