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Chapter 20- Measuring GDP and Economic Growth.doc

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Wilfrid Laurier University
Rizwan Tahir

Chapter 20: Measuring GDP and Economic Growth Tuesday, January 08, 2013 12:58 PM Gross Domestic Product •The market value of all final goods and services produced in a country in given time period •Counts everything that goes through market mechanism •Sum of market value of 'n' number of goods produced •Market value ‒ Quantity and price ‒ Goods and services valued at their market prices •Final goods and services ‒ Final good- item bought by final user during specified time period ‒ Intermediate- goods used to produce other goods and services ‒ GDP excludes intermediate goods to avoid double/triple counting •produced within a country ‒ GDP measures domestic production • in given time period ‒ GDP measures production during specific time period (a year or quarter of a year) GDP and Circular Flow of Expenditure and Income •Measures two things at once: ‒ Total income of everyone in economy ‒ Total expenditure on economy's output of goods and services •For economy as whole, income = expenditure, because every dollar of expenditure by buyer is dollar of income for seller The Simple Circular-Flow Diagram Assume: •No government collects taxes, purchases goods and services •No foreign sector trades goods and services, financial assets, currencies with country's residents •No financial sector matches savers' supply of funds with borrowers' demand for loans Measure GDP: oIncome oWages/rent/profit oRevenue ospending Leakage from flow of economic activity: savings, imports Injection into flow of economic activity: government spending Approaches to Measure GDP 1. The Expenditure Approach • Measures GDP as sum of consumption expenditure (C), investment (I), government purchases of good and services (G) and net exports (NX) • Y = C + I + G + NX • Consumption expenditure (C): ‒ Total spending by households on goods and services ‒ Buying/selling of houses are not included in this category • Gross Investment Expenditure (I): ‒ Total spending on goods that will be used in future to produce more goods ‒ Includes capital equipment, structures, inventories (not purchase of financial assets ie. stocks, bonds) ‒ Gross investment = net investment + depreciation • Government Purchases (G): ‒ All goods and services purchased by all levels of governments ‒ Excludes transfer payments (CPP benefits or EI benefits- these payments represent transfers of income, not purchases of goods & services and do not represent production) • Net Exports (NX): ‒ NX = exports - imports ‒ Exports represent foreign spending on domestically produced goods & services ‒ Imports are portions of C, I, and G that are spent on goods & services produced abroad 2. The Income Approach • Measures GDP by summing incomes that firms pay households for factors of production they hire • Includes compensation of employees, net interest, rental income, corporate profits, proprietors' income ‒ Sum of these five income components is net domestic income/product (NDP) at fa
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