Econ 1010 Chapter 20
- GDP or gross domestic product is the market value of the final goods and
services produced within a country in a given time period.
o Market value – we use market values times the quantity of the product to
determine and compare the net values of the good produced.
o Final goods and services – we value the final goods and services
produced. Final good or service is an item that is bought by its final user
during a specified time period. While an intermediate good or service is
an item that is produced by one firm and the bought by another to be
used as a component of the final good or service. Only the final goods
produced are accounted for to avoid a term called double counting where
the intermediate goods are counted many times and thus the final goods
o Produced within a country – the firm’s production must be of a domestic
setting. Even foreign firms produce in another country will count towards
o In a given time period – the GDP is measured in a given and set time
period. Further, the production of a country must equal the living
standards. When the income rises the production should also rise, thus
they should be complemented together.
- GDp and the circular flow of expenditure and income
o Households and firms – Individuals gain income from the firm through the
factors of production, rent, entrepreneurship, wages, and profit, the
income received by workers are known as the aggregated income which
is then retained by households. While the firm will gain money through
consumer expenditure. Investments made by the firms includes
productions that are not directly sold afterwards and thus this is
transferred from the goods market known as I.
o Governments – governments also play a role in the cycle, they may make
social welfare and other investments to the households. This is known by
the symbol G. The investments that governments make are not
accounted for in the income and expenditure of individual families.
o Rest of the world – countries will sell the goods to other countries known
as exports as well, they will buy goods and services from other countries
and it is known as import. Through this the export is known as X and
imports are known as M, X – M will produce the net exports which will
determine whether a country has more output than import which will later
determine to the addition of the GDP. o GDP Equals expenditure equals income aggregated expenditure is the
sum of the red flows, and it equals consumption expenditures plus
investment plus government expenditure plus net exports. Conversely,
aggregated income is shown by the blue flow which includes the income
paid by firms, wages interest rent and profit. Y = C + I + G +X – M
o Gross is before subtracting the depreciation of capital. Conversely the net
is after the subtraction of the depreciation of capital.
o Depreciation Is the decrease in the value of a firm’s capital that results
from wear and tear. The total amount of capital spent to replace
depreciated capital is known as the gross investments. The amount by
which the values of capital increase is called the net investment. Net
Investment is the gross investment minus depreciation
o Gross investment is one of the expenditure expresses used to measure
gdp. The result is a gross measure
o Gross profit, is a firm’s profit before depreciation and thus is known as the
- Stats Canada uses the circular flow model to measure GDP and its components
in the National income and expenditure accounts.
o Expenditure approach – This methods adds all the consumption
expenditure ©, investments (I), government expenditure on goods and
services (X – M), corresponding to the red flows in the circular flow
model. Personal expenditure on consumer goods and services are things
that are consumed by the general public. Business investments includes
the purchase of capital, government expenditures is the goods and
services spent on public goods such as national defence and garbage
collection. Finally net export of goods and services are the value of
exports minus the imports and shows the net gain.
o The income approach – This approach estimates GDP through summing
the incomes that firms pay and the factors of production.
Wages, salaries, and supplementary labour income
Interest and miscellaneous investment income
Income from non-farm unincorporated businesses. The sum of above elements will provide the factor costs because
they are factors of production. While the final cost is known as the
domestic product at market prices. They differ due to taxes and
Indirect taxes refer to taxes on purchases. Direct tax refers to
taxes on income.
A subsidy is a payment from the government to the produces, this
allows lower consumer prices.
To obtain the net domestic income at market prices we add
indirect taxes and subtract subsidies.
The gap between the expenditure approach and the income
approach is the statistical discrepancy and is calculated as t