Measuring Total Output and Income

TRY IT!

Here is a two-part exercise.

1. Suppose you are given the following data for an economy:

   Personal consumption	$1,000
   Home construction	100
   Increase in inventories	40
   Equipment purchases by firms	60
   Government purchases	100
   Social Security payments to households	40
   Government welfare payments	100
   Exports	50
   Imports	150

   
   

   Identify the number of the flow in Figure 6.5 "Spending in the Circular Flow Model" to which each of these items corresponds. What is the economy's GDP?

2. Suppose a dairy farm produces raw milk, which it sells for $1,000 to a dairy. The dairy produces cream, which it sells for $3,000 to an ice cream manufacturer. The ice cream manufacturer uses the cream to make ice cream, which it sells for $7,000 to a grocery store. The grocery store sells the ice cream to consumers for $10,000. Compute the value added at each stage of production, and compare this figure to the final value of the product produced. Report your results in a table similar to that given in Table 6.1 "Final Value and Value Added".