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York University
ECON 1000

Chapter 20 GDP Defined:  GDP: market value of the final goods and services produced within a country in a given time period  Has four parts:  Market value: prices that items are traded in markets  Final goods and services:  Produced within a country  In a given time period  Market value:  prices that items are traded in markets  Final goods and services:  Final good: an item that is bought by its final user during a specified time period  Intermediate good: an item that is produced by one firm, bought by another firm and used as a component of a final good or service  Double counting: value of intermediate goods and value of final goods counted for two times  A good is an intermediate good or a final good depends on what it is used for, not what it is  Sometimes things that people buy are neither, not part of GDP (ex. Financial assets)  Second good: is part of GDP in the year it was produced but not part of GDP the next  Produced within a country:  Only goods and services produced within a country count as part of GDP  In a given time period:  Measures value of production in a given time period- annually or quarterly GDP  GDP measured: value of total production, total income, and total expenditure  Equality between value of total production and total income is important because it shows direct link between productivity and living standards  Standard of living rises when incomes rise  rise in income = rise value of production GDP and Circular Flow of Expenditure and Income:  Economy consists of households, firms, governments, and the rest of the world  Trade in factor markets and goods (and services) markets Households and Firms:  Households sell and firms buy services of labour, capital, and land in factor markets  Firms pay income to households, wages for labour services, interest for use of capital, rent for use of land, and entrepreneurship receives profit  Retained earnings: profits that are not distributed to households and are a part of household’s sector’s income  Aggregate income: received by households, including retained earnings  Firms sell and households buy consumer goods and services  Consumption expenditure: total payment for these goods and services  Firms buy and sell new capital  Some of what a firm produces is not sold buy is added in added to inventory  Aggregate income = aggregate expenditure  Investment: purchase of new plant, equipment, and building Governments:  Governments expenditure: expenditure on goods and services from firms  Finance expenditure with taxes- not part of circular flow of expenditure and income  Make financial transfers (ex. Social security benefit)- not part Rest of the World:  Exports: firms sell goods and services to the rest of the world  Imports: buy goods and services from the rest of the world  Net exports = value of exports – value of imports GDP Equals Expenditure Equals Income:  GDP is measures in two ways:  By total expenditure on goods and services  By total income earned producing goods and services  Total expenditure – aggregate expenditure = consumption expenditure + net exports  Aggregate income = total amount paid for services of the factors of production used to produce final goods and services – wages, interest, rent, and profit  Y= C + I + G + X - M  GDP equals aggregate expenditure and aggregate income Why is Domestic Product “Gross”?  “Gross” means before subtracting depreciation of capital  Gross is the opposite of Net - after subtracting depreciation of capital  Depreciation is the decrease in value of a firm’s capital that results from wear,tear,obsolescence  Gross investment: total amount spend both buying new capital &replacing depreciated capital  Net investment: amount that the value of capital increases  Net investment = gross investment – depreciation  Gross investment is the expenditure included in the expenditure approach to measuring GDP  Gross profit is the income included in the income approach to measuring GDP Measuring Canada’s GDP Expenditure Approach:  Measures GDP as sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services  Personal expenditures on consumer goods and services are expenditures by Canadian households on goods and services produced in Canada and in the rest of the world (doesn’t include purchase of new homes = investment)  Business investment: expenditure on capital equipment and buildings by firms & added inventory (includes expenditure on new homes by households)  Government expenditures on goods and services: expenditure by all levels of government on goods and services (doesn’t include transfer payments because they aren’t expenditures on g&s)  Net exports of goods and services: value of exports minus value of imports Income Approach:  Measures GDP by summing incomes that firms pay households for the factors of production they hire- wages for labour, interest for capital, rent for land, and profit for entrepreneurship  National income and expenditure accounts divide incomes into five categories: 1. Wages, salaries, and supplementary labour income: payment for labour services (includes net wages + taxes withheld on earnings + benefits as pension contributions) 2. Corporate profits: some are paid to households in form of dividends and some are retained by corporations as undistributed profits  all income 3. Interest and miscellaneous investment income: interest households receive on loans they make minus interest households pay on their borrowing 4. Farmers’ income: mixture of top three (include compensation for owner’s labour, payment for use of owner’s capital, and profit) 5. Income from non-farm uninco
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