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Class note Fall 2010_CH5 completed note

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ECON 102
Angela Trimarchi

5-1 Chapter 5: Measuring a Nation’s Income Gross Domestic Product – GDP o It is the market value of all final goods and services produced o (And income earned) within a country o In a given period of time (such as a year) 5-2 Important Facts about GDP: o GDP is basically a production concept o GDP is a flow variable (define flow variable) (measure a year or over) o Market Value – See example below o In the national accounts, firms and the government are the units which produce output in the domestic economy o GDP includes only final goods not intermediate goods (parts of the product) (final goods = goods will not sell to anyone else) P.S. Second hand goods will not count since it already recorded when it first time produced 5-3 Example: Item Price Quantity CDs $15 1000 Tapes $ 5 2000 o Calculate GDP by multiplying P * Q for each good and then adding your results together o GDP = P*Q (then add the results) o = ($15*1000)+($5*2000) = $25000 5-4 Items NOT included in GDP: o Used or second hand goods (already recorded) o Non-marketed goods and services (not produced by firm/government) o Financial assets (because don’t measure in production) 5-5 How do we actually measure GDP? Three Methods: o Value-added (production) Approach -Adds the value added to a good at each stage of production of a final good that is included in GDP o Expenditure Approach o Income Approach 5-6 Value-Added Example Col (i) Col (ii) Col (iii) Col (iv) = Col (ii – iii) Stage of Given: Cost of Value Added = Production Total Intermediate Total Value - Cost of Value of Products Intermediate Products single stage Sheep Ranch $60 - $60 (stage of begin) Wool Processor $100 $60 $40 Suit $175 $100 $75 manufacturer Retail Outlet $250 $175 $75 5-7 total $585 $335 $250 Contribution to GDP: $250 Total value of all transactions: $585 5-8 Subsidies A payment by the government to a producer 5-9 Income Approach Factors Compensation Land Rent Labour Wages and Salaries Interests Capital Profit Entrepreneurship 5-10 Income Approach to Measuring GDP (this is in the notes, don’t copy) First determine: o Net Domestic Income at Factor Cost Payments to the factors of production o Wages, salaries and supplementary labour income o Corporate profits before taxes o Government enterprise profits before taxes 5-11 o Interest and miscellaneous investment income o Accrued net income of farm operators o Net income of non-farm unincorporated business, including rent o Inventory valuation adjustment 5-12 o Add the following to Net Domestic Income at Factor Cost to obtain GDP: o Indirect taxes(only on goods buy) less subsidies o Capital Consumption Allowance (Also called depreciation) Time line $20,000 $15,000 Jan01,2010 Dec31,2010 o Statistical Discrepancy 5-13 (Additional Note) Gross Investment – Depreciation = Net Investment Government Budget =Taxes- Spending =T-G Taxes are the way the government earns revenue. G is the spending on goods and services that the government does Budget Deficit Budget Surplus T-G<0 T-G>0 5-14 Expenditure Approach C – Consumption 5-15 I – Business Gross Investment o Residential construction o Non-residential Construction (i.e. Office Building) o Machinery o Inventory Investment o Depreciation - discuss 5-16 G – Government Expenditure on Goods and Services Can be divided into two categories: o Current expenditures o Investment expenditures Does not include: o Transfer payments o Interest payments on national debt (national debt – The sum of all government deficits minus any surpluses) 5-17 NX – Net Exports o =Exports – Imports o Exports are included in GDP o Imports are not included in GDP (import has nothing to do with production in Canada) GDP expenditure based (Y = Income)= C + I + G + X – M M=Import X=Export (Exports – Goods and services produced domestically and sold to foreigner) (Imports – Goods produced by foreigners and sold to domestic residents) 5-18 Gross National Product (GNP) First define: Investment Income Interest payment and dividends for ownership of capital 5-19 GNP = When considering the production (income) included in GNP, remember GNP is the production (income earned) by a country’s residents or nationals. It does not matter if that production took place in the residents’ own country or in another country. o GDP o – o Net investment income paid to foreigners It is the output produced by a country’s domestic residents (The output can be produced in Canada or it can be produced in a foreign country (abroad)) (Domestic residents are also called nationals) 5-20 Foreign owned companies: -General Motors Canada -Owned by Detroit-based, General Motors -Wal-mart Canada -Wholly owned by Wal-Mart of the US 5-21 Other Key National Accounts Concepts Personal Disposable Income o Consumption (C) + Savings (S) Personal (Private) Saving 5-22 Nominal GDP versus Real GDP
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