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Gross output

What Is Gross Output?

Gross output (GO) is a comprehensive measure of total economic activity within an economy over a specific period, typically a quarter or a year. It falls under the umbrella of economic indicators in macroeconomics. Unlike some other economic measures, gross output captures the full value of all goods and services produced at every stage of production, including both intermediate goods and final goods. This broad scope means it reflects not only finished products sold to end-users but also the extensive business-to-business (B2B) transactions that occur throughout the supply chain. The Bureau of Economic Analysis (BEA) defines gross output as an industry's sales or receipts, encompassing sales to final users (which are part of Gross Domestic Product) and sales to other industries (intermediate inputs).38

History and Origin

The concept of gross output has roots in early economic thought, predating the widespread adoption of Gross National Product (GNP) and Gross Domestic Product (GDP). Austrian economist Friedrich A. Hayek introduced "Hayek's triangles" in the 1930s, a theoretical diagram illustrating the various stages of production, which laid an early foundation for understanding total production across different stages.37 However, it was not until much later that statistical measurement of gross output became formalized.

While Simon Kuznets developed national income accounting in the 1930s, focusing on the "net product" or final output, and Wassily Leontief expanded on this with input-output tables in the 1960s, a dedicated, aggregate gross output statistic for the U.S. economy gained prominence more recently.36 The U.S. Bureau of Economic Analysis (BEA) began publishing gross output on an annual basis in the early 1990s.35 A significant shift occurred in April 2014 when the BEA began releasing gross output data on a quarterly basis, alongside GDP, providing a more timely and granular view of the overall economy.34 This move was spearheaded by BEA director J. Steven Landefeld, who emphasized that gross output offers "an important new perspective on the economy and a powerful new set of tools of analysis."33

Key Takeaways

  • Gross output (GO) measures the total value of all goods and services produced at every stage of production within an economy.
  • It includes both intermediate inputs (business-to-business transactions) and final goods and services, offering a broader view than Gross Domestic Product (GDP).
  • The Bureau of Economic Analysis (BEA) officially began publishing quarterly gross output data in 2014.
  • Gross output is considered a "top-line" measure in national income accounting, reflecting total sales or revenues across the economy.
  • It highlights the significant role of the business sector and supply chain activity in economic performance.

Formula and Calculation

Gross output is calculated as the sum of Gross Domestic Product (GDP) and intermediate goods (II). This relationship highlights how gross output encompasses all stages of production, unlike GDP which focuses solely on final goods and services.

The formula is expressed as:

GO=GDP+IIGO = GDP + II

Where:

  • (GO) = Gross Output
  • (GDP) = Gross Domestic Product (the value of all final goods and services produced)
  • (II) = Intermediate Inputs (goods and services used up in the production process by other industries)

Alternatively, gross output can be viewed as an industry's sales or receipts, which can include sales to final users or sales to other industries. It can also be measured as the sum of an industry's value added and intermediate inputs.32

Interpreting the Gross Output

Interpreting gross output provides a deeper understanding of the underlying dynamics of the economy beyond just final sales. While Gross Domestic Product focuses on the "use" economy, or what consumers and final users purchase, gross output sheds light on the "make" economy, detailing the extensive business-to-business transactions that enable production.31

A rising gross output indicates robust activity across all stages of production, suggesting a healthy supply chain and strong business spending. It offers insights into the interdependencies of various industries. For instance, an increase in manufacturing gross output implies more raw materials and components are being processed, which then contribute to the final products counted in GDP. Conversely, a decline in gross output could signal contractions in intermediate stages, which might eventually affect final output. Analyzing gross output allows for a more granular view of how different sectors contribute to overall economic growth.29, 30

Hypothetical Example

Consider a hypothetical economy with three main stages of production for a simple product like a wooden chair:

  1. Logging Company: Harvests timber and sells it to a lumber mill.
    • Sells timber for $100. (Gross Output of Logging Company = $100)
    • No intermediate inputs for this stage.
  2. Lumber Mill: Buys timber, processes it into planks, and sells planks to a furniture manufacturer.
    • Buys timber for $100.
    • Sells planks for $250. (Gross Output of Lumber Mill = $250)
    • Intermediate Inputs for Lumber Mill = $100 (timber)
  3. Furniture Manufacturer: Buys planks, crafts them into chairs, and sells finished chairs to consumers.
    • Buys planks for $250.
    • Sells finished chairs for $500. (Gross Output of Furniture Manufacturer = $500)
    • Intermediate Inputs for Furniture Manufacturer = $250 (planks)

To calculate the total gross output for this economy, we sum the sales at each stage:
Gross Output = Gross Output of Logging Company + Gross Output of Lumber Mill + Gross Output of Furniture Manufacturer
Gross Output = $100 + $250 + $500 = $850

In contrast, the Gross Domestic Product (GDP) would only account for the sale of the final chairs to consumers:
GDP = $500 (value of final chairs)

This example illustrates how gross output ( $850) is significantly larger than GDP ( $500) because it includes the value of intermediate goods traded between businesses. It provides a more comprehensive picture of all economic activity that occurred to produce the final product.

Practical Applications

Gross output serves as a vital tool for macroeconomic analysis and policymaking by offering insights that complement Gross Domestic Product (GDP).

