Class Notes (808,299)
Canada (493,123)
Economics (470)
ECON 102 (134)
Ying Kong (1)

Chapter 20.docx

13 Pages
Unlock Document

University of British Columbia
ECON 102
Ying Kong

TEXTBOOK NOTES 1/26/2013 5:48:00 PM NATIONAL OUTPUT AND VALUE ADDED - one firm’s output is often another firm’s input  EX a local baker uses flour (input) from a milling company (output) - 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 other firms  this is why we do not count every firm’s output when adding national output - double counting can be solved by distinguishing intermediate goods and final goods  but it is impossible to determine what will ultimately be a intermediate good  we must use the value added concept - an individual firm’s value is:  VALUE ADDED = Revenue – Cost of intermediate goods  But since we must consider other factors of payment (wages, etc) we use:  VALUE ADDED = Payments to factors of production  - value added is the NET VALUE of a firms outputs  it is this net value that is the firm’s contribution to the national output  the firm’s personal efforts that add value to what is uses as inputs - the sum of all values added in an economy is a measure of the economy’s total output NATIONAL INCOME ACCOUNTING: THE BASICS - the 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 - GDP can be calculated three different ways:  GDP by value added  GDP on the expenditure side  GDP on the income side GDP on the Expenditure Side - computed by adding up all the expenditures needed to purchase the final output that year - Four broad categories of expenditure:  consumption  investment  government spending  net exports Consumption Expenditure - Consumption expenditure includes household purchases such as hair cuts, legal advice, groceries, health care, etc. - Ca= actual measured consumption expendature Investment Expenditure - Investment expenditure is money spent on investment goods such as capital goods (factories, machinery) and investments - almost all firms hold stocks on their inputs (unfinished material  can continue production despite interruption) and their outputs (allow firms to meet orders despite production rate fluctuations) called inventories - inventories are considered a positive investment and are counted in the national income accounts at market value  includes wages, production cost, and future profit - decumulation is considered negative investment because it reduces stock available to be sold - capital goods (tools, machinery, factory buildings) are all counted as capital stock - the creation of new capital goods is an investment we call fixed investment - since the building a house is the creation of a durable good, we consider it an investment  the purchase of a house/transfer of ownership the transaction is not considered in national income - Gross investment (total economy investment) is divided into replacement investment and net investment  replacement investment = replacement of capital stock that is lost through depreciation  net investment = gross investment - depreciation - positive net investment means growing capital stock - negative net investment means shrinking capital stock - ALL gross investment is included in the calculation of national income - Ia= actual total investment expenditure Government Purchases - ALL government purchases are included in the national income - Ga= actual government purchases of goods and services - only government purchases of currently produced goods and services are counted as apart of GDP  a great deal of government expenditure on other things (pension payments, unemployment insurance etc) is not counted - transfer payments are government expenditure that is not on currently produces goods or services Net Exports - Imports are domestic expenditure on foreign produced goods and services - if you buy things produced in other countries but sold here, most of the profit goes to that other country (increasing their GDP) - any materials imported to make a Canadian product (machinery, roads, etc), the expenditure goes to foreign firms - to find the value spent on Canadian products, we must subtract Canadian expenditure on imports - IMa= value of actual imports - Exports are foreign expenditure on domestically produced goods and services - goods produced in Canada, but bought by other countries do not contribute to Ca, a , or a - to arrive at the expenditure on Canadian output, it is necessary to add the value of Canadian exports of goods and services - Xa= value of actual outputs TOTAL EXPENDITURE GDP from Expenditure Side = C + I + G + (X a IM )a a a a GDP from the Income Side - the calculation of GDP from the income side involves adding up factor incomes and other claims on the value of output until all value is accounted for Factor Incomes - three main components of factor incomes:  wages and salaries  interest  business profits - Wages and salaries are the value of production that goes to labour  includes all pre-tax earning - Interest includes:  interest earned on bank deposits  interest earned on loans to firms  misc. investment income -Interest excludes:  Interest from government loans - Business profits paid out in dividends or held by firms as retained earnings are counted in GDP - Profits and interest together represent payment for use of capital - Net domestic income at factor cost = wages & salaries + interest + profits Non-Factor Incomes Non-factor payments:  Indirect taxes and subsidies  Depreciation - if a consumer spends $10 on a product, less than $10 is gained as income for factors of production due to non-factor payments - Indirect taxes like GST and provincial sales tax supply the government with a certain percentage of profit on a good  this government claim is considered when calculating GDP  “Indirect” because the government requires it of the firm, so the firm charges the customer  government is charging customer indirectly - Subsidies act like negative taxes  the government provides a firm with money to provide a service or a good  the amount of the subsidy must be subtracted when calculating GDP because it is not the market value of output - Depreciation is the value of capital that has been used up in the process of producing final output  considered in gross income but not net income GDP from the income side = net domestic income + indirect taxes (net of subsidies) + depreciation NATIONAL INCOME ACCOUNTING: SOME FURTHER ISSUES GDP & GNP - The difference between GDP (gross domestic product) and GNP (gross national product) is income produced
More Less

Related notes for ECON 102

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.