Question

Write down the 3 identities of calculating the GDP of a country by the 3 methods. Also briefly explain why each of those should give us the same value of GDP.

Answer 1

Gross National Product (GNP) equals Gross National Income equals Gross National Expenditure, i.e. 

GNP = GNI = GNE 

These are equal because national income is a circular ow of income. Aggregate expenditure is equal to aggregate output which in turn, is equal to aggregate income. However each method has some different items, yet they show exactly identical results. 

Their identity can be shown in the following manner:

National product at Market price

Income Method	Product Method	Expenditure Method
1) Compensation of employees	Net value added in primary Sector	Private final consumption Expenditure
2) Operation surplus	Net value added in secondary sector	Government final consumption Expenditure
3) Mixed income of self Employed	Net value added in tertiary Sector	Gross domestic capital formation
4) Consumption of fixed capital	Consumption of fixed capital	Net exports (X-M)
5) Net indirect Taxes	Net indirect Taxes	Already included
6) Net factor Earning from Abroad	Net factor Earning from Abroad	Net factor Earning from Abroad