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


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".