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Lecture 2

EC140 Lecture 2: lecture 2 chpt. 20

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Shadab Qaiser

Lecture 2 Jan. 11 /17 The Measurement of come – chapter 20 National Output and value added – chapter 20.1  Production occurs in stages  Some firms produce outputs that are used as inputs by other firms which in turn, produce outputs that are used as inputs by other firms  Error estimating nation’s output by adding all sales of all firms is called DOUBLE COUNTING  Intermediate goods: outputs that are used as inputs by other producers  Final goods: goods that are not used as inputs by other firms but are produced to be goods of consumption, investment, government, or export  To avoid double counting, use concept of VALUE ADDED Value added  The value of a firm’s output minus the value of the inputs that it purchases from other firms  It is the correct measure of each firm’s contribution to total output – the amount of market value that is produced by that firm  Sum of all values added in an economy is a measure of the economy’s total output  VALUE ADDED = SALES REVENUE – COST OF INTERMEDIATE GOODS AND  VALUE ADDED = PAYEMENTS OWED TO THE FIRM’S FACTORS OF PRODUCTION GDP from the Expenditure Side 1) Consumption expenditure: is household expenditure on all goods and services sold to their final users during the year ex. Dental care, non-durable goods (vegetables) 2) Investment expenditure: expenditure on the production of goods not for present consumption, inventories of goods made but not yet sold and inputs purchased but not yet in production  Inventories: are stocks of raw materials, goods in process, and finished goods held by firms to mitigate the effect of short-term fluctuations in production or sales o Also, includes capital goods and residential housing o Drawing down of inventory = decumulation  Capital stock: economy’s total quantity pf capital goods o Creating new capital goods is called FIXED INVESTMENTS o “plant and equipment” o NET INVESTMENT = GROSS INVESTMENT – DEPRECIATION 3) government purchases: government expenditure on currently produced goods and services, exclusive of government transfer payments  Transfer payments: payments to an individual or institution not made in exchange for goods and services  Only government purchases count in GDP, most government spending does not count 4) net exports: value of total exports – value of total imports GDP from the Income Side calculation for GDP from the income side involves adding up factor incomes and other claims on the value of output until all that value is accounted for 1) Factor Incomes  national income accountants distinguish 3 main components of factor incomes: wages and salaries, interest, and business profits  in
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