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Chapter 20.docx

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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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