National Output and Value Added

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:

• Outputs of some firms that are used as inputs by others

Final Goods:

• Products that are not used as inputs by other firms

Value Added:

Amount of value that firms and workers over and above the costs of purchased intermediate goods

$$ \begin{align} \text{Value Added} &= \text{Sales } - \text{Cost of Intermediate Goods} \\ & = \text{Payment owed to the firm's factor of production} \\ & = \text{All final goods produced (output)} \end{align} $$

• The sum of all values added in an economy is a measure of the economy’s total output

Factor Payments = Value Added

Wages + Profit = Value Added

National Income Accounting:

<aside> 💡 The value of domestic output is equal to the value of the expenditure on that output and is also equal to the total income generated by producing that output

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ChatGPT’s explanation:

The concept that the value of domestic output is equal to the value of expenditure on that output and is also equal to the total income generated by producing that output is known as the expenditure-income approach to calculating GDP.

According to this approach, the total value of domestic output or GDP can be measured in three ways: through the expenditure approach, the income approach, and the production or output approach.

The expenditure approach measures GDP by adding up the total expenditures on goods and services produced within a country's borders, including personal consumption, government spending, investments, and net exports. This approach assumes that all goods and services produced in the economy are eventually purchased by someone.

The income approach measures GDP by adding up the total income generated by producing goods and services within a country's borders, including wages, salaries, profits, and other forms of income. This approach assumes that all factors of production (i.e., labor, capital, and land) are compensated for their contributions to the production process.

The production or output approach measures GDP by adding up the total value of all final goods and services produced within a country's borders. This approach assumes that the value of all goods and services produced in the economy is equivalent to the total income generated by the production process.

Therefore, the value of domestic output is equal to the value of the expenditure on that output, as measured by the expenditure approach, and is also equal to the total income generated by producing that output, as measured by the income approach. These three measures are all interrelated and provide different perspectives on the same concept, which is the total value of goods and services produced within a country's borders during a specific period.