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Lecture

ECON 1010 Lecture Notes - Gross Domestic Product, Social Security, Net Domestic Product


Department
Economics
Course Code
ECON 1010
Professor
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 Canadas 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 nations 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
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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)
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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 Canadas 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
years 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 firms production and the value of
intermediate goods bought from other firms
Net Domestic Product (or net Domestic income)(NDP) at market prices
NDP = GDP depreciation
GDP includes depreciated (or capital consumption)
Example
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