1. Explain GDP as a measure of economic performance.

The gross domestic product (GDP) is the godfather of the indicator world. As an aggregate
measure of total economic production for a country, GDP represents the market value of all
goods and services produced by the economy during the period measured, including personal
consumption, government purchases, private inventories, paid-in construction costs and the
foreign trade balance (exports are added, imports are subtracted).
Presented only quarterly, GDP is most often presented on an annualized percent basis. Most of
the individual data sets will also be given in real terms, meaning that the data is adjusted for
price changes, and is therefore net of inflation.
The GDP is an extremely comprehensive and detailed report. In fact, reading the GDP report
brings us back to many of the indicators covered in earlier tutorial topics, as GDP incorporates
many of them: retail sales, personal consumption and wholesale inventories are all used to help
calculate the gross domestic product. Various chain-weighted indexes discussed in earlier
topics are used to create Real GDP Quantity Indexes with a current base year of 2000.1

2. Meaning, purpose and limitations of GDP.

Meaning:
The monetary value of all the finished goods and services produced within a country's borders
in a specific time period, though GDP is usually calculated on an annual basis. It includes all of
private and public consumption, government outlays, investments and exports less imports that
occur within a defined territory.
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy"G" is the
sum of government spending"I" is the sum of all the country's businesses spending on
capital"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX
= Exports - Imports)2

Purpose:
The gross domestic product (GDP) is one the primary indicators used to gauge the health of a
country's economy. It represents the total dollar value of all goods and services produced over a
specific time period - you can think of it as the size of the economy. Usually, GDP is expressed
as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%,
this is thought to mean that the economy has grown by 3% over the last year.

As one can imagine, economic production and growth, what GDP represents, has a large
impact on nearly everyone within that economy. For example, when the economy is healthy, you
will typically see low unemployment and wage increases as businesses demand labor to meet

the growing economy. A significant change in GDP, whether up or down, usually has a
significant effect on the stock market. It's not hard to understand why: a bad economy usually
means lower profits for companies, which in turn means lower stock prices. Investors really
worry about negative GDP growth, which is one of the factors economists use to determine
whether an economy is in a recession.3

Limitation:

Changes in quality and the inclusion of new goods

Leisure/human costs
Underground economy
Harmful Side Effects
Non-Market Production4

3. Explain expenditure approach and income approach.

Expenditure approach:
One of three methods for determining aggregate demand in an economy. The expenditure
approach consists of adding up the total of government expenses, consumption, net
exports and investment that make up the Gross National Expenditure. The income
approach and the output approach use the total of consumption, savings and taxation to yield
the same results.5
In this approach GDP is calculated as the sum of four categories of expenditures on output.
These are:
Gross Private Consumption Expenditures(C)
Gross Private Investment (I)
Government Purchases (G)
Net Exports (X - M)
GDP = C + I + G +NX6

Income Approach:
A real estate appraisal method that allows investors to estimate the value of the property based
on the income produced. The income approach is computed by taking the net operating income
of the rent collected and dividing it by the capitalization rate (the investor's rate of return).7
This approach calculates National Income, NI. NI is the sum of the following components:
Labor Income (W)
Rental Income (R)
Interest Income (i)
Profits (PR)

NI = W + R + i + PR8

Resources:
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http://www.investopedia.com/university/releases/gdp.asp
http://www.investopedia.com/terms/g/gdp.asp
http://www.investopedia.com/ask/answers/199.asp
http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/limitations-gdpalternative.asp
http://www.businessdictionary.com/definition/expenditure-approach.html
http://www.econport.org/content/handbook/NatIncAccount/CalculatingGDP/Expenditures
.html
http://www.investopedia.com/terms/i/income-approach.asp
http://www.econport.org/content/handbook/NatIncAccount/CalculatingGDP/Income.html