Page 19 - Macroeconomics. book docx_Neat

C (Consumption): Household spending on goods and services such as food, clothing,

healthcare. and education. I (Investment): Spending by firms on capital goods such as

machinery, buildings, and equipment. G (Government Spending): Government

expenditure on public services like education, healthcare, and infrastructure. X
(Exports): Goods and services sold to other countries. M (Imports): Goods and services

purchased from other countries.

This method is widely used because it clearly shows the sources of demand in the

economy.

5.2 Income Approach

The income approach calculates GDP by summing all incomes earned by factors of
production. These include wages paid to workers, profits earned by businesses,

interest received by capital owners, and rent earned by landowners.

The logic behind this method is that total production generates total income, so both

values should be equal.

5.3 Production (Value Added) Approach

The production approach measures GDP by calculating the value added at each stage

of production. Value added is the difference between the value of output and the
value of intermediate inputs.

This approach avoids double counting and is useful in analyzing sectoral

contributions to GDP.

6. Nominal GDP and Real GDP

Nominal GDP measures the value of goods and services produced using current prices of

the same year. It reflects both changes in production and changes in prices.

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