Cambridge International as and a level Economics Ebook

The output measure
Th
e output method measures the value of output produced 
by industries such as manufacturing, construction, 
distributive, hotel and catering and agricultural industries 
or sectors.
In using this measure it is important to avoid counting 
the same output twice. For example, if the value of cars 
sold by manufacturers is added to the value of output of 
the tyre fi rms, double counting will occur. Value added 
is the diff erence between the sales revenue received and 
the cost of raw materials used. It is equal to the payments 
made to the factors of production in return for producing 
the good or service, so that if a TV manufacturing fi rm 
buys components costing $280,000 and uses them to 
make TVs that it sells for $350,000, it has added $70,000 
to output. It is this $70,000 that will be included in the 
measure of output.
The income method
Th
e value of an output produced is based on the costs 
involved in producing that output. Th
ese costs include 
wages, rent, interest and profi ts. All these payments 
represent income paid to factors of production. For 
instance, workers receive wages and entrepreneurs receive 
profi ts. In using this measure it is important to include 
only payments received in return for providing a good 
or service. So transfer payments, which are transfers of 
income from taxpayers to groups of individuals for welfare 
payments, are not included.
The expenditure method
What is produced in a year will either be sold or added to 
stocks. So, if additions to stocks are added to expenditure 
on goods and services, a measure is obtained that will equal 
output and income. In using this method it is necessary 
to add expenditure on exports and deduct expenditure 
on imports. Th
is is because the sale of exports represents 
the country’s output and creates income in the country, 
whereas expenditure on imports is spending on goods 
and services made in foreign countries and creates income 
for people in those countries. It is also necessary to 
deduct indirect taxes and add subsidies in order to get a 
value which corresponds to the income generated in the 
production of output.