Chapter 7: Tracking the Economy
The National Accounts
The national income and national product used in Canada is derived from an
accounting system called the National Income and Expenditure Accounts. It
keeps track of the spending of consumers, sales of producers, business
investment, government spending and a variety of other flows of money
between different sectors of the economy. It has a logical structure based on
the circular flow of income.
The key point of the circular flow diagram is thatthe value of domestic
output produced is equal to the value of expenditu res on that output and is
equal to the income generated by producing that output.
Circular-Flow Diagram: The Flows of Money through the Economy
!Households earn income via the factor markets fromwages, interest on
bonds, dividends on stocks, and rent on land.
!A stock is a share in the ownership of a company held by a shareholder.
!A bond is borrowing in the form of an IOU that pays interest.
!In addition, households receive government transfers from the
!Disposable income, total household income minus taxes, is availableto
spend on consumption or to save.
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!Private savings, equal to disposable income minus consumer spending, is
disposable income that is not spent on consumption.
!The banking, stock, and bond markets — which channel private savings
and foreign lending into investment spending, government borrowing, and
foreign borrowing — are known as the financial markets.
!Government purchases of goods and services (G) is paid for by tax
receipts, as well as by government borrowing.
!Exports (X) generate an inflow of funds into the country from the rest of
the world, while imports (IM) lead to an outflow of funds to the rest of the
!Investment spending (I) is spending on productive physical capital, such
as machinery and construction of structures, and on changes to inventories.
Inventories are stocks of goods and raw materials held to facilitate business
Gross Domestic Product
!Gross domestic product,or GDP, measures the market value of all final
goods and services produced in the economy within a certain time perid,
i.e. quarterly or annual. This definition has 4 parts:
!Market Value. GDP adds all the different kinds of products the economy
produces together into a single measure of economic activity. To do this, it
!Final goods and services. Final goods and services are goods and services
sold to the final, or end, users. Intermediate goods and services are goods
and services—bought from one firm by another firm—that are inputs for
production of final goods and services. Excluding intermediate goods avoids
! Produced within a country. It measures domestic production.
!In a given time period
!GDP can be calculated three ways:
"Output based; Adding up thevalue addedof all producers
"Expenditure based; Adding up all spending on domestically produced final
goods and services, leading to the equation GDP = C + I + G + X − IM
"Income based; Adding up all the income paid to factors of production
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Output based GDP. This approach adds the value of all goods and services
produced in the economy.
Value added = Value of Output – Value of Intermediate Goods
©2006WorthPublishers Slide 7-10
Expenditure based GDP. This approach measure GDP as the sum of
consumption expenditure (C), investment (I), government expenditure (G)
and net exports (X-IM).
1. Consumption expenditure (C) includes the expenditures of
households for durable consumer goods (autos, refrigerators), non-
durable goods (bread, milk) and consumer services (mechanics,
2. Investment (I) includes
• Purchases of machinery, equipment and tools by businesses
• All construction (including residential)
• Changes in inventories (unconsumed output)
Note: Does not include financial transactions or transfer of tangible
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Flows and Stocks in MacroeconomicsA flow is a quantity per unit of
time; a stock is the quantity that exists at a point in time. For example, the
water running from a faucet is a flow; the water inthe bathtub is a stock.
Wealth, the value of all the things that people own, is astock.Saving is the
flow that changes thestock of wealth. Capital which is a stock is the plant,
equipment, and inventories of raw and semi-finished materials that are used
to produce other goods and services. Two flows change the stock of capital:
investment and depreciation. Investment which is the purchase of new
capital increases the stock of capital, where as depreciation decreases the
stock of capital. The total amount spent on purchases of new capital and on
replacing depreciated capital is called gross investment. When we talk about
the total investment in the economy we are talking about gross investment.
3. Government expenditure (G) includes expenditures ofall
governments (federal, provincial and municipal) on final goods and
• Does not include transfer payments (e.g. EI benefits,welfare
• Government output is typically valued at cost rather than at market
4. Net Exports (X-IM)
• (X-IM) = Exports (X) – Imports(IM). Imports are domestic
expenditure on foreign produced goods and services and exports
are foreign expenditure on domestically produced goods and
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Gross Domestic Product, expenditure based, 2012, S
l a t o T f o % ) s n o i l l i m $ ( l a t o T
Source: Statistic Canada
Income based GDP. The national income accounting conventions ensure
that the output produces generates income exactly equal to the value of the
output produced. Calculation of GDP from the income side involves adding
• factor incomes:
wages and salaries