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Measuring Total Output

24 April, 2015 - 11:52

Learning Objectives

  • Define gross domestic product and its four major spending components and illustrate the various flows using the circular flow model.
  • Distinguish between measuring GDP as the sum of the values of final goods and services and as the sum of values added at each stage of production.
  • Distinguish between gross domestic product and gross national product.

An economy produces a mind-boggling array of goods and services. In 2007, for example, Domino’s Pizza produced 400 million pizzas. The United States Steel Corporation, the nation’s gest steel company, produced 23.6 million tons of steel. Strong Brothers Lumber Co., a Colorado firm, produced 2.1 million board feet of lumber. The Louisiana State University football team drew 722,166 fans to its home games—and won the national championship. Leonor Montenegro, a pediatric nurse in Los Angeles, delivered 387 babies and took care of 233 dditional patients. A list of all the goods and services produced in any year would be virtually endless.

So—what kind of year was 2007? We would not get very far trying to wade through a list of all the goods and services produced that year. It is helpful to have instead a single umber that measures total output in the economy; that number is GDP.