  • Understanding Business-to-Business Activity: Gross output highlights the sheer volume of transactions within the supply chain. It reveals that business spending, including intermediate goods and services, is substantially larger than final consumer spending.28 This perspective underscores the critical role of the business sector in driving economic growth and facilitating the production of goods and services for consumption, investment, government spending, exports, and imports.27
  • Analyzing Industry Contributions: The Bureau of Economic Analysis (BEA) publishes gross output data by industry, allowing analysts to assess which sectors are expanding fastest or contributing most to overall economic activity, including the "make" economy that supports final production.26 This granular data helps in understanding industry dynamics and interdependencies.
  • Business Cycle Analysis: Some economists suggest that earlier-stage and intermediate inputs, as captured by gross output, can provide helpful insights for forecasting the direction of the business cycle. Changes in business-to-business activity often precede shifts in final demand.25
  • Policy Formulation: Acknowledging the comprehensive nature of gross output can inform policymakers about the impact of taxes on businesses and savings, recognizing that the business sector is a significant driver of economic prosperity.24 The U.S. Bureau of Economic Analysis provides interactive data applications that allow users to access and analyze gross output data, among other national, international, and regional statistics.23

Limitations and Criticisms

While gross output provides a more comprehensive view of economic activity than Gross Domestic Product (GDP), it is not without limitations or criticisms.

One primary concern is the inherent "double-counting" of economic activity.22 Because gross output includes intermediate transactions at every stage of the supply chain, the same economic value can be counted multiple times as it moves from raw materials to final goods. For instance, the value of timber is counted when sold to a mill, then again as part of lumber sold to a manufacturer, and finally as part of a finished piece of furniture. This characteristic means aggregate gross output is a measure of total sales or turnover, rather than a measure of net new wealth created, which is the focus of GDP.20, 21

Critics caution that aggregate gross output may be a more volatile and less reliable measure of aggregate business cycles and economic growth because it can exaggerate the cyclicality of components most sensitive to economic fluctuations, such as manufacturing.19 For example, a downturn might see a larger percentage drop in gross output for durable goods manufacturing compared to the value added (GDP contribution) from that same industry.18

Furthermore, the Bureau of Economic Analysis (BEA) itself advises that gross output should not be considered a singular objective measure of the overall health of the economy or for judging the performance of specific industries or sectors in isolation.17 It is explicitly noted as a complementary tool to GDP, not a substitute.16 Misinterpreting gross output could lead to flawed policy decisions, such as using it as a direct yardstick for government spending, debt, or taxation, given its duplicative nature.15

Gross Output vs. Gross Domestic Product

Gross output and Gross Domestic Product (GDP) are both key economic indicators, but they measure different aspects of economic activity and offer complementary perspectives. The fundamental difference lies in what they include in their calculations.

Gross Domestic Product (GDP) measures the total market value added of all final goods and services produced within a country's borders over a specific period.14 This means GDP only counts the value of products and services sold to the ultimate consumer or end-user, deliberately avoiding "double-counting" intermediate goods to represent the net new wealth created.13 GDP is often seen as the "bottom line" in national income accounting, reflecting the final stage of economic production and is frequently used as a gauge of a nation's standard of living or overall economic health.12

Gross Output (GO), on the other hand, is a much broader measure. It includes the value of both final goods and services and all the intermediate goods and services used in their production.11 This means gross output counts the total sales or receipts at every stage of the supply chain, leading to a much larger figure than GDP. For example, in Q3 2021, the BEA estimated U.S. gross output at $41.8 trillion, while GDP was $23.2 trillion.10 Gross output is often referred to as the "top line" in national income accounting, representing the total economic activity that fuels the economy.9

The confusion between the two often arises because both describe economic activity. However, GDP tells us what was ultimately consumed or invested, while gross output provides a more detailed picture of the underlying production process and the volume of business-to-business transactions that drive the economy.8 Both measures are crucial for a complete understanding of a nation's national income and production accounts.

FAQs

What is the primary difference between gross output and GDP?

The primary difference is that gross output measures total sales at all stages of production, including intermediate goods used by businesses, while Gross Domestic Product (GDP) only measures the value of final goods and services sold to end-users. Gross output therefore includes "double-counting" of intermediate transactions, making it a much larger figure than GDP.6, 7

Why is gross output important if GDP is the main economic indicator?

Gross output is important because it provides a more comprehensive view of economic activity, particularly highlighting the extensive business-to-business transactions that drive the supply chain. It offers insights into the "make" economy, complementing GDP's focus on the "use" economy and offering a fuller picture of how production occurs.5

How frequently is gross output data released?

The U.S. Bureau of Economic Analysis (BEA) began publishing gross output statistics on a quarterly basis in April 2014.4 These releases often coincide with the third estimate of Gross Domestic Product each quarter.3

Can gross output replace GDP as a measure of economic health?

No, gross output is not intended to replace GDP. The Bureau of Economic Analysis and economists view gross output and GDP as complementary measures. While gross output provides a broader view of total sales and production activity, GDP remains the primary measure for assessing the net new wealth created and the overall standard of living, as it avoids the issue of double-counting value added at different stages.1, 2