• Where there are different stages in the production process, only the value created in each production phase must be included in the GDP figure and not the total value at each stage, because this would lead to double-counting.
• Because the flow of income and the flow of expenditure are the same, the value of total production can be calculated in three ways, namely according to production, according to income and according to expenditure.

Calculation of GDP according to the production method

• GDP is calculated by adding together the value-added to goods and services in each phase of the production process.

Calculation of GDP according to the income method

• GDP(I) is calculated by adding together the total income received by the suppliers of the factors of production for their contribution to production.
• There are four components, namely suppliers of natural resources receive rent, labour receives wages, capital suppliers receive interest and entrepreneurs receive profit.
• Total income indicates how much it cost to produce the output.
• The income equation is stated as follows: GDP(I) = wages (W) + rent (R) + interest (I) + profit (P). In short: GDP(I) = W + R + I + P.

Calculation of GDP according to the expenditure method

• GDP(E) is calculated by adding together the total expenditure of households, businesses, the government and the value of exports.
• The value of imports is subtracted because local factors of production were not used for the imported goods and services.
• The expenditure equation is stated as follows: GDP(E) = consumption expenditure (C) + expenditure by businesses (investment) (I) + government expenditure (G) + exports – imports (X – M). In short: GDP(E) = C + I + G + (X – M).

Calculation of GNI

• When calculating Gross National Income, the income earned by South African citizens working abroad must be added to GDP and the income earned by foreign workers working in South Africa must be subtracted.
• The formula for calculating GNI is: GNI = GDP + factor income earned by citizens working abroad – factor income earned by foreigners working in South Africa.

I have an additional numerical explanation of the three methods in the way that we explain it to first-year students: