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01.25 - Measuring National Income.docx

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ECON 102
Lanny Zrill

Measuring National Income 01-25-2013 Chapter 20  The measurement of National Income is central to our understanding of the level of economic activity  We can measure National Income indirectly by measuring how much is produced in the economy  However, it is not as simple as just measuring the value of the output of all firms o This would lead to the problem of double counting  Measuring production as a means of Measuring income Consider the contribution of a load of bread to our measure of production…  This includes the sale of wheat to the mill, the sale of flour to the baker, and finally the sale of bread to the consumer  If we add up the value of the output for all three transactions then we will overestimate (double count) the level of production  Instead, we should focus not on the sale price of the good, but rather the value added at each stage of production (Value Added Approach)  Value Added = Revenue – Cost of Intermediate Goods o Intermediate goods – goods used by another producer to make something else  Ex. Flour, wheat o Value added can also be thought of as the payment that goes to factors of production Example: o Suppose the baker sells $1800 worth of bread and pays $1500 for flour to make it o The miller receives $1500 for the flour from the baker, but pays the famer $1000 for the wheat o And the farmer receives $1000 from the miller for the flour and buys nothing from other firms o What is the value added at each stage of production? What is the total value added? How does this differ from the total value of all sales? Circular Flow Diagram (Get from Powerpoint) Domestic households do two things with their income:  Payments for goods and services  Save – putting it in bank account, buying stocks, buying bonds – money flowing from households to the financial system There are two equivalent ways to measure national income ie. GDP:  Expenditure Approach  Income Approach – read about in book  All expenditures represent income for someone else in the economy  (In this course, we pursue a theoretical model of the expenditure side of the economy)  Know the difference between expenditure and income approach – for the midterm! FOUR MAIN COMPONENTS INCLUDED IN THE CALC. OF GDP: Consumption Expenditure  Includes household expenditure on all goods and services sold to their final users during the year  Haircuts, TVs, restaurant meals, etc. Investment Expenditure  Includes expenditure on the production of goods and services not for present consumption  Three Components ONLY: o Changes in Inventories  Purchasing the product you produced to sell at a later date  Needed a way to account for the fact that it was produced this year, even though it will be sold next year o New Plant and Equipment o New Residential Housing  Only thing that households buy that is not included in household consumption  BUILT in current time period (year); doesn’t count if you buy a used house  If you flip a shitty house, only the added value of the reconstruction should be included, not the price of the original house.  GDP records Gross Investment as opposed to Net Investment (= Gross Investment – Depreciation)  Buying stocks, bonds, etc. = “Saving” (Financial Market) Government Purchases  Includes all government expenditures on current produced goods and services  Does NOT include transfer payments (income assistance, employment insurance: transfer from government to population) o Public health and education, infrastructure, etc. Net Exports  Inflow of income – Canadian producers sell products abroad  Exports and Imports represent inflows and outflows of expenditure respectively  Net effect  must be considered in the calculation of National Income and likewise Expenditure  Largely an accounting issue since net exports (Exports – Imports) is a very small component of the o
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