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ECN 204 Study Guide - Midterm Guide: Gdp Deflator, Potential Output, Labour Force Survey

Course Code
ECN 204
Eric Kam
Study Guide

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Gowtham Kirupakaran
February 21st,2017
Midterm Review Notes for Chapters 20-23
Week 2 Lecture Chapter 20 Measuring GDP and Economic Growth
Gross Domestic Product
GDP Defined is the market value of all final G/S produced in a country in a given time period
This definition has four parts (important);
Market Value today’s dollar, Final Goods and Services (things that are sold), Produced
within a Country, and In a given time period (Usually a Year)
Market Value
GDP is a market value G/S are valued at their market prices
- To add apples and oranges, computer and popcorn, we add the market values so we
have a total value of output in dollar
Final Goods and Services
GDP is the value of the final G/S produced
A final good (or service) is an item bought by its final user during a specified time period
A final good contrast with an intermediate good, which is an item that is produced by
one firm, bought by another firm and used as a component of a final good or service
Intermediate Good all the things required to make the final good
Excluding the value of intermediate G/S avoids counting the same value more than once
which is also known as Double Counting
Produced Within a Country
GDP measures production within a country domestic production (within boarders)
In a Given Time Period
GDP measures production during a specific time period, normally a year/quarter of a
GDP and The Circular Flow of Expenditure and Income
GDP measures the value of production, which also equals total expenditure on final
goods and total income
The equality of income and value of production shows the link between productivity and
living standards
Income = Expenditure
The value of everything you spend will equal to everything you earned
The circular flow diagram shows the transaction among;
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Gowtham Kirupakaran
February 21st,2017
- Households, Firms, Governments, and The Rest of the World All Spend and Earn
Factors of Production Land earns rent, Labour earns wages and Capital earns interests
Households and Firms
Households sell and firms buy the services of labour, capital, and land in Factor Market
For these factor services, firms pay income to households: wages for labour services,
interest for the use of capital, and rent for the use of land
4th FOP is entrepreneurship and it receives profit
Firms sell and households buy consumer goods and services in the Goods Market
Consumption Expenditure is the total payment for consumer G/S, shown by the red
Households consume and firms invest
Firms buy and sell new capital equipment in the Goods Market and put unsold output
into the inventory
The purchase of new plant, equipment, and building and the addition to inventories are
investment, shown by the red flow labelled I
Buy G/S from firms and their expenditure on G/S is called Government Expenditure
Government expenditure is shown as the red flow G
Governments finance their expenditure with taxes and pay financial transfers to
households, such as unemployment benefits, and pay subsidies to firms
These financial transfers are not part of the circular flow of expenditure income
Rest of the World
Exports firms in Canada sell goods and services to the rest of the world
Imports buys goods and services from the rest of the world
The value of exports (X) minus the value of imports (M) is called net exports, the red
If net exports are positive, the net flow of G/S is from Canadian firms to the rest of the
world Exports > Imports
If net exports are negative, the net flow of G/S is from the rest of the world to Canadian
firms Imports > Exports
Y = C + I + G + (X M)
The circular flow shows two ways of measuring GDP
GDP Equals Expenditure Equals Income
Total expenditure on final goods and services = GDP
GDP = C +I + C + X M
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Gowtham Kirupakaran
February 21st,2017
Aggregate Income = total amount paid for the use of FOP; wages, rent, interest and
Firms pay out all their receipts from the sale of final goods, so income equals
Y = C + I + G + (X-M)
Why Is Doestic Product Gross?
Gross means before deducting the depreciation of capital
Net means after deducting the depreciation of capital
Depreciation is the derease i the alue of a fir’s apital that results fro ear ad
tear and obsolescence
Gross Investment is the total amount spent on purchases of new capital and on
replacing depreciated capital
- Gross investment is one of the expenditures included in the expenditure approach to
measuring GDP
Net Investments is the irease i the alue of the fir’s apital
Net Investments = Gross Investments Depreciation
- Total product is a gross measure
Gross profit, hih is a fir’s profit efore sutratig depreiatio, is oe of the
incomes included in the income approach to measuring GDP
Measuring Canadian GDP
The Bureau of Economic Analysis uses two approaches to measure GDP
Expenditure approach
- Measures GDP as the sum of the red flow: consumption expenditure, investment,
government expenditure on G/S, and net exports
- GDP = C+I+G +(X-M)
Income approach
- Measures GDP by summing the incomes that firms pay households for the factor of
production they hire
- Two broad categories are; Wages, Salaries, and other Labour Income
- Other factor incomes
The payment for labour services is the sum of net wages plus benefits such as pension
contributions and is shown by the blue flow W.
Other factor incomes include a mixture of interest, rent, and profit and include some
labour income from self-employment. They are included in the blue flow OFI.
- The sum of all factor incomes is net domestic income at factor cost.
Two adjustments must be made to get GDP:
1. Indirect taxes less subsidies are added to get from factor cost to market prices.
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