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MGEA06H3 (157)
Iris Au (146)
Lecture

# ECMA06_Tutorial_1_Solution.doc

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School
University of Toronto Scarborough
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Summer

Description
ECMA06 Tutorial #1 Answer Key Question 1 Part (a) Expenditure Approach: • The expenditure approach: GDP = C + I + G + X – IM • GDP = \$619.6B + (\$214.0B + (– \$1.0B)) + \$198.4B + \$496.2B – \$427.1B GDP = \$1100.1B • Note: I = Fixed capital formation + Change in inventories. We do not include capital consumption allowances (CCA) because it is already included in fixed capital formation. Factor Income Approach: • The factor income approach: GDP = wages + interest + profits + income of unincorporated business (farm + non-farm + government) + CCA + indirect taxes minus subsidies + IVA. • GDP = \$557.1B + \$58.5B + \$133.8B + (\$64.7B + \$2.9B + \$10.8B) + \$141.2B + \$132.0B + (– \$1.3B) GDP = \$1099.7B Part (b) • Typically, the expenditure approach and the factor income approach will not give the same answer due to statistical discrepancy. • Since both approaches must give us the same GDP number, we divide the difference in two and add half to the low side and subtract half from the high side. • In our example, the difference is \$0.4B. We will subtract \$0.2B from the GDP calculated using the expenditure approach and add \$0.2B to the GDP calculated using the factor income approach. • As a result, both approaches will give us a GDP of \$1099.9B, and the statistical discrepancy is \$0.2B. Part (c) • GDP (using the expenditure approach) calculates the total (market) value of final goods and services produced within the country in a given year. Thus, only final goods and services produced within the country should be included in the calculation. • However, consumption, investment, and government spending include all spending on final goods and services by households, firms and all levels of government, and these spending may include imported goods. • Given imported goods are not produced in Canada, we have to subtract the value of imported goods from the total in order to get the true value of goods and services produced in Canada in a given year. Implication on the interpretation of consumer spending data: • The inclusion of imported goods in con
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