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ECON 311 Jan 18 Ch 20.docx

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ECON 311
Ratna Shrestha

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 powerpoint. 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 four parts: o Market value o Final goods and services o Produced within a country o In a given time period Market Value  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)  investment  government purchases  net exports (foreign products are not included in Canadian GDP) Actual consumption expenditure (C ) inaludes expenditure on all final goods during the year. Actual investment expenditure (I ) ia expenditure on the production of goods not for present consumption, including: • inventories • 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
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