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  How to calculate GDP using GDP Deflator? To know this process at first we need to know about two types of GDP; those are 1. Nominal GDP:     Nominal GDP shows the production of goods and services at the current year. In nominal GDP price or quantity may be increased. This can be best explained by an example below: Year Price of good A Quantity of good A Price of good B Quantity of good B 2001 1 100 2 50 2002 2 150 3 100 2003 3 200 4 150 Here, Nominal GDP of 2001 = (1 X 100) + (2 X 50) = 200                                         2002 = (2 X 150) + (3 X 100) = 600                                            2003 = (3 X 200) + (4 X 150) = 1200 Limitations:               It is easy to see that GDP computed this way is not a good picture of economic well being. That is, this measure does not accurately reflect how well the economy can satisfy

The Methods of Calculating GDP Gross Domestic Product-GDP is the monetary value of all the finished goods and services produced within a country’s boarder in a specific time period. There are three alternative methods of computing GDP. This includes: 1.        Value Added Method 2.        Factor Income Method 3.        Expenditure Method These methods are described below: 1. Value Added Method: This is also known as inventory method. In this method the sum total of the gross value of the final goods and services in different sectors of economy such as industry, service, agriculture etc is acquired for the current year by determining the total production the was made during the specific time period. The value obtained in the gross domestic product. GDP is calculated using value added method or output method by summing the value of sales of goods and adjusting or subtracting for the purchase of intermediate goods t produce the goods sold. Thus, GDP (usin

3.    The Four-Sector Economy: The circular flow model in four sector economy provides a realistic picture of the circular flow in an economy. The four sector economy comprises of: a)     Household b)     Firms c)     Government d)     Foreign Sector Here, there are two important components: a.     Export:   Export is referring to as an injection into the circular flow that consists of payment receives for goods and services sold to the rest of the world.       b.     Import:   Import is referred to as a leakage from the circular flow that consists of        payments made for goods and services purchased from the rest of the world. When firms exports goods and services to the foreign markets, injections are made into the model. On the other hand, when household, firm or government imports any goods and services from foreign sector, leakage occur in the model. In this model, each sector has dual roles to play in the economy; while one s

2.     The Three-Sector Economy : In the circular flow model of three sector economy, government intervention has also been accounted for. But it is still assumed to be a closed economy, where the income flow is not influenced by any foreign sector. IN three-sector economy there are three parties: a)     Household b)     Firms c)     Government   Here, there are two important components: a.     Injection:   Injections are types of expenditure on goods and services that have any origin other than the household consumption. There are two types of injections: The first one is called government purchases. This includes all purchases of goods made by all levels of government employees. Government purchases do not transfer payments like social security, disability payments or unemployment compensation. The sum of government purchases and transfer payments is called the government expenditure . The second injection is investment. Investme

The circular flow of income is the model of the economy in which the major exchanges are represented as flows of money, goods and services etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow of income can be described in three types of economies. They are: 1.     The Two-Sector Economy 2.     The Three-Sector Economy 3.     The Four-Sector Economy (Open Economy) 1.    The Two-Sector Economy: This economy considers a simple prototype economy which does not have a government and does not trade with other countries. The only transactions in this economy are: a)     Households b)     Firms Functions of Household : i.               Factors of production ii.              Consumption Spending Functions of Firms : i.               Production of goods and services ii.              Payments of factors Any profit earned by the f

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. GDP measures two things at once; the total income of everyone in the economy and the total expenditure on the economy’s output of goods and services. The reason that GDP can measure both total income and total expenditure is that these two things are really the same. For an economy, as a whole the income must equal to its expenditure. The income must be equal to its expenditure because every transaction has two parties; a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. For example, if person A buys some goods on the cost of $20, then that $20 is his spending (expenditure). On the other hand, the $20, which the buyer has given to seller in exchange of some goods, is the income of the seller. Thus, the transaction contributes equally to the economy’s income and to its expenditure. GDP whethe