ECN 204 Study Guide - Midterm Guide: Xm Satellite Radio, Workforce Productivity, Potential Output
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ECN 204 Midterm Notes
CHAPTER 20 – MEASURING GDP AND ECONOMIC GROWTH
• 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
• 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
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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