Equivalence of the Two Approaches

Now we have calculated GDP by the upper loop flow-of-product approach and by the lower-loop earnings-flow approach. Which is the better approach? The surprise is that they are actually the same.

In fact, the two approaches are identical because we have ,included “profit” in the lower loop along with other incomes. What exactly is ·profit? Profit is what remains from the sale of a. product after you have paid the other factor costs-wages, interest, and rents. It is the residual that adjusts automatically to make the lower loop’s costs or earnings exactly match the upper loop’s value of goods To sum up GDP,or gross domestic product, am be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output, Because profit is a residual, both approaches will yield exactly the same total GDP.

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