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ECON 1010 (200)

Chapter 21

10 Pages

Course Code
ECON 1010
John Paschakis

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ECON1010 – Week 1 00:31 Chapter 20 Measuring GDP and Economic Growth Macroeconomics The study of the national economy and the global economy Macroeconomic Issues Unemployment Recession Budget Deficit Inflation Gross Domestic Product (GDP) The total market value of all the final goods and services produced within a country in a give time period Final goods and services produced in Canada by foreigner are part of Canada’s GDP In measuring GDP, economists Use final goods and services only This avoids double counting Use market prices to value production The value of intermediate goods is not counted in GDP Intermediate goods are produced by one firm, bought by another from, and used as a component of a final good or service An alternative concept for measuring a nation’s output is Gross National Product (GNP) GNP is the total value of all final goods and services produced by the labour, capital and other resources of a country, regardless of where production occurred. The circular flow model It illustrates the flow of expenditure and income between different sectors of the economy The economy consists of Households Firms Governments The rest of the world Business firms sell goods and services Households sell resources (labour) to business firms The purchasers of goods and services are: households, firms, governments, the rest of the world Aggregate Expenditures 1. Consumption Expenditures (C) – Personal Expenditures on consumer goods and services by households the purchase of a new car by a Canadian household Haircuts Consumption expenditures do not include the purchase of new homes, new homes are counted as part of investment 2. Business Investment (I) – firms make investment expenditures on new plant, equipment and buildings this is the purchase of capital by firms it includes expenditures on new homes by households the purchase of a new car by a company is considered an business investment it also includes additions to business inventories (the change in business inventories) 3. Government Expenditures (G) – government (federal, provincial, and local) spending on goods and services Expenditures n national defence and garbage collection They do not include transfer payments because they are not purchases of goods and services Governemnts use taxes to pay for their purchases Net taxes (NT) = taxes paid to governemnts – transfer payments received from governments Transfer payments Cash transfers from governments to households and firms Social security benefits Unemployment benefits Subsidies to firms 4. Net Exports of goods and services (X-M) – the value of exports (X) minus the value of imports (M) Aggregate Expenditures or Total Expenditures = C+I+G+(X-M) Aggregate Incomes (Y) – income earned producing goods and services Wages for labour Interest for capital Rent for land Profit for entrepreneurship Firms pay out as incomes everything they receive from the sale of their output. Therefore, aggregate expenditures equals aggregate income (Y) and equals GDP GDP = Y = C+I+G+(X-M) Capital The plant, equipment, buildings, inventories of raw materials and semi-finished goods It is used to produce other goods and services Gross Investment The total amount spent on both buying new capital and replacing depreciated capital Depreciation (or capital consumption) The decrease in the stock of capital that results from wear and tear and absolenscence Net investment equals gross investment minus depreciation The stock of capital increases by the amount of net investment form on year to the next GDP grows because capital stock grows Investment adds to capital so GDP grows because of investment Measuring Canada’s GDP – to measure GDP, statistics Canada uses two approaches #1 - The expenditure approach GDP = Y = C+I+G+(X-M) The largest component of GDP form the expenditure approach is expenditures on consumer goods and services In 2004, GDP measured by the expenditure approach was $1290 billion The cost of adding a new kitchen to you house would be included in the calculation of GDP The government bond you buy for investment purpose is not counted as part of this year’s GDP It does not represent goods and services produced The value of intermediate goods is not counted in GDP Intermediate goods are goods that are used in the production of other goods and services Value Added The difference between the value of a firm’s production and the value of int
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