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Ryerson University
ECN 204
Eric Kam

Midterm Study Chapters All Chapters Chapter 5 Measuring a Nations Income Micro vs. Macro: -Microeconomics: The study of how individual households and firms make decisions, interact with one another in markets -Macroeconomics: The study of the economy as a whole We begin our study of macroeconomics with the countrys total income and expenditure Income and Expenditure: -Gross Domestic Product (GDP) measures total income of everyone in the economy -GDP also measures total expenditure on the economys output of goods and services (g&s) -For the economy as a whole, income equals expenditure because every dollar a buyer spends is a dollar of income for the seller A dollar spent is a dollar earned -A good way to judge how well someone is doing economically is to look at his or her income; we can judge how well a country is doing economically by looking at the total income that everyone in the economy is earning -GDP is our measure of the economys total income, often called national income -GDP also measures total expenditure on the goods and services produced in the economy, and the value of the economys output (production) of goods and services, GDP is also referred to as output -The equality of income and expenditure is an accounting identity (not, for example, an equilibrium condition): it must be true that income equals expenditure The Circular-Flow Diagram: -a simple depiction of the macro-economy -illustrates GDP as spending, revenue, factor payments, and income -Preliminaries: Factors of production are inputs like labour, land, capital, and natural resources Factor payments are payments to the factors of production Example: wages, rent -land earns rent -labour earns wages -capital earns interests -Households: Is land, labour, capital own the factors of production, sell/rent them to firms for income buy and consume, good and services -Firms: buy/hire factors of production, use them to produce goods and services sell goods & services firms have goods and services which they want to sell, which are bought buy households -both actors (households and firms) are both buyers and sellers: you sell yourself as a factor of production (you sell your labour) Midterm Study Chapters All Chapters What This Diagram Omits: -the government: collects taxes, buys g&s -the financial system: matches savers supply of funds with borrowers demand for loans -the foreign sector: trades g&s, financial assets, and currencies with the countrys residents Gross Domestic Product (GDP): -the market value of all final goods & services produced within a country in a given period of time All goods measured in the same units dollars in Canada Things that dont have a market value are excluded housework you do for yourself -the market value of all final goods & services produced within a country in a given period of time -final goods: intended for the end user -intermediate goods: used as components or ingredients in the production of other goods GDP only includes final goods they already embody the value of the intermediate goods used in their production -the market value of all final goods & services produced within a country in a given period of time GDP includes tangible goods (like DVDs, mountain bikes, beer) and intangible services (dry cleaning, concerts, cell phone service) -the market value of all final goods & services produced within a country in a given period of time GDP includes currently produced goods, not goods produced in the past -the market value of all final goods & services produced within a country in a given period of time GDP measures the value of production that occurs within a countrys borders, whether done by its own citizens or by foreigners located there -the market value of all final goods & services produced within a country in a given period of time Usually a year or a quarter (3 months) The Components of GDP: -GDP is total spending -4 components: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) -These components add up to GDP (denoted Y) -Y = C + I + G + NX Consumption (C): -Is total spending by households on g&s. -Note on housing costs: For renters, consumption includes rent payments Midterm Study Chapters All Chapters For homeowners, consumption includes the imputed rental value of the house, but not the purchase price or mortgage payments Investment (I): -Is total spending on goods that will be used in the future to produce more goods? -Includes spending on capital equipment (e.g., machines, tools) structures (factories, office buildings, houses) inventories (goods produced but not yet sold) - Investment does not mean the purchase of financial assets like stocks and bonds - When a consumer (as a tenant) rents a house or apartment, the consumer is buying housing services, - these services are considered consumption, so the price paid for these services rent is counted in the consumption component of GDP -When someone buys a new house to live in, she is both a producer and a consumer As a producer, she has made an investment (the purchase of the house) that will produce a service She is also the consumer of this service, which is valued at the market rental rate for that type of house So, the accounting conventions treat this situation as if the person is her own landlord and rents the house to/from herself Government Purchases (G): -Include spending on goods and services by local, territorial, provincial, and federal governments -It includes the salaries of government workers and spending on public works -G excludes transfer payments, such as a Canada pension Plan benefit to an elderly or employment insurance benefits -They are not purchases of g&s Net Exports (NX): -NX = exports imports -Exports represent foreign spending on the economys g&s. -Imports are the portions of C, I, and G that are spent on g&s produced abroad -Adding up all the components of GDP gives Y = C + I + G + NX Real versus Nominal GDP: - Inflation can distort economic variables like GDP, so we have two versions of GDP: One is corrected for inflation, the other is not -Nominal GDP values output using current prices. It is not corrected for inflation -Real GDP values output using the prices of a base year -Real GDP is corrected for inflation The GDP Deflator: -the GDP deflator is a measure of the overall level of prices -definition: GDP deflator = 100 x nominal GDP / real GDP
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