All Transactions are Not Equal

To see why this might be difficult, suppose that Jonathan McJohnson purchases a new set of All Season MegaTread tires for his vintage 1983 OmniMotors XL GT 9000 Sports Coupe. As a card-carrying member of the household sector, Jonathan buys these tires for his personal driving enjoyment. The market value of this purchase is a consumption expenditure and is included in gross domestic product.

In contrast, suppose that OmniMotors also buys a set of All Season MegaTread tires for the production of a brand new OmniMotors XL GT 9000 Sports Coupe. OmniMotors buys these tires as an intermediate good in the production of its OmniMotors XL GT 9000 Sports Coupe. This Sports Coupe, complete with All Season MegaTread tires is ultimately be sold to a satisfaction-minded consumer like Maurice Finkelstein. When purchased by Maurice, the total value of the OmniMotors XL GT 9000 Sports Coupe, including tires, is a consumption expenditure and is included in gross domestic product.

A potential problem emerges if the total sales of every All Season MegaTread tire sold by the MegaTread Tire is included in gross domestic product. Doing so means double counting. Some of the tires sold are finals goods purchased by the household sector and some are intermediate goods purchased by other firms like OmniMotors. Including transactions for All Season MegaTread tires when purchased as an intermediate good by OmniMotors in gross domestic product causes serious double counting. The value of the tires is part of the value of the Sports Coupe and need not be included separately in gross domestic product.

Double Stuffing an Amigo

In addition to these intermediate goods, The Wacky Willy Company also uses the four basic factors of production--labor, capital, land, and entrepreneurship. The expense of these resources in the production of Stuffed Amigos is not particularly important at the present. What is important is the market transactions for the intermediate goods.

Stuffed Amigo Production
Production Input	Value
Fabric	$1.00
Thread	$0.25
Stuffing	$2.75
Intermediate Goods	$4.00
Labor	$5.00
Capital	$3.00
Land	$0.50
Profit	$2.45
Value Added	$10.95
Total Value	$14.95

The table at the right presents a breakdown of the revenue received by The Wacky Willy Company for the sale of one Stuffed Amigo and the cost incurred in its production. The sales price is $14.95. This is the revenue collected by The Wacky Willy Company. More importantly, this is the value placed on this product by the buyer and the market transaction for this Stuffed Amigo is included in gross domestic product.

But, the production of this Stuffed Amigo involves other market transactions. One market transaction is the purchase of fabric by The Wacky Willy Company from OmniTextiles for $1. Another market transaction results when The Wacky Willy Company buys $0.25 worth of thread from MegaThread. And a third market exchange is $2.75 worth of gelatinous substance sold by Ooze, Inc. to The Wacky Willy Company. Each of these three companies, OmniTextiles, Mega Thread, and Ooze, Inc., not only sells intermediated goods to firms like The Wacky Willy Company, but they also sell final goods directly to consumers.

If the Department of Commerce number crunchers merely added all market transactions, they would be overstating the value associated with the production of this Stuffed Amigo. In addition to the actual $14.95 value of the Stuffed Amigo, they would be separately including $4 worth of intermediate good transactions.