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Data-Exercise-1 Expenditures Approach to Calculating GDP

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Data Exercise 1Insert Name

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ECON 201Insert Date

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Submitted to: Prof.Data Exercise 1In any country, Gross Domestic Product is the economic measure of the overall market value of all the final goods produced within a country during a given year.

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Expenditures Approach to Calculating GDP

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In the calculation of Gross Domestic Product, there are mainly two approaches which are employed. These approaches include the expenditure approach and the income approach to calculation of Gross Domestic Product. There are different components which compose the expenditure approach of calculating GDP.

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GDP = C + Ig + G + (X-M)

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Where,

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GDP is gross domestic product

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C is consumption

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Ig is the investment

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G is government expenditure

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(X-M) is the net exports obtained from subtracting the imports of a country from exports.

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Income approach of GDP

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The second approach of the calculating Gross Domestic Product is the income approach. In this method, economists calculate the GDP through the addition of all the accrued earnings in a particular year. This approach is composed of 10 factors which include compensation of employees, rents, interests, proprietor’s income, corporate income taxes, dividends, undistributed corporate profits, indirect business taxes, consumption of fixed capital and net foreign factor income.

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The factors are explained below:

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compensation of employees:

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This factor includes wages; salaries paid by companies and the government to employees; benefits; supplements; and payments by employers to Social Security and other health and pension funds.

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Rents

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This is a factor which covers payments received by landlords for supplying property.

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interest

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This consists of payments made by private businesses to moneylenders, as well as of earnings obtained by households on corporate bonds, certificates of deposit (CDs), and savings deposits.

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Proprietors’ income

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Proprietor’s income is the net income received by sole proprietorships, partnerships, and cooperatives during a year.

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Corporate income taxes

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Corporate taxes cover taxes paid by corporations to the government.

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Dividends

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These are the parts of corporate net income paid to shareholders.

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Undistributed corporate profits

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They are also referred to as retained earnings, which are corporate profits that have been retained and reinvested in the corporation.

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The summation of all the above factors gives the figure for national income. This is the total income earned through the use of a country’s resources, whether in that country or abroad.

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The other factors which must be added in order for us to come up with the Gross Domestic Product include the following:

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Indirect business taxes

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This includes sales, excise, and property taxes; license fees; and customs duties.

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Consumption of fixed capital which is also referred to as depreciation.

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Net foreign factor income which is referred to as the total earnings of foreigners inside the United States minus the income earned by Americans outside the country.

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GDP In different countries

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As seen from the reading in chapter 6, Gross Domestic Product is useful as a measure of the economic welfare or standards of living in the different countries. When comparing the GDP of different nations, there are factors which must be considered. First, the GDP of a country is measured using its own currency. For that matter, the comparison of the GDP of two countries calls for the conversion of currency so that we use a common currency for calculation.

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Conversion of currencies with exchange rates

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Comparison of GDP of countries with different currencies needs the conversion to a common denominator with the use of an exchange rate. This represents the value of a given currency in terms of another. There are two types of exchange rates which are market exchange rates and purchasing power parity denoted as PPP equivalent exchange rates. PPP-equivalent exchange rates are used for cross country comparison of GDP

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Different countries have different values of Gross Domestic Product. In this section, we shall look at the different nations and their GDPs. For example, let us look at the GDP of the United States as it was posted in 2012.

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The total GDP was 16.2 trillion dollars. Consumption accounted for 68.6% of the total GDP, investment accounted for 15.2%, and government expenditure took 19.5% of the total GDP while exports accounted for 13.5%. Imports accounted for 16.9%. This shows that as at 2012, the net exports were negative.

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In terms of production, the total GDP of the United States was 16.3 trillion dollars. Nondurable goods accounted for $4.7 trillion, which about 29.1%. Services carried $7.6 trillion dollars which is about 46.7percent. Structures on the other hand accounted for 1.2 trillion dollars and this is about 7.2 percent while durable goods and change in inventories accounted for 16.6 percent and 0.4 percent respectively.

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Another country whose Gross Domestic Product we can analyze is Brazil. It was estimated to be 2.33 trillion dollars in 2012. It can be broken down as follows:

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Household consumption took 62.3 percent of the total GDP while government expenditure was 21.5 %. Investment took 18.1%. Exports accounted for 12.6 percent and lastly imports were -14 percent. This shows that the net exports brought a negative figure.

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The table below shows the different GDPs for different countries as per 2012

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Country GDP in billions of domestic currency Domestic currency/ US dollars(PPP equivalent) GDP in USD (billions)

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Brazil 4403 Reals 1.869 2356

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Canada 1818 Dollars 1.221 1488

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China 51932 Yuan 4.186 12406

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Egypt 1542 Pounds 2.856 540

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Germany 2644 Euros 0.827 3197

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India 97514 Rupees 20.817 4684

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Japan 475868 Yen 102.826 4628

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Mexico 15502 Pesos 8.813 1759

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South Korea 1302128 won 806.81 1614

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United Kingdom 1539 Pounds 0.659 2336

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United States 16245 dollars 1.00 16245

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Index of Economic Freedom

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Index of Economic Freedom is a system of ranking which arranges countries or states based on the number and the intensity of government involvement, influence and regulations on wealth-creating activity. Simply put, it is the measure of how the government controls business activities.

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Among the free economies include Hong Kong, Singapore, Australia, Switzerland, New Zealand and Canada. United States is ranked 12th with 75.5.

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Among the repressed economies, we have North Korea, Cuba, Zimbabwe, Venezuela, Eritrea and Iran among other states (The Heritage Foundation, 2014).

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References

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The Heritage Foundation (2014). Country ranking. Retrieved from: http://www.heritage.org/ on: 21st January, 2015.

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Xu, X. (2004). China’s gross domestic product estimation. China Economic Review, 15(3), 302-322.

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