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
ANSWER TO TRY IT! PROBLEM
- GDP equals $1,200 and is computed as follows (the numbers in parentheses correspond to the flows in Figure 6.5 "Spending in the Circular Flow Model"):
Here is the table of value added.
Good Produced by Purchased by Price Value Added Raw milk Dairy farm Dairy $1,000 $1,000 Cream Dairy Ice cream maker 3,000 2,000 Ice cream Ice cream manufacturer Grocery store 7,000 4,000 Retail ice cream Grocery store Consumer 10,000 3,000 Final Value $10,000 Sum of Values Added $10,000
|Personal consumption (1)||$1,000|
|Private investment (2)||200|
|Equipment and software||60|
|Government purchases (3)||100|
|Net exports (4)||−100|
Notice that neither welfare payments nor Social Security payments to households are included. These are transfer payments, which are not part of the government purchases component of GDP.