Why is GDP the same whether computed via the expenditures a

Solution

The gross domestic product determines the value of all final goods and services produced within a country during a specific time period. GDP is considered to be a good indicator of the economics performance.

Thus GDP helps to measure the output as well as income. GDP can be calculated in two ways:

Expenditure method: In this approach GDP is calculated by totaling the expenditures on final-user goods and services produced during the year.

In this method, GDP = C+I+G+NX

Resource cost income method: In this approach, GDP is calculated by summing the income payments to the resource suppliers and the indirect cost of producing the goods and services.

GDP = Wages + Rents + Profits + Interest + Depreciation + Indirect business taxes + Net income earned abroad.

The aggregate expenditure in the economy should be equal to the aggregate income. Thus, both the approaches lead to the same estimates of GDP.