MGEA06H3 Lecture Notes - Lecture 2: Government Spending, Unita, Markel Corporation

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30 Nov 2010
x Why we want to measure output?
x The 3 approaches to measure national income—the expenditure approach, the income approach, and the value-added approach.
x Other issues related to national income—gross national income vs. net national income, GDP vs. GNP, Nominal GDP vs. Real
GDP, GDP deflator.
Why We Want to Measure Output?
x A measure of the country’s economic activitywhat kind of goods and services we produced? What are the levels of production?
x A simple way to measure our standard of living and compare it other countries.
x 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
x 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.
x There are 3 ways to measure GDP:
1) The expenditure approach
2) The income approach
3) The value added approach
x Note: The government uses both the expenditure approach and income approach to measure GDP.
The Expenditure Approach
x The expenditure approach, sometimes called gross domestic expenditure (GDE), adds up the expenditure needed to purchase the
final output produced during a given period.
x 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 investment—the purchases of capital equipments, machinery and production plants.
ii. Residential investment—the building of new houses.
iii. Inventory investment—the change in the quantity of goods that firms hold in storage, including materials and supplies,
work in process, and finished goods.
3) Government spending (G)—spending on goods and services by different levels of government, exclusive of government
transfer payment, such as welfare, employment insurance, and child care benefit.
4) Net exports(NX), NX = Exports (X) – Imports (IM)
9 C, I, and G may include final goods and services produced by foreigners.
9 Given GDP measures final goods and services produced within the country, we need to subtract imports to avoid double counting.
GDP from the expenditure approach = C + I + G + NX
The Income Approach
x The income approach looks at all the incomes earned by Canadians as a result of production.
x It takes into account of the followings:
o Factor incomeswages, salaries, interest, business profits
o Non-factor payments—indirect taxes and subsidies (sales tax), capital consumption allowances (CCA) (depreciation), inventory
valuation adjustments (IVA) (change in physical inventory held by firms)
x Statistical discrepancy: Take the greater of expenditure approach and income approach and subtract the smaller from it. Then
divide the difference by 2 to get the statistical discrepancy. Then add the statistical discrepancy to the smaller number and subtract
from the greater one. For example, if expenditure approach > income approach, then (expenditure approachincome approach) / 2
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