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Lecture 1

ECO1102 Lecture 1: Week 2_ January 17 - 19 (Chp 7)

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David Gray

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Week: 2 - January 17, 2018 Chapter 7: Measuring the Wealth of Nations Objectives: Importance of GDP and each of its components Explains the equivalence of the expenditure and income approaches to valuing an economy Difference between real and nominal GDP The GDP deflator and inflation The meanings of GDP per capita and the real GDP annual growth rate Limitations to GDP - the measurement of home production, the underground economy, degradation environmentally and well-being Introduction: Economic growth has increased living standard over time GDP per capita is Measure used most often use to measure living standards (and changed in them) GDP Defined: The market values of all final goods and services produced within a country in a given period of time. Only newly produced goods are included Not goods produced in the past Although services relating to existing houses sales are included. Goods produced but not sold are added to inventories. All goods are valued at their market price and measured in the same units (eg; dollars in Canada) Things that doesnt have a market values are excluded (eg; housework), as in the underground economy. Goods and services includes both tangible goods and intangible services Final goods and services are those intended for the end user All productions that occurs within a countrys borders, whether done by its own citizens or by foreigners located there Income & Expenditure: The circular flow diagram tells us that GDP measures: Total production in an economy The total income of everyones in the economy The Expenditure Approach to Measuring GDP Consider GDP as total spending (or expenditure) There are four components of spending: Consumption (C) Investment (I) - Goods that provide for future consumption Govt Purchases (G) - all govt spending Net Exports (NX) - exports count, imports do not These four components adds up to GDP (denoted Y) Y = C+ I + G + NX (= production) Consumption (C) Total spending by households on goods and services Goods include: Durable goods such as cars and appliances Non- durable goods such as food and clothing Services includes intangible items as haircuts and health care Note on housing costs: For renters, consumption includes rent payments For homeowners, consumption includes the imputed rental values of the house ( for housing services), but not the purchased price or mortgage payments. Expenditures on new housing are treated as inv
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