Macroeconomics
consumption , while imports indicate goods and services brought into the nation . The fnal fgurecanbepositiveornegative.Apositivefguremeansthatthevalueofexportsexceedsthat of imports,whereasanegativefguremeansthatthevalueofimportsexceedsthatofexports. Imports are subtracted since they represent output produced outside the country’s borders whichcontradictswiththeGDPdefnition.Exports,ontheotherhand,areaddedbecausethey represent domestically produced goods that were sold abroad. In essence, the expenditure approach provides a clear framework to understand the various components that contribute to a nation's GDP. By summing upconsumption,investment,government spending, and net exports, this approach quantifes the overall economic activity within an economy, shedding light on its performance and growth. 3. The Value-Added (Output)Approach: Alsoknownastheproductionapproach.Thisapproach addsupthevalueofallgoodsandservicesproducedbyallindustriesintheeconomy whileexcluding the value of intermediate goods to avoid counting the same output twice. This can be achieved by addingthevalueaddedateachstageofproduction . Valueadded representsthedifferencebetween thepriceafrmpaysforthegoodsandservicesitbuysfromotherfrms (valueofinputs) andthepriceit sells its product for (value of sales) . For example, consider a car manufacturer that acquires componentsfor$1millionandusesthemtoproducecarsthatitsellsfor$1.2million.Inthiscase,the manufacturer has added $200,000 to the overall output ($1.2 million − $1 million). It's importantto note that the initial $1 million hasalreadybeencountedwithinthevalueofinputs,andtheadditional $200,000isaddedinthevalue-addedcalculation.Whenyouaddthevalueateachstageofproduction, it should yield the same fgure as the market value of the fnished product produced. Limitations of GDP Increasing GDP is one of the main macroeconomic objectives of governments around the world. We usually think that an increase in GDP is good. However, there are some limitationsofusingGDPasa measure of welfare. ● The Exclusion of Non-Market Activities: The GDP calculation disregards certain unpaid productivetransactionsknownas non-marketactivitiesornon-marketedgoodsandservices . Despitetheirunpaidnature,theseactivitiesresultintangibleoutput.Consequently,GDPfailsto fully capture the value of total output by omitting these activities like trimmingtreesinone’s GDP = ∑value added per frm(where ∑ denotes the sum)
gardenorbakingapiefortheneighbors.Whilethese transactions involve both services and goods, they are not offcially accounted for in GDP. ● Ignored Well-Being and Leisure: The GDP cannot always beusedtoreflectbeneftsofcertainchanges onpeople’swell-beingandsatisfaction.Forexample, some countries, such as Germany,havereducedthe
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