Measuring Total Output and Income

Read this chapter, to learn about measuring domestic output, and attempt the "Try It" exercises. The material in this chapter concentrates on the four components of GDP: consumption, investment, government purchases, and net exports. Pay attention to the definition of these components as it may differ from your expectations. For example, note that Investment does not refer to the common knowledge definition of investment as in the trading of stock and bonds. Instead, the Investment component refers mainly to the purchase of physical machinery and equipment needed in the production of goods and services. You will revisit certain sections of the chapter later in this unit.

6.1 Measuring Total Output


  1. Define gross domestic product and its four major spending components and illustrate the various flows using the circular flow model.
  2. Distinguish between measuring GDP as the sum of the values of final goods and services and as the sum of values added at each stage of production.
  3. Distinguish between gross domestic product and gross national product.

An economy produces a mind-boggling array of goods and services every year. For example, Domino's Pizza produces hundreds of millions of pizzas. The United States Steel Corporation, the nation's largest steel company, produces tens of millions of tons of steel. A small logging company in Colorado produces a couple million board feet of lumber. A university football team draws more than half a million fans to its home games. A pediatric nurse in Los Angeles delivers hundreds of babies and takes care of several hundred additional patients. A list of all the goods and services an economy produces in any year would be virtually endless.

So - what kind of year is the year we are looking at? We would not get very far trying to wade through a list of all the goods and services produced that year. It is helpful to have instead a single number that measures total output in the economy; that number is GDP.