Maura Peters
An important indication of a country’s economic development is the measure of
overall output a country is producing during a given period. In order to accurately
measure domestic production, overall output needs to be quantified. However, any given
economy is producing multiple outputs that use different units of measurement and thus
cannot be readily added together. For example, a country may only produce apples and
steel but in order to measure productivity level the amount of apples produced and steel
produced would need to be added together. But, bushels of apples cannot be converted
into tons of steel and vice versa. So how is economic performance calculated? Compared
over time and between countries? This paper will discuss the conceptual development of
gross domestic production and how it has addressed these issues but is still an imperfect
measure of economic well being.
Gross domestic production or GDP is the total value of all final goods and
services produced in an economy during a given period. This definition of economic
productivity solves the apple and steel problem because it measures overall production as
the price per quantity times the total quantity produced of all outputs in a given economy.
For instance, if a country produces 20 bushels of apples at $10 per bushel and 20 tons of
steel at $100 per ton during a given period GDP would equal 20 bushels times $10 plus
20 tons times $100, which equals $2,200. This method of calculation enables different
measurements of outputs to be added together because it converts all measurements into a
single monetary unit of measurement. However, adding up the total value of final good
and services produced is only one method of calculating GDP.
There are three different approaches used to calculate gross domestic product; the
value added approach, the expenditure approach, and the income approach. The value
added approach, as demonstrated earlier, adds up the final value of goods and services
produced in a given economy. However it is important to note that this only includes the
sale of final goods and services. Final goods and services are goods and services sold to
the final or end user. This method excludes the transaction of intermediate goods and
services, which are inputs used in the current production of final goods and services. The
purchase of intermediate goods and services is excluded to prevent those costs from
being counted twice in the calculation of GDP. For example, a firm that produces orange
