Chapter 20 – The Measurement of National Income
Production occurs in stages: some firms produce outputs that are used as inputs by other firms,
and these other firms, in turn, produce outputs that are used as inputs by yet other firms.
Intermediate goods: all outputs that are used as inputs by other producers in a further stage of
Final goods: goods that are not used as inputs by other firms but are produced to be sold for
consumption, investment, government, or exports during the period under consideration.
Value added: the value of a firm’s output minus the value of the inputs that it purchases from
Value added is the correct measure of each firm’s contribution to total output—the amount of
market value that is produced by the firms.
The sum of all values added in an economy is a measure of the economy’s total output.
Each firms contribution to total output is equal to its value added, which is the value of the
firm’s output minus the values of all intermediate goods and services—that is, the outputs of
other firms—that is uses. The sum of all the values added produced in an economy is the
economy’s total output, which is called gross domestic product (GDP).
The value of domestic output is equal to the value of the expenditure on that output and is also
equal to the total income claims generated by producing that output.
Gross domestic product (GDP): the total value of goods and services produced in the economy
during a given period.
GDP from the expenditure side is equal to the sum of the four major expenditure categories
1. Consumption Expenditure
2. Investment Expenditure
3. Government Purchases
4. Net Exports
o GDP = C a Ia+ G a (X a IM )a
Consumption expenditure: household expenditure on all goods and services. Represented by
the symbol C.
Investment expenditure: expenditure on the production of goods not for present consumption.
Represented by the symbol I.
o Investment goods: inventories; capital goods, such as factories, machines and
o Actual Investment Expenditure: denoted by the symbol I .a
Inventories: stocks of raw materials, goods in process, and finished goods held by firms to
mitigate the effect of short-term fluctuations in production or sales.
Capital stock: the aggregate quantity of capital goods.
Fixed investment: the creation of new plant and equipment.
Depreciation: the amount by which the capital stock is depleted through the production
process. Gross investment: the total investment that occurs in the economy.
o Divided into 2 parts: replacement investment and net investment
Net investment = Gross Investment – Depreciation
o If net investment is positive, the economy’s capital stock is growing
o If net investment is negative—which rarely happens—the economy’s capital stock is
Government purchases: all government expenditure on