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. 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"):
  2. Personal consumption (1) $1,000
    Private investment (2) 200
      Housing 100
      Equipment and software 60
      Inventory change 40
    Government purchases (3) 100
    Net exports (4) −100
    GDP $1,200

    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.

  3. 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