WEEK 1: CHAPTER 6/7 - GDP
Macro is the big picture, study of economy as whole. Focus on:
➔ Interactions of different sectors in econ
➔ Strong policy focus
NOTE: Total Spending (TS) on final goods/service = Consumer Spending (CS) + Investment
Spending (I) + Government Purchase of goods/services (G) + Exports (E) - Imports (I)
TS = GDP = C + I + G + (Ex - Im)
THE NATIONAL ACCOUNT
GDP: total value of all final goods/services produced in economy during given year
➔ Only includes goods/services sold to end users, ex) intermediate goods not
➔ Looks at value of products produced within econ
3 ways to MEASURE GDP:
1) Value-added approach
2) Expenditure approach
3) Income approach
VALUE-ADDED APPROACH: focuses on the value added of each producer in econ
VA = Value of Sales - Value of Purchases of Intermediate Goods/Services
EX) An economy consists of 3 firms only – Canadian Ore, Inc. (CO), Canadian Steel, Inc.
(CS), and Canadian Motors, Inc. (CM).
Canadian Ore Canadian Steel Canadian Motors
(ore – sold to (steel – sold to (car – sold to
CS) CM) consumers)
Sales $4200 $9000 $21500
Intermediate goods $0 $4200 $9000
Wages $2000 $3700 $10000
Interest payments $1000 $600 $1000
Rent $200 $300 $500 Profit $1000 $200 $1000
· Using the value-added approach to find the GDP.
VA of Canadian Ore = 4200 - 0 = $4200
VA of Canadian Steel = 9000 - 4200 = $4800
VA of Canadian Motors = 21500 - 9000 = $12500
GDP = 4200 + 4800 + 12500 = $21,500
EXPENDITURE APPROACH: adds up total expenditure (spending) on domestically produced
final goods/services by households, firms, governments, and foreign buyers.
1) Consumption (C): spending by households on goods/services
2) Investment (I): spending on goods not for present consumption, building up of physical
capital stock. *ALWAYS refers to physical capital stock. 3 types:
a) Business fixed - purchase of capital equip, machinery & production plants.
b) Residential - building of new houses. *Preowned don’t count
c) Inventory - change in quantity of goods that firm hold in storage, including
materials/supplies, work in process, and finished goods.
3) Government Spending (G): spending on goods/services by different levels of
government, exclusive of gov transfer payments (EI, insurance, benefits, etc;)
4) Net Exports (NX = X - IM): C, I, & G may include imported goods (made in other
countries), and these imports shouldn’t be in country’s GDP; thus must be subtracted.
**NX is only item that can be negative, C, I, G CANNOT be NEGATIVE.
Expenditure Approach: GDP = C + I + G + NX or C + I + G + (X - IM)
1) Referring to example from Value-added approach, GDP = C = $21500
- There is no I, G, or NX, only C
INCOME APPROACH: looks at income earned from production of goods/services. 2 sources:
1) Factor Incomes: earned by factors of production or inputs such as wages, salaries,
interest, rent, business profits.
2) Non-Factor Incomes: difference between the prices paid for final goods/services & the
amount received by production factors before income taxes are removed. Comes in form
of net indirect taxes (sales tax - production subsidies), capital depreciation. Difference
between the $$ we paid for the product & the amount that we pay to production factor.
EX) Using same chart as before.
Wages = 2000 + 3700 + 10000 = $15,700
Interest payments = 1000 + 600 + 1000 = $2,600
Rent = 200 + 300 + 500 = $1,000
Profit = 1000 + 200 + 1000 = $2,200
Income Approach, GDP = $21,500 **GDP MUST BE THE SAME… why?
One person’s spending is another person’s income. So if you add up everyone’s spending it
must equal total income.
What GDP Tells Us:
➔ Most commonly used measure of size of economy, just an estimate never a perfect
measure because it doesn’t include:
- Inputs & intermediate goods/services, we only count the final product (value of
intermediate good is already taken into consideration when firm prices product).
- Used goods, since NO NEW production is happening production already taken
into consideration for.
- Financial assets such as bonds, stocks, mutual funds since no production
- Foreign-produced goods/services since not produced in our country.
- Household production/Volunteer work since won’t go through the market.
- Underground econ & illegal transactions.
- Harm done on environment, pollution.
GDP vs GNP
GDP: sum of final goods/services produced within a country. “Made in Canada”
GNP: sum of final goods/services produced by country’s residents. “Made by