With aid of example below, use income method to calculate GDP:
Suppose a farmer produces 100 bags of wheat, using only his own labor, seed, and fertilizers
on a smallholding which he rent. Hesells the wheat to a miller for 1000 and pays 500 rents
in theowner of the land. His net income or profit is therefore 500. The miller buys the wheat
and produce 200 kgs of flourwhich he sells to a baker for 3000. His production costs are
1000 forlabour (wages)and 500 for overheads (interests and rental, or other charges),which
leaves a profit of 500,the barker produce 1000 loaves of bread with the flour, which he sells
directly to the consumers for 5000. His labour cost is 750and his overheads amounts to 400,
which means that his profit is 850.
To calculate GDP using the income method, we need to consider the income generated at each stage of production.
1. Farmer's income: The farmer's income is the amount he receives from selling the wheat to the miller, which is $1000. This represents the value added by the farmer to the production process.
2. Miller's income: The miller's income is the amount he receives from selling the flour to the baker, which is $3000. This represents the value added by the miller to the production process.
3. Baker's income: The baker's income is the amount he receives from selling the bread to the consumers, which is $5000. This represents the value added by the baker to the production process.
Now, let's calculate GDP:
GDP = Farmer's income + Miller's income + Baker's income
= $1000 + $3000 + $5000
= $9000
Therefore, the GDP in this example is $9000.