EC140 Lecture Notes - Labour Force Survey, Frictional Unemployment, Potential Output

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Published on 21 Apr 2013
School
WLU
Department
Economics
Course
EC140
Professor
Econ 120
Chapter 20
Define GDP an explain why GDP equals aggregate expenditure and aggregate
income
Explain how statistics Canada measures GDP and real GDP
Describe how real GDP Is used and explain its limitations as a measure of
economic well being
GDP defined
GDP or gross domestic products is the market of all final goods and services
produced in a country in a given time period
o This definition has four parts
Market value
Final goods and services
Produced within a country
In a given time period
Market value
o GDP is a market value- goods and services are valued at their market
prices
o To add apple and oranges, computers and popcorn, we add the
market values so we have a total value of output in dollars
Final good and services
o GDP is the value of the final goods and services produced
o A final good (or service) is an item bought by its final user during a
specified time period
The Circular Flow Diagram
Households
o Own the factors of productions, sell/rent them to firms for income
o Buy and consume g&s
Firms
o Buy/hire factors of production, use them
GDP and the circular flow of expenditure and income
Total income of everyone in the economy
Total expenditure on the economy’s output of goods and services
For the economy as a whole, income equals expenditure, because every
dollar of expenditure by a buyer is a dollar of income for the seller
Approaches to measure GDP
1. The expenditure approach
2. The income approach
The expenditure approach
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Measures GDP as the sum of Consumption expenditure (c), Investment (I),
Government purchases of goods and services (G), and net exports (NX)
Consumption Expenditures (C)
Total spending by households on goods and services
Buying and selling houses are not included in this category.
The expenditure approach
Gross investment expenditures (I)
Total spending on goods that will be used in the future to produce more
goods. Includes spending on
o Capital equipment
o Structures (factories, office buildings, houses)
o Inventories (goods produced but not yet sold)
Government Purchases (G)
All the goods and services purchased by local, provincial and federal
governments
Net Exports (NX)
NX= exports-imports
Exports represent foreign spending on domestically produced goods and
services
Imports are the portions of C, I and G that are spend on goods and service
produced abroad
The Income Approach
The income approach measures GDP by summing the incomes that firms pay
households for the factors of production they hire
Types of Incomes
1. Compensation of employees
2. Net interest
3. Rental income
4. Corporate profits
5. Proprietors income
a. the sum of theses five income components is net domestic
income/product (NDP) at factor cost
Two adjustments must be made to get GDP
1. Indirect taxes minus subsidies (NIBT) are added to NDP
2. Depreciation is added to NDP
3. SO…NDP+NIBT+DEPRECIATION=GDP
Nominal GDP and Real GDP
Real GDP is the value of final goods and service produced in a given year
when valued at the prices of a reference base year
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Currently, the reference base year is 2002 and we describe real GDP as
measured in 2002 Dollars.
Nominal GDP is the value of goods and service that prevailed in that same
year
Statistics Canada uses a measure of real GDP called chained dollar Real GDP
Three steps are needed to calculate this measure
o Value production in the prices of adjacent years
o Find the average of two percentage changes
o Link(chain) to the reference year
The uses and limitations of real GDP
To compare the standard of living over time
To compare the standard of living across countries
The standard of Living over time
Real GDP per person is real GDP divided by the population
Real GDP per persons tells us the value of goods and services that the
average person can enjoy
By using real GDP, we remove any influence that rising prices and a rising
cost of living might have had on our comparison
Long term Trend
A handy way of comparing real GDP per person over time is to express it
as a ratio of some reference year
For example in 1969, real GDP per person was 19000 and in 2010, it was
38,000
So real GDP per person in 2010 was double its 1969 level
Two features of our expanding living standards are
The growth of potential GDP per person
Fluctuations of real GDP around potential GDP
The value of real GDP when all the economies labour capital land, and the
entrepreneurial ability are fully employed I called potential GDP
Lucas wedge is the dollar value of the accumulated gap between what real GDP
would have been if the 1960s growth rate had persisted and what real GDP per
person turned out to be
Real GDP fluctuations- business cycle
A business cycle is a periodic but irregular up and down movement of total
production and other measures of economic activity
Every cycle has two phases
1. Expansion
2. Recession
Amd two turning points
1. Peak
2. Trough
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Document Summary

Define gdp an explain why gdp equals aggregate expenditure and aggregate income. Explain how statistics canada measures gdp and real gdp. Describe how real gdp is used and explain its limitations as a measure of economic well being. Gdp or gross domestic products is the market of all final goods and services produced in a country in a given time period: this definition has four parts. Final good and services: gdp is the value of the final goods and services produced, a final good (or service) is an item bought by its final user during a specified time period. Households: own the factors of productions, sell/rent them to firms for income, buy and consume g&s. Firms: buy/hire factors of production, use them. Gdp and the circular flow of expenditure and income. Total income of everyone in the economy. Total expenditure on the economy"s output of goods and services.

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