(a) Describe the output method of measuring the gross domestic product of a country. [6 marks] (b) How is the net national product at factor cost obtained f...

(a) The output (product) method of measuring GDP. Under this method the gross domestic product is found by adding up the money value of all final goods and services produced by all sectors of the economy (agriculture, industry, services and so on) within the country during a year. To avoid double counting, only the value of final goods is counted, or equivalently the value added at each stage of production is summed. Value added is the difference between the value of a firm's output and the cost of the inputs it bought from other firms.

(b) Obtaining net national product at factor cost from GDP. Proceed step by step:

1. Add net income from abroad to GDP to obtain gross national product: \( GNP = GDP + \text{net income from abroad} \).
2. Subtract depreciation (capital consumption) to obtain net national product at market prices: \( NNP_{mp} = GNP - \text{depreciation} \).
3. Subtract indirect taxes and add subsidies to obtain net national product at factor cost: \( NNP_{fc} = NNP_{mp} - \text{indirect taxes} + \text{subsidies} \).

(c) Two problems associated with the output method

• The danger of double counting: if intermediate goods are added in as well as final goods, output is overstated; care is needed to count only final goods or value added.
• Valuation of non-marketed and subsistence output: goods produced and consumed at home (for example subsistence farming and unpaid household services) have no market price and are hard to value or may be left out, understating true output.