Chapter 7 - Macroeconomics Chapter 7 National Output and...

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Macroeconomics – Chapter 7 National Output and Value Added Production occurs in stages: Many firms produce outputs that are used as inputs by other firms Intermediate goods (and services): Outputs of firms that are used as inputs by other firms Final products: Outputs that are not used as inputs by any other firms Value Added: Measures each firm’s contribution to total output The amount of market value that is produced by that firm Value added = Revenue – Costs of Intermediate Goods and Services e.g. Company buys iron ore for $200 Produces steel that it sells for $500 Iron ore is the intermediate good Steel is the output/final good Steel company’s value added is $500- $200 = $300 Total value added for a product = final selling price of the product Example: Product Selling price Value Added Cotton $2 $2 Cloth $5 $3 ($5 - $2) Shirt $20 $15 ($20 - $5) Total Value Added $20 Shirt sells for $20, and sum of value added ($2 +$3 +$15) equals $20. Also value added = Income to factors of production. Total value added in the economy is the Gross Domestic Product (GDP): Measure of all final output that is produced in the economy, valued at market prices o Adding up value added avoids double counting o Must not add up each firm’s output – overestimates GDP
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E.g. adding up cotton, plus cloth, plus short overestimates value of production – prices of cotton and cloth are included in price of shirt National Income Accounting: The Basics Three different ways of measuring national income: Add up the total value added from domestic production Add up the total expenditure on domestic output Add up the total income from domestic production The circular flow of income: Yield 3 measures of Gross Domestic Product (GDP) The circular flow of national income and expenditures (diagram) o Domestic households (top) o Domestic producers (bottom) GDP from the Expenditure Side
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