Answer to Question #32163 in Macroeconomics for Helen

Question

How is the factor payments approach different from the expenditure approach to GDP?
A. the expenditure approach measures the total output of the economy, whereas the factor payments approach does not.
B. the factor payments approach measures the total output of the economy, whereas the expenditure approach does not
C. in the factor payments approach, income of each household is added up, as opposed to values of goods and services purchased by each type of final user.
D. in the factor payments approach, values of goods and services purchased by each type of final user are added up, as opposed to income of each household.

suppose you own a coffee shop in a small town. you buy coffee beans and milk from local farmers and earn a sizeable revenue from your business. Which of the following business payments are factor payments?

A. Payment to the coffee farmer
B. Profit from your business
C. Wages paid to waiters
D. Rent paid to your landlord

Answer 1

There are different approaches to measuring GDP:

1. Expenditures Approach:
The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) +
(Exports (X) - Imports (M))
GDP = C + I + G + (X-M)
2. Income approach

Using this approach GDP is calculated by adding up the factor incomes to the factors of production in the society.

GDP = Compensation of employees + Rent + Interest + Proprietor’s Income +Corporate Profits + Indirect business taxes + Depreciation + Net foreign factor
income

1. A, C

The factor payments are wage, interest, rent, and profit payments for the services of scarce resources or the factors of production (labor, capital,
land, and entrepreneurship) in return for productive services.
2. A, B, C, D.