Explain how GDP is measured according to the expenditure and ...

[pepyto]

Explain how GDP is measured according to the expenditure and income approaches.
 
  What will be an ideal response?

Question 2

The profits of business firms, defined as the difference between total revenue and total cost, are not zero because
 
  A) capitalists have a near monopoly over the means of production.
  B) information is a scarce good.
  C) the government defines some opportunity costs as revenue in order to increase tax receipts.
  D) there would be no investment if firms did not earn positive profits.

[Pswine]

Answer to Question 1

GDP can be measured using the expenditure approach or the income approach. The expenditure approach uses the streams of spending and adds together the total expenditure, or spending, on final goods and services. Thus the expenditure approach calculates the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. The income approach uses another of the circular flows to calculate GDP. The income approach adds together all sources of income and then incorporates a few additional adjustments. Thus the income approach calculates the sum of wages (which is the compensation of employees) plus the net operating surplus (which is the sum of interest, rent, and profit). The sum is net domestic product at factor cost. To change this sum to GDP, which is calculated at market prices rather than factor costs, and which is the gross product rather than net product, indirect taxes are added and subsidies subtracted, then depreciation is added, and finally any statistical discrepancy is added.

Answer to Question 2

B