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1. Total supply of goods and services must equal total demand for goods and services. This assumption holds on the basis of the argument that goods and services are scarce in the economy and therefore once produced must be consumed.
Let: Y = total supply of goods and services
D = total demand for goods and services
C+I+G+(X-M)
Since total supply equals to total demand then
Y = D = [C+I+G+(X-M)]
Suppose p = price index, then
Y.p = C.p + I.p + G.p + (X-M).p
If p = 1
Then, Y=C+I+G+(X-M)
This gives us an expenditure measure of GDP.
2. The second assumption comes from the observation that goods and services in an economy cannot be produced out of nothing but requires factor inputs. The assumption therefore states that the total value of output must equal total value of inputs. This assumption is clear from Euler’s theorem whereby given a production function
Y = f (K, L), Then, Euler’s theorem states that:
Where:
Y= Total value of output
K= Capital
L= Labour
Hence, Y = rK + wL this gives us the value added or output measure of GDP
3. The third assumption emphasizes the fact that households have limited ways of spending their income.
Therefore, Y = C + S + T + R,
Where:
Y = Income,
C = Consumption,
S = Savings,
R = Transfer payments
T = Taxes.
This gives us the income measure of GDP.
Zainabdawa answered the question on August 1, 2018 at 08:59
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