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ECON 209 Chapter 20.docx

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Economics (Arts)
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ECON 209
Paul Dickinson

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ECON 209 Chapter 20 – The Measurement of National Income January 17, 2013 20.1 National Output and Value Added Production occurs in stages – some firms produce outputs that are used as inputs by other firms, and so on and so forth  Therefore, if we simply added up market vals of all outputs of all firms, that total > econ’s actual output (DOUBLE COUNTING) – could in principle be rectified by distinguishing btwn 2 types of output  Intermediate goods: all outputs that are used as inputs by other producers in a further stage of production  Final goods: goods that are not used as inputs by other firms, but are produced to be sold for consumption, investment, gov’t, or exports during the period under consideration  HOWEVER, it is extremely difficult if not impossible to consistently and successfully distinguish btwn the 2 types  To avoid double counting: the concept of VAL ADDED – the correct measure of ea. firm’s contribution to total (nat’l) output (the amt of market val that is produced by that firm, or net val of its output)  Represents the firm’s own efforts that add to the val of what it takes in as inputs  Val added = revenue – cost of intermediate goods purchased from other firms  Val added = pymts to factors of production  The sum of all vals added in an econ is a measure of the econ’s total output 20.2 National Income Accounting – The Basics In Canada: measures of nat’l income and product derive from the Nat’l Income and Expenditure Accts (NIEA), produced by Stats Canada  Based on CIRCULAR FLOW OF INCOME – val of domestic output = val of expenditure on that output = total income claims generated by producing that output  Natl’l income = nat’l product  There are injections (e.g. investment) into and w/drawals from (e.g. taxes) from the circular flow of income  3 diff ways of measuring nat’l income: 1. Add up val of all goods and services produced in the econ – use of val added concept (GDP by val added) 2. Add up the total flow of expenditure on final domestic output (GDP on the expenditure side) 3. Add up the total flow of income generated by the flow of domest production (GDP on the income side)  All 3 methods yield the same total, GDP (gross domestic product): total val of all goods and services produced in the econ during a given period (GDP on the expenditure side and on the income side are conceptually identical) GDP from the Expenditure Side: Calculated for a given yr by adding up vals needed to purchase the final output produced in that yr  Sum of 4 broad categories of expenditure: consumption, investment, gov’t purchases, and net exports (by definition, these categories of expenditure are exhaustive) Consumption expenditure: expenditure on all goods and services sold to their final users during the yr  Includes services, non-durable goods, and durable goods  Actual measured consumption expenditure is denoted as C a Investment expenditure: expenditure on goods not for present consumption  Includes inventories, k goods, residential housing (investment goods)  Changes in inventories: stocks of raw materials, goods in process, and finished goods held by firms to mitigate the effect of short-term fluctuations in production or sales  Accumulation of inventories during a given yr = (+) investment for that yr b/c it represents goods produced but not used for current consumption  Included in the nat’l income accts as market val (includes wages and other costs the firm incurred in producing them and the profit their future sale will generate)  Drawing down of inventories (decumulation) = disinvestment b/c it represents a reduction in stock of finished goods ready to be sold  New plant and equipment: all production uses k goods (manufactured aids to production)  K stock: econ’s total qty of k goods  Fixed investment: creation of new k goods (plant and equipment)  New residential housing: investment expenditure rather than a consumption expenditure (b/c durable asset that yields utility over a long period of time)  However, when an individual purchases a residence from another individual, an existing asset is merely transferred… transaction not part of nat’l income  Only when a new house is built does it appear as a residential investment in the nat’l accts  Gross and net investment:  Gross investment: total investment that occurs in the econ… divided into 2 parts 1. Replacement investment: amt of investment req to replace that part of the k stock losth through depreciation, which is amt by which k stock is depleted through the production process 2. Net investment = gross investment – depreciation  When net investment is (+), econ’s k stock is growing  When net investment is (-) (rare), econ’s k stock is shrinking  All investment goods are part of the nation’s total current output and their production always creates income – all gross investment is included in the calculation of nat’l income  Actual total investment is denoted as I a Gov’t purchases: all gov’t purchases of goods and services are considered part of nat’l income; actual gov’t purchases of goods and services are denoted as G a  Cost vs. market val: gov’t output typically valued at cost rather than at market val (frequently, this is necessary)  B/c gov’t purchases are valued at cost, gov’ts contribution to the nat’l econ can rise or fall w/o their actual output changing  Gov’t purchases vs. gov’t expenditure: only gov’t purchases are included as part of GDP, so a great deal of gov’t expenditures do not count as part of GDP  Gov’t purchases: all gov’t expenditure on currently produced goods and services, exclusive of gov’t transfer pymts (e.g. welfare pymts, interest on the nat’l debt, etc.); represented by the symbol G… transfer pymts are not a part of expenditure on the nation’s total output Net exports: expenditure arising from frgn trade  Import
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