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ECON 1P92.docx

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ECON 1P92 LECTURE 01/15/13 Value Added:  Measures each firm’s contribution to total output  The amount of the market value that is produced by that firm Total value added for a product= final selling price of the product Product Selling Price Value Added Cotton 2 2 Cloth 5 3 (5-2) Shirt 20 15 (20-5) Total Value Added = $20 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 produced in the economy, valued at market prices  Adding up value added avoids double counting  Must not add up each firm’s output – overestimates GDP  E.g. adding up cotton, plus cloth, plus shirt overestimates value of production – prices of cotton and cloth are included in price of shirt National Income Accounting : The Basics Three different ways of measuring national income: 1. Add up the total value added from domestic production 2. Add up the total expenditure on domestic output 3. Add up the total income from domestic production  The circular flow of income yield 3 measures of Gross Domestic Product (GDP)  **the circular flow of national income and expenditure** GDP from the Expenditure Site  add up expenditures needed to purchase final output produced (in year)  Four expenditure categories 1. Actual consumption expenditure ( C):  Expenditure on all final consumer g & s in year 2. Actual gross investment expenditure (I):  Expenditure on g & s not for present consumption including: o New plant and equipment (additions to capital stock) also called business fixed investment o Inventory accumulation o New residential construction  (I) used in two ways: ECON 1P92 LECTURE 01/15/13 o replacement investment  investment to cover depreciation(or capital consumption)  maintains existing capital stock o net investment  addition to capital stock Gross Investment = Depreciation + Net Investment Since all of Gross I is new production, it is included in GDP 3. Government purchases of g & s (G):  Does not include transfer payments e.g. pensions  Government output must be measured by cost since o No market price o No market value of output  (If fewer police do the same job, measure of G fails, although output is the same) 4. Net Exports: NX = (X-IM)  Exports (X): o Pur
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