From the above equation employee compensation, operating surplus and mixed income added together are referred to as factor income. It is therefore evident that this method involves adding up income earned by factors of production.
This is another method used in calculating GDP and the method involves adding up the unit rise in prices of products in the production stages. Therefore this method involves adding up contributions of the factors of production that add value to a product. Value is added either through services rendered and goods used to process final products.
However calculation of GDP using the above three methods should be the same, the expenditure method is commonly used in many countries to calculate GDP due to the availability of data, the following is an analysis of changes in GDP due to increase in production and change in price.
The following information on the production of a good is provided, Lenovo produces 10,000 units of a product with a market value of 2,000 each in 2009 December; however no units are sold until spring of 2010. The following are the requirements:
For this reason therefore the Lenovo products produced and not sold in this year will increase the level of investment in terms of an increase in inventory, the following is a summary of the calculations:
Given that 10,000 units were produced and the market price of these products is 2,000 then it is possible to determine the GDP level increase as a result of this production, the value of these products is determined by multiplying the quantity produced and the prevailing market price, and the following formula is used:
Value of products = quantity X price (Obstfeld (1997))
Substituting the values as follows:
10,000 X 2,000 = 20,000,000 dollars
From the above calculation therefore it is evident that the GDP level in 2009 will increase by 20,000,000 dollars, this increase will be as a result of the increase in investment in the year 2009.
b) GDP increase in 2010:
The GDP level will be affected in 2010; there will be an increase in consumption in this year