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ECON1100 Midterm: 139 Pages Macro Review Lifesaver

Course Code
ECON 1100
Eveline Adomait
Study Guide

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Chapter 4 - GDP: Measuring Total Production and Income
The Health of The Canadian Economy
Many diff factors impact the health of the Canadian economy. One of those factors is exports
Canadian exporters were feeling the effects of the business cycle, which refers to the
alternating periods of economic expansion and recession that occur in all economies
Whether the general level of economic activity is increasing it is important to all kinds of firms,
and it is also important to workers wondering whether they will be able to keep their jobs and to
college and university students wondering whether they will be able to find jobs when they
A Canadian study showed that those graduating from university during a recession had lower
earnings for 10 years or more
Economics in your life
What's the Best Country for You to Work In?
Suppose that an airline offers you a job after graduation in 2014. The firm has offices in the
United Kingdom and China, and because you are fluent in English and Mandarin, you get to
choose the country in which you will work and live
Gross domestic product (GDP) is a measure of an economy's total production of goods and
services, so one factor in your decision is likely to be the growth rate of GDP in each country.
Based on the International Monetary Fund's forecast for 2014. GDP would increase by 1.5
percent in the UK but expand 8.2 percent in China
Microeconomics: The study of how households and firms make choices, how they interact in
markets, and how the govt. attempts to influence their choices
Macroeconomics: The study of the economy as a whole, including topics such as inflation,
unemployment, and economic growth.
Business cycle: Alternating periods of economic expansion and economic recession
Expansion: The period of a business cycle during which total production and total employment
are decreasing
Economic growth: The ability of an economy to produce increasing quantities of goods and
Inflation Rate: The percentage increase in the price level from one year to the next.
4.1 Gross Domestic Product Measures Total Production
Gross domestic product (GDP): The Market value of all final goods and year services produced
in a country during a period of time, typically one year
GDP is Measured Using Market Values, Not Quantities: We measure production by taking the
value, in dollar terms, of all the goods and services produced.
GDP Includes Only the Market Value of the final goods
Intermediate good or service: A good or service that is an input into another good or service,
such as a tire on a truck
To avoid double counting, we do not include the value of intermediate goods or services in
calculating GDP
GDP Includes Only current Production: GDP includes only production that takes place during
the indicated time period
Calculating GDP
Suppose that a very simple economy produces only four goods and services: Energy drinks,
pizzas, textbooks, and paper. Assume that all the paper in this economy is used to make either
textbooks or pizza boxes. Use the information in the following table to compute GDP for the
year 2014

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Step 1: Review the chapter material
Step 2: Determine which goods and services listed in the table should be included in the
calculating of GDP... GDP is the value of all final goods and services. Therefore, we need to
calculate the value of the final goods and services listed in the table. Energy drinks, pizzas, and
textbooks are final goods. Paper would also be a final good if, for instance a consumer bought it
to use in a printer. However, here we are assuming that publishers purchase all the paper to use
in manufacturing textbooks, so the paper is an intermediate good, and its value is not included
in GDP
Step 3: Calculate the value of the three final goods and services listed in the table... Value
is equal to the quantity produced multiplied by the price per unit, so we multiply the numbers in
column (1) by the numbers in column (2)
Step 4: Add the value for each of the three final goods and services to find GDP
GDP = Value of energy drinks produced + Value of pizza produced + Value of
textbooks produced
= $5000 + $800 + $2000
= $7800
Production, Income, and the Circular-Flow Diagram
The Circular Flow and the Measurement of GDP
The circular-flow diagram illustrates the flow of spending and money in the economy. Firms
sell goods and services to three groups: domestic households, foreign firms and households, and
the government. To produce goods and services, firms use factors of production: labour, capital,
natural resources, and entrepreneurship.
Households supply the factors of production to firms in exchange for income in the form or
wages, interest, profit, and rent.
Firms make payments of wages and interest to households in exchange for hiring workers and
other factors of production.
The sum of wages, interest, rent, and profit is total income in the economy.We can measure
GDP as the the total income received by households
The diagram also shows that households use
their income to purchase goods and services,
pay taxes, and save. Firms and the
government borrow the funds that flow from
households into the financial system, which
consists of banks and stock and bond
Expenditures by foreign firms and
households on domestically produced goods
and services are called exports, and spending
on foreign-produced goods and services is
known as imports.
We can measure GDP either by calculating
the total value of expenditure on final goods
and services, or by calculating the value of
total income
Transfer payments: Payments by the
government to households for which the
government does not receive a new good or
service in return.

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Gross Private domestic Investment, or “Investment”
Investment Spending by firms on new factories, office buildings, machinery, and additions to
inventories, plus spending by households and firms on new houses.
Spending on gross private domestic investment, or simply investment, is divided into three
1. Business gross fixed capital formation is spending by firms on new factories, office
buildings, and machinery used to produce other goods.
2. Residential structures is spending by households and firms on new houses.
3. Business investment in inventories are also included in investment.
Government Consumption and Gross Investment, or “Government Purchases”: Spending
by federal, provincial and local governments on goods and services, such as teachers’ salaries,
highways, and hospitals. Again, government spending, when referring to GDP, does not
include transfers to individuals because such payments do not represent the production of a new
good or service
Net Exports of Goods and Services, or “Net Exports”
Net Exports = Exports minus imports
We add exports to expenditures to include all spending on new goods and services domestically
produced and we subtract imports from total expenditures to exclude spending that does not
result in this production.
The equation tells us that GDP (denoted as Y) equals consumption (C) plus investment (I) plus
government purchases (G) plus net exports (NX).
Consumption accounts for 54 percent of GDP, far more than any of the other components. In
recent years, net exports typically have been negative, which reduces GDP. Note that the
subtotals may not sum to the totals for each category because of rounding.
Components of GDP
Statistics Canada divides its statistics on GDP into four major categories of expenditures:
Government purchases
Net exports
Economists use these categories to understand why GDP fluctuates and to forecast future GDP
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