Lecture notes for week 2

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University of Toronto Scarborough
Economics for Management Studies
Iris Au

MEASUREMENT OF NATIONAL INCOMEGDP Outline N Why we want to measure output? N The 3 approaches to measure national incomethe expenditure approach, the income approach, and the value-added approach. N Other issues related to national incomegross national income vs. net national income, GDP vs. GNP, Nominal GDP vs. Real GDP, GDP deflator. Why We Want to Measure Output? N A measure of the countrys economic activitywhat kind of goods and services we produced? What are the levels of production? N A simple way to measure our standard of living and compare it other countries. N If we have an aggregate price, we need an aggregate output; otherwise we cannot do a demand and supply diagram. How to Measure Aggregate Output N We call the aggregate output as Gross Domestic Product (GDP)the total value of goods and services produced in the economy during a given period. N There are 3 ways to measure GDP: 1) The expenditure approach 2) The income approach 3) The value added approach N Note: The government uses both the expenditure approach and income approach to measure GDP. The Expenditure Approach N The expenditure approach, sometimes called gross domestic expenditure (GDE), adds up the expenditure needed to purchase the final output produced during a given period. N Total expenditure is the sum of 4 major broad categories: 1) Consumption (C)spending by households on goods and services. 2) Investment (I)spending on goods that are not for present consumption. There are 3 types of investment: i. Business fixed investmentthe purchases of capital equipments, machinery and production plants. ii. Residential in
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