lesson
Three approaches to the measurement of GDP
- explain the three approaches to measure GDP with the aid of examples.
Study Instructions
Study chapter 2.4 of the textbook.
Watch the video clips on the measurement of gross domestic product (GDP).
Do the activities.
Introduction
Production or value-added method
Watch the following video clip on the production or value-added method and complete the table:
Complete the table based on the values in the video clip:
| Production or value-added method | |
| Participants | Value added in $ |
| Cotton farmer | |
| Thread maker | |
| Fabric maker | |
| Jeans producer | |
| Total value added |
| Production or value-added method | |
| Participants | Value added in $ |
| Cotton farmer | 10 |
| Thread maker | 10 |
| Fabric maker | 10 |
| Jeans producer | 20 |
| Total value added | 50 |
Three approaches to the measurement of GDP: Activities
You are given the following information about the production of 1 000 loaves of bread:
A farmer uses her own labour, seed, fertiliser and land she rents to produce 100 bags of wheat. She sell these bags of wheat to a miller for R1 000. The miller then uses the wheat he has bought for R1 000 to produce 200 kg of flour, which he sells for R3 000 to the baker. The baker uses this flour for which he has paid R3 000 to bake 1 000 loaves of bread. He sells these loaves as final goods to households for R5 000.
Expenditure method
The expenditure value involves calculating the total expenditure on final goods.
Income method
The income method focuses on the income earned in the form of rent, interest, wages and profit.
6 Given the following scenario, what is the total rent, interest, wages and profit (total income)?
A farmer uses her own labour, seed, fertiliser and land she rents to produce 100 bags of wheat. She sells these bags of wheat to a miller for R1 000. Her rent is R300, the interest she pays is R200 and her profit is R500. The miller then uses the wheat he has bought for R1 000 to produce 200 kg of flour, which he sells for R3 000 to the baker. His rent is R500, his labour cost is R800 and his profit is R700. The baker uses this flour for which he has paid R3 000 to bake 1 000 loaves of bread. He sells these loaves as final goods to households for R5 per loaf. His rent is R400, his interest is R200, his labour cost is R800 and his profit is R600.
Rent: R300 + R500 + R400 = R1 200
Interest: R200 + R200 = R400
Wages: R800 + R800 = R1 600
Profit: R500 + R700 + R600 = R1 800
Note that according to the income method the total value is R5 000.
Production = Income = Expenditure on final goods
7 Given the following scenario, what is the value of production, income and expenditure on final goods?
A farmer uses her own labour, seed, fertiliser and land she rents to produce 100 bags of wheat. She sells these bags of wheat to a miller for R1 000. Her rent is R300, the interest she pays is R200 and her profit is R500. The miller then uses the wheat he has bought for R1 000 to produce 200 kg of flour, which he sells for R3 000 to the baker. His rent is R500, his labour cost is R800 and his profit is R700. The baker uses this flour for which he has paid R3 000 to bake 1 000 loaves of bread. He sells these loaves as final goods to households for R5 per loaf. His rent is R400, his interest is R200, his labour cost is R800 and his profit is R600.
|
Production |
Income |
Expenditure of final goods |
|
Farmer: R1 000 |
Rent: R1 200 |
1 000 x R5 |
|
Miller: R2 000 |
Interest: R400 |
|
|
Baker: R2 000 |
Wages: R1 600 |
|
|
Profit: R1 800 |
||
|
R5 000 |
R5 000 |
R5 000 |
Note that production = income = expenditure of final goods = R5 000.