How to Measure the Output of Economy

Before getting into the concept, first understand about the Factors of Production. To produce anything certain things like raw materials, labor, infrastructure is required. These all are known as “Factors of Production”.

Now, once we understood what is Factors of Production in an economy, now know how it assists in computation of Output:

Monetary value of output can be viewed from two perspectives: (1) Factor Cost & (2) Market Price

(1) Factor Cost: It includes income for factor of production

(2) Market Price: It includes Net Taxes (Net Taxes = Indirect taxes – Subsidies) 

Output @ Factor Cost -  Output@ Market Price = Tax Burden on an economy

This tax burden is used for cross country comparisons

 

However, while computing inflation one should always try to reduce the impact of inflation on the output otherwise it will not provide a clear picture about the economies. Therefore, while calculating the output of an economy, GDP Deflator is generally used.

GDP Deflator: It is a statistical exercise which gives output at Factor Cost in terms of constant prices by reducing the effect of Inflation towards output.

Therefore, on this basis on can differentiate the types of economic growths:

· Real Growth: Adjust Inflation

· Nominal Growth: Ignores the inflation adjustment


Always keep one thing in mind, the growth always should be “Real Growth” which means Increase in GDP at Factor Cost with Constant Prices.