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Lecture 14

ADMS 2200 Lecture Notes - Lecture 14: Monetary Policy, World Economy, Growth Accounting

Administrative Studies
Course Code
ADMS 2200
Alexander Rusetski

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Ch20: Measuring GDP and Economic Growth
- gross domestic product
- the market value of all final goods/services produced in a country in a
given time period
- definition has 4 parts:
Market value
o Goods/services are valued at their market prices
Final goods/services
o An item bought by its final user during a specified time period
o Contrasts with an intermediate good an item that is
produced by one firm, bought by another firm, and used as a
component of the final good/service
o Excluding the value of intermediate goods/services avoids
counting the same value more than once
Produced within a country
o Measures domestic production
In a given time period
o Measures production normally a year or quarter of a year
Circular flow of expenditure/income
- GDP measures the value of production, which also equals total expenditure
on final goods/ total income
- equality of income & value of production shows the link between
productivity & living standards
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Households and firms
- they buy the services of labour, capital, and land in factor markets
- for these factor services, firms pay income to households wages for
labour, interest for use of capital, rent for use of land (Y)
- a fourth factor of production (entrepreneurship) receives profit
Consumption expenditure (C)
o The total payment i9for these goods/services by households
(ex. beer, pizza, dry cleaning services)
Investment (I)
o When the firm adds unsold output to its stocks/inventories
o The purchase of new plant/equipment/buildings and the
addition to stocks
- governments buy goods/services from firms - govt. expenditure (G)
- they use taxes to pay for their purchases
Net taxes
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o Taxes paid to governments minus transfer payments received
from governments
o Transfer payments cash transfers from govts. to
households/firms such as social security benefits,
unemployment compensation, subsidies, interest
Rest of world
- firm sells goods/services to the rest of the world (exports X) and buy
goods from the rest of the world (imports M)
Net exports (X M)
o The value of exports minus the value of imports
o If its positive, net flow of goods/services is from Canadian
firms to the rest of the world
o If its negative, net flow or goods/services is from the rest of
the world to Canadian firms
GDP = expenditure = income
- GDP can be measured by the total expenditure on goods/services OR by
the total income earned by producing goods/services
** total expenditure (aggregate expenditure) = consumption expenditure +
government expenditure + net exports
** aggregate income earned producing goods/services = total amount paid
for the factors used (ex. wages, interest, rent, profit)
** aggregate expenditure = aggregate income
GDP = C + I + G + X M
Y = C + I + G + (X M)
- before deducting the depreciation of capital
- opposite of gross
- after deducting the depreciation of capital
- the decrease in the value of a firm’s capital that results from wear/tear and
Gross investment
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