9F National Accounts and Business Cycles

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University of Toronto St. George
Gustavo Indart

NATIONAL ACCOUNTS Gross Domestic Product (GDP): total value of final goods and services produced in the economy during a given period. GDP is a flow of new products during a period of time There are three different approaches to measure GDP: 1) Production Approach: measures value added in the production of goods and services in different industries. The value added by a firm is the difference between the revenue the firm earns by selling its product and the amount it pays for the product of other firms it uses as intermediate goods 2) Expenditure Approach: measures total expenditure on final goods and services by different groups (households, business, government, and foreigners) GDP = C + I + G + (X - IM) C = consumption expenditures of households I = investment in plant and equipment, residential construction, inventory accumulation G = government purchases of goods and services (X - IM) = net exports of goods and services (also noted as NX) 3) Income Approach: measures total income earned by the different participants in the process of producing goods and services (wages, rents, profits, etc.) Net Domestic Product (NDP) = GDP - depreciation Net Domestic Income = GDP - depreciation - indirect taxes Net Domestic Income (from Factor Prices) = Wages + Interest Income + Corporate Profits + Rental Income Personal Income (PI) = NDI - corporate profits + dividends + government transfers to individuals + interest on government debt Corporate Profits = dividends + undistributed profits + corporate taxes Personal Disposable Income (YD) = PI - personal income taxes = consumption + savings Business Cycles Potential output (Y*): real GDP that the economy would produce if its productive resources were employed at their normal levels or utilization Output gap: actual national income minus potential national income (Y - Y*) Recessionary gap: a situation in which actual output is less than potential output, Y < Y* Inflationary gap: a situation in which actual ou
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