Question

Explain the following
(i) Why are exports added while calculating GDP through the expenditure approach ?
(ii) Why are subsidies added while calculating national income ?
(iii) Why are intermediate cost deducted for arriving at GDP through the production approach ?

Answer 1

(i) Exports are added because these are produced within the economic (domestic) territory of the country. GDP is also defined in the same Way.
(ii) Subsidies are added because these are paid by government to production unit over and above the price paid by the buyers. As such these add to the factor payments paid by the production units.
(iii) Intermediate cost is deducted to avoid double counting of the value of the same product more than once. By doing so we arrived at the value of final products which counts value of a product only once