Gross Domestic Product (GDP): There are three different ways to think of GDP and each produce the same result:
● The expenditure approach adds up the value of purchases made by final users in a country—for example, the consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners.
● The income approach sums the incomes generated by production in a country—for example, the compensation employees receive and the operating surplus of companies (roughly sales less costs).
● The production approach sums the “value-added” at each stage of production in a country, where value-added is defined as total sales less the value of intermediate inputs into the production process. For example, flour would be an intermediate input and bread the final product; or an architect’s services would be an intermediate input and the building the final product.
Why it matters: On the one hand, GDP per capita is an approximation of how much income households and firms earn. On the other hand, it is a widely used point of reference for measuring against – for example government revenues as a share of GDP, public debt as a share of GDP, exports as a share of GDP and so on.
Source: https://en.wikipedia.org/wiki/Gross_domestic_product
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