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Econ 1010 Chapter 20 pt 2

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York University
ECON 1000
Rebecca Jubis

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 are overstated. 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 their GDP. 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 gross measure. - 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  Corporate profits  Interest and miscellaneous investment income  Farmers’ 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 subsidies.  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
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