Let us look at a numerical example to see how all three methods of estimating GDP gives us the same answer.
There are two firms, A and B. Suppose firm A uses no raw material and produces cotton worth ₹50. Firm A sells its cotton to firm B, who uses it to produce cloth. Firm B sells the cloth produced to consumer for ₹200.
1. GDP in the phase of production or the value added method: Value added (VJ = sales – intermediate goods.
Thus VA of firm A = 50 – 0 = 50 and VA of firm B = 200 – 50 = 150 Thus, GDP = V. of firm A + VA of firm B = 200
Distribution of GDPs for firm A and B
2. GDP in the phase of expenditure method: GDP = sum of final expenditure or expenditure on goods and services for end use.
In the above case, final expenditure is expenditure by consumers on cloth. Therefore, GDP = 200
3. GDP in the phase of income method.
Now, of this 50 received by firm A, the firm gives ₹20 to the workers as wages and keeps the remaining 30 as its profits. Similarly, firm B gives 60 as wages and keeps 90 as profits.
Distribution of factor incomes of firms A and B
GDP by income method = sum total of factor incomes, which is equal to total wages received by both the firms and total profits earned by both the firms, which is equal to 80 + 120 = 200
Hence, estimation of GDP gives us same answer in all three methods of calculating GDP.