Blue words are notes taken in class Page 1 of 4
ECON 311 Jan 18 Ch 20 The measurement of national income
** This lecture he didn’t add in more information, pretty much just straight from the
20.1 National Output and Value Added
Production occurs in stages — most firms produce outputs that are other
firms’ inputs: intermediate products and then final products.
Each firm’s contribution to total output is its value added
o value added = revenues - non-labour costs
Summing value added avoids the problem of double counting when
measuring total output.
Total value added in the economy is called Gross Domestic Product (GDP).
Gross Domestic Product
GDP or gross domestic product, is the market value of all final goods and
services produced in a country in a given time period. This definition has
o Market value
o Final goods and services
o Produced within a country
o In a given time period
Use market prices to value production. Both quantity and price together
determine the total value of production.
GDP includes only those items that are traded in markets. For example, If
you wash your own car, it is not accounted in GDP calculation. However, if
you buy a car wash, it is a part of GDP.
Exception: market value of home that people own. GDP puts a rental value on
such homes as if the owners pay rents for their homes.
Final Goods and Services
A good or service that is produced for its final user and not as a component of
another good or service (i.e., intermediate good).
Intermediate good or service
A good or service that is produced by one firm, bought by another firm, and
used as a component of a final good or service. For example, Goodyear tire
used by Ford SUVs. Intermediate goods are not included in GDP calculation to
avoid double counting.
GDP is the value of the final goods and services produced.
20.2 National Income Accounting
Three methods for measuring national income (output):
• total value added from domestic production
• total expenditures on domestic output
• total income generated by domestic production
• Because of the circular flow of income, these three measures yield the same
total — GDP. Blue words are notes taken in class Page 2 of 4
whatever we can earn, that’s our income.
GDP from the Expenditure Side
Consider adding up the expenditures needed to purchase the final output produced
in any given year.
There are four broad expenditure categories:
consumption (total consumption-domestic product+ foreign product, GDP
doesn’t include foreign product so subtract import)
net exports (foreign products are not included in Canadian GDP)
Actual consumption expenditure (C ) inaludes expenditure on all final goods during
Actual investment expenditure (I ) ia expenditure on the production of goods not for
present consumption, including:
• plant and equipment
• residential housing
Actual government purchases (G ) isathe purchase of currently produced goods and
services by government, excluding transfer payments. Transfer payment is the
payment made to the provinces out of revenue raised