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Lecture

Chapter 5 Notes FULL lecture notes for Chapter 5


Department
Economics
Course Code
ECON101
Professor
Angela Trimarchi

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Econ 102 Chapter 5 Notes Prof: Angela Trimarchi
Chapter 5: Measuring a Nation’s Income
Gross Domestic Product – GDP
Is the market value of all final goods and services produced
It is strictly a measure of PRODUCTION
(And income earned) within a country
In a given period of time (such as a year)
Valued at market prices
Domestic means within the borders of a country
Important Facts about GDP:
GDP is basically a production concept
GDP is a flow variable (through time) – ie not Stock variable
Market Value – see following example
Example:
Item Price Quantity
Price *
Quantity
CDs $15 1000 15000
Tapes $ 5 2000 10000
Calculate GDP by multiplying P * Q for each good and then adding
your results together
GDP = (15 * 1,000) + ($5 * 2,000)
= $25,000
Important Facts about GDP continued…
In the national accounts, firms and the government are the units
which produce output in the domestic economy
GDP includes only final goods not intermediate goods
o(input into the production process)
Items not included in GDP:
Used or second hand goods
Non-marketed goods and services
Financial assets

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Econ 102 Chapter 5 Notes Prof: Angela Trimarchi
How do we actually measure GDP?
Three Methods:
Va lue-added (production) Approach
oMeasures items included in GDP by measuring value added at
each stage of production
Expenditure Approach
oCalculates GDP by adding together spending by all the sectors
(groups) in the economy
Income Approach
oMeasures GDP by adding together the incomes of the factors of
production used to produce domestic product
Value-Added Example
Col (i) Col (ii) Col (iii) Col (iv) = Col (ii – iii)
Stage of
Production
Total Value Cost of
Intermediate
Products
Value Added =
Total Value - Cost of
Intermediate
Products
Sheep Ranch $60 $0 $60
Wool
Processor
$100 $60 $40
Suit
Manufacturer
$175 $100 $75
Retail Outlet $250 $175 $75
Total $585 $335 $250
Contribution to GDP: $250
Total value of all transactions: $585

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Econ 102 Chapter 5 Notes Prof: Angela Trimarchi
Income Approach
Factors Compensation (Income)
Land Rent
Labour Wages
Capital Interest & Dividends
Entrepreneurship Profits
Income Approach to Measuring GDP
First determine:
Net Domestic Income at Factor Cost
Wages, salaries and supplementary labour income
Corporate profits before taxes
Government enterprise profits before taxes
Interest and miscellaneous investment income
Accrued net income of farm operators
Net income of non-farm unincorporated business, including rent
Inventory valuation adjustment
Add the following to Net Domestic Income at Factor Cost to
obtain GDP:
oIndirect taxes less subsidies
oCapital Consumption Allowance:
Also known as depreciation
oStatistical Discrepancy
Expenditure Approach
C - Consumption
I – Business Gross Investment
Residential construction
Non-residential construction
Machinery
Inventory investment
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