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ECON 1P92 (65)
Lecture

Chapter 20.docx

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Department
Economics
Course
ECON 1P92
Professor
Professor Cottrel
Semester
Fall

Description
ECON 1P92 September 17 and 19 2013th Chapter 20 The Measurement of National Income National Output and Value Added Production Occurs in Stages: - Many firms produce outputs that are used as inputs by other firms Intermediate Goods (and services): - Outputs of firms that are used as inputs by other firms Final Products: - Outputs that are not used as inputs by any other firms Value Added: - Measures each firms contribution to total output - The amount of market value that is produced by that firm Value Added = Revenue – Costs of intermediate Goods & Services Ex. - Steel company buys iron ore for $200 - Produces steel that it sells for $500 - Iron ore is the intermediate good - Steel is the output (final product) - Steel company’s value is $500 - $200 = $300 Total value added for a product = final selling price of the product or service Ex. Product Selling Price Value Added Cotton $2 $2 Cloth $5 $3 ($5-$2) Shirt $20 $15 ($20-$5) Total Value Added $20 The shirt sells for $20, and sum of value added ($2 + $3 +$15) equals $20 Also, Value Added = Income to Factors of Production Total Value Added in the Economy is Gross Domestic Product (GDP): - Measure of all final output that is produces in the economy, value at market prices. - Adding up value added avoids double counting - Must not add up each firm’s output – overestimated GDP - Ex. Adding up cotton, plus cloth, plus shirt overestimates value of production. Prices of cotton and cloth are included in the price of shirt. National Income Accounting: The Basics Three different ways of measuring national income: - Add up the total value added from domestic production - Add up the total expenditure on domestic output - Add up the total income from domestic production The circular flow of income: - Yield 3 measures of Gross Domestic Product (GDP) GDP from the Expenditure Side: Add up expenditures needed to purchase final output produced (in year) 4 expenditures categories: 1) Actual Consumption Expenditure (C): - Expenditure on all final consumer goods and services in year 2) Actual gross Investment Expenditure (I): Expenditure on goods and services not for present consumption, including: - New plant and equipment (additions to capital stock), also called business fixed investment - Inventory accumulation - New residential construction [I] used in 2 ways: A. Replacement investment - Investment to cover depreciation or capital consumption) - Maintains existing capital stock B. Net Investment - Addition to capital stock Gross I = Depreciation + Net I Since all of Gross I is new production it is included in GDP 3) Government Purchases of Goods and Services (G): - Does not include transfer payments, e.g pensions Government output must be measured by cost since: - No market price - No market value of output (e.g cost of policing) (If fewer police do the same job, measure of G falls, although output is the same) 4) Net Exports: NX = (X – IM) Exports (X): - Purchases of Canadian produces goods and services by foreigners - Part of the total expenditure on Canadian output Imports (IM): - Purchases of foreign – produced goods and services by Canadians - Not spent on Canadian Output - Subtract it from total expenditure GDP = C + I + G + X – IM GDP from the Income Side GDP is the sum of factor incomes plus indirect taxes (net subsides) plus depreciation. Factor Incomes Includes: - Wages and salaries (total payment for services of labor) - Interest (e.g from banks and loans to businesses) - Business profits both distributed (e.g dividends) and undistributed (retained earnings) - Sum of these factor incomes is net domes
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