Topic 2: National Income and GDP - Knowledge Summary and Exam Analysis

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Economics for Management Studies
Course Code
Iris Au

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Knowledge Summary: Topic 2 – Part A: Measurement of National Income - GDP How to measure aggregate output? We measure aggregate output as Gross Domestic Product (GDP) – the total value of goods and services produced in the economy during a given period There are 3 ways to measure national income/GDP: 1) Expenditure approach 2) Income approach 3) Value added approach Expenditure approach = C + I + G + NX • The expenditure approach, sometime called gross domestic expenditure (GDE), adds up the expenditure needed to purchase the final output produced during a given period • Total expenditure is the sum of 4 major broad categories: 1) Consumption (C) 2) Investment (I) 3) Government spending (G) 4) Net exports (NX) = Exports (X) – Imports (IM) Note: • Consumption, investment, and government spending may include final goods and services produced by foreigner. Therefore, given that GDP only measures final goods and services produced within the country, we need to subtract imports to avoid double counting Income approach • The income approach looks at all the incomes earned by Canadians as a result of production • It takes into account of the followings: o Factor incomes – wages, salaries, interest, business profits o Non-factor payments – indirect taxes and subsidies, capital consumption allowances (CCA), inventory valuation adjustments (IVA) Note: • Both the expenditure approach and the income approach give the same GDP because one’s spending equals another income. Therefore, for a country as a whole, total expenditure equals total income Value-added approach • Value added = Output of every firm in Canada – intermediates purchased by firm • Final product = Sum of every firm’s contribution towards final product Note: • Value-added gives us the same answer as final products because value added is the correct measure of each firm’s contribute to total output. Therefore, when we add all firms’ contributions together, it will give us the measure of the economics total output Topic 2 – Part B: Other Issues Related to National Income Issue #1 – Gross National Product vs. Net National Product • Net national product (NNP) excludes the amount of the economy’s stock of plants, equipment, and residential structures that wears out during the years o NNP = Gross National Product – Depreciation o NNP = Gross National Prod
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