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CHAPTER 20.docx

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McGill University
Economics (Arts)
ECON 209
Paul Dickinson

CHAPTER 20THE MEASUREMENT OF NATIONAL INCOME201 NATIONAL OUTPUT AND VALUE ADDED Production occurs in stages some firms produce outputs that are used as inputs by other firms and these other firms in turn produce outputs that are used as inputs by yet another firmsThe error that would arise in estimating the nations output by adding all sales of all firms is called double countingMust distinguish between two 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 government or exports during the period under consideration It is extremely difficult if not impossible to distinguish final from intermediate goods To avoid double counting economists use the concept of value added the value of a firms output minus the value of the inputs that it purchases from other firms Value addedrevenuecosts of intermediate goods Payments made to factors of production such as wages or profits are not subtracted But revenue must equal cost of intermediate goods plus payments to factors of production so Value addedpayments to factors of production Value added is the correct measure of each firms contribution to total outputthe amount of market value that is produced by that firmthe sum of all values added in an economy is a measure of the economys total output 202 NATIONAL INCOME ACCOUNTING THE BASICS National Income and Expenditure Accounts NIEAproduced by Statistics CanadaThe value of domestic output is equal to the value of the expenditure on that output and is also equal to the total income claims generated by producing that output Redsimple circle from households to producers and back to householdsBlueinjections exports investments and government purchases Greenwithdrawals imports saving and taxes
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