3.5 Three ways of counting GDP

The national accounts are based on the premise that the value of production equals income equals expenditure. GDP can accordingly be counted in three different ways:

The first method (and the primary method in Finland and many other countries) is the output method, which starts out from production: value added is obtained by deducting intermediate consumption from output. Value added is computed separately for each industrial sector, and the sums are then added together to get the GDP figure.

In the second, income method, all income items are summed up: wages and salaries, social security contributions, profits and depreciations. Seen from the point of view of income generated through production, value added includes wages and salaries paid to wage earners, profits (i.e. operating surplus), depreciations and the public sector's contribution to production, i.e. taxes on production minus subsidies on production.

In the third, expenditure method, GDP is counted on the basis of demand components, which are summed up: GDP = C + G + I + (X - M). End products are those that go direct to private or public consumption and that are invested or exported. Imports have to be deducted from exports in order to obtain the GDP figure. Products used for intermediate consumption appear on producers' accounts both as outputs (incomes) and inputs (expenses) so these intermediate products can be netted out.

Examples