Q: How do we measure GDP in Reality? A: There are three equivalent approaches

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Q How do we measure GDP in Reality? A There
are three equivalent approaches

• Value-Added Approach
  adds up production across producers
• Income account
  adds up claims against value added across
  types of claimant
• Expenditure Account
• adds up uses of product by type of use

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Factors of Production

• factors of production (capital and labor) help
  interpret the national accounts
• preliminaries
• stocks vs. flows
• location of factors
• factors in the income accounts
• factors in the expenditure accounts
• private vs. public sectors
• factors and value-added are connected through
  the production function

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Private vs. PublicPrinciples and Measurement

• principle add private factors with public
  factors
• practice public investment rarely measured
  separately from public consumption
• principle add public sector value-added to
  private sector value-added
• practice public sector output not sold in the
  marketplace, so net value-added is assumed to be
  equal to public sector labor costs. It is
  impossible to measure aggregate public sector
  productivity
• principle add private factor incomes with
  public factor incomes
• practice public capital is not rented in a
  marketplace, so net public capital income is
  assumed to be zero
• practice public sector output cannot be
  classified as final versus intermediate ? need to
  adjust the income accounts for indirect taxes

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Government Spending Compared with Public Sector
NIPA Entries

• government spending government purchases
  transfers, only purchases included as public
  entry in the NIPA expenditure account
• government purchases purchases of items from
  private enterprises purchases of factors used
  by public institutions and enterprises, but only
  the later are included as public entry in the
  NIPA value-added account