Question

GDP and Welfare
GDP is the sum total of the value of goods and services created within the geographical boundary of a country in a particular year. In order to compare the GDP figures and other macroeconomic variables of different countries or to compare the GDP figures of the same country at different points of time, we take the help of real GDP instead of relying on current market prices. The ratio of nominal GDP to real GDP gives us an idea of how prices have moved from the base year to the current year. The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are the other important ways to measure change of prices in an economy.

GDP gets distributed among the people as incomes and may treat higher level of GDP of a country as an index of greater well-being of the people of that country. But it may be incorrect to treat GDP as an index of the welfare of the country based on three reasons. Firstly, the distribution of GDP is not uniform, secondly, non-monetary exchanges are not accounted as part of economic activity and lastly, GDP does not take into account externalities.

The aggregate value of goods and services produced in an economy can be calculated by three methods.

• A. Product, Investment, Value Added
• B. Product, Expenditure, Value Added
• C. Product, Income, Expenditure
• D. Product, Expenditure, Disposable Income

Hint:

GDP is measured by the product (value added), income and expenditure methods.

Answer 1

The Correct Option is C

Step 1: Understand the question
The question asks for the three standard methods of measuring the total value of goods and services produced in an economy, that is, national income or GDP.

Step 2: Recall the three methods
GDP can be measured from three sides of the same circular flow. The product (or value added) method adds the value added by all firms. The income method adds all factor incomes such as wages, rent, interest and profit. The expenditure method adds all spending on final goods and services.

Step 3: Check option 1
It lists Investment as a method. Investment is only one part of expenditure (it is a component of the expenditure method), not a method by itself. Option 1 is WRONG.

Step 4: Check option 2
It lists Product and Value Added separately. These are the same method, because the product method is also called the value added method. So only two methods are named here and option 2 is WRONG.

Step 5: Check option 3
Product, Income and Expenditure are exactly the three methods. Option 3 is CORRECT.

Step 6: Check option 4
Disposable income is the income left with households after taxes. It is not a method of measuring GDP. Option 4 is WRONG.

Final Answer:
The three methods are the product method, the income method and the expenditure method. This is option 3. \[ \boxed{\text{3. Product, Income, Expenditure}} \]