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ECN 204 Study Guide - Midterm Guide: Xm Satellite Radio, Workforce Productivity, Potential Output

Course Code
ECN 204
Eric Kam
Study Guide

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ECN 204 Midterm Notes
GDP is the market value of all final goods/services produced within a country in a given
period of time,
There are 4 factors of production: land (rent), labour (wages), capital (interest), and
entrepreneurship (profit).
There are 4 actors (households, firms, rest of world, and government) who play in 2
playgrounds (factor market and goods market).
Households sell and firms buy services of labour, capital, and land in factor markets.
For these factor services, firms pay income to households (wages, interest, rent,
and profit). Blue flow, Y, shows total income paid by firms to households.
Firms sell and households buy consumer goods and services in the goods market.
Consumption expenditure is the payment for consumer goods/services, shown
by red flow, C.
Firms buy and sell new capital equipment in the goods market and put unsold output
into inventory. The purchases are investments, shown by red flow, I.
Governments buy goods/services from firms in the goods market.
Their expenditure is called government expenditure, shown as red flow, G.
Firms in Canada sell goods/services to the rest of the world (exports) and buy
goods/services from the rest of the world (imports).
Net exports = Exports (X) Imports (I)
If +ve, the net flow of goods/services is from Canadian firms to the rest of the
world, and vice versa.
The circular flow shows 2 ways of measuring GDP:
1. The sum of the red flows equal GDP (expenditure approach).
GDP = C + I + G + (X M)
2. Total income equals total amount paid for use of the factors of production.
Y = C + I + G + (X-M)
Circular Flow of Expenditure
and Income
The sum of the red flows equals
the blue flow.
Y = C + I + G + (X-M)

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ECN 204 Midterm Notes
Gross investment is the total amount spent on purchases of new capital and on
replacing depreciated capital.
Net investment is the increase in the value of the firm’s capital.
Net Investment = Gross Investment Depreciation
Real GDP = Today’s quantities @ yesterday’s prices
Nominal GDP = Today’s quantities @ today’s prices
Real GDP per person = Real GDP / Population
Two features of our expanding living standard are the growth of potential GDP per
person and fluctuations of real GDP around potential GDP.
Potential GDP is the value of real GDP when all the economy’s labour, capital,
land, and entrepreneurial ability are fully employed.
A business cycle is a periodic but irregular up-and-down movement of total production
and other measures of economy.
Every cycle and two phases (expansion and recession) and two turning points (peak and
Expansion is a period during which real GDP increases, from a trough to a peak.
Recession is a period when real GDP decreases its growth rate is ve for at
least two successive quarters.
Factors that influence the standard of living but aren’t part of GDP are:
Household production
Underground economic
Health and life expectancy
Leisure time
Environmental quality
Political freedom and social
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