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Economics 1022 Review.docx

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Economics
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Economics 1022 Review
Chapter 20-GDP & Economic Growth
Gross Domestic Product
-GDP or gross domestic product, is the market value of the final goods and services
produced within a country in a given time period. This definition has four parts:
Market value
Final goods and services
Produced within a country
In a given time period
-A final good or service is an item that is bought by its final user during a specified time
period.
-In contrast to a final good is an intermediate good or service, which is an item that is
produced by one firm, bought b another firm, and used as a component of a final good or
service.
-Some items that people buy are neither final goods nor intermediate goods and they are
not part of GDP. Examples of such items include financial assets-and stocks and bonds-
and secondhand goods-used cars or existing homes.
GDP and The Circular Flow of Expenditure and Income (pg 469)
-Households sell and firms buy the services of labor, capital, and land in factor markets.
For these factor services, firms pay income to households: wages for labor services,
interest for the use of capital, and rent for the use of land.
-The total payment for consumer goods is the consumption expenditure, shown by the red
flow labeled C.
-Households make consumption expenditures (C); firms make investments (I),
governments buy goods and services (G); and the rest of the world buys net exports (X-
M). Firms pay incomes (Y) to households. Aggregate income equals aggregate
expenditure.
-Government expenditure on goods and services is called government expenditure.
-Governments finance their expenditure with taxes, however taxes are not apart of
expenditure and income.
-Governments make payments like social security and subsides, however these are not
apart of expenditure and income as well.
-Aggregate expenditure can be determined by the formula Y=C+I+G+(X-M)
-Because expenditure equals aggregate income, the two methods of measuring GDP give
the same answer, so GDP equals aggregate expenditure and equals aggregate income.
-The total amount spent both buying new capital and replacing depreciated capital is
called gross investment. The amount by which the value of capital increases is called net
investment. Net investment equals gross investment minus depreciation.
-Gross investment is one of the expenditure included in the expenditure approach to
measuring GDP.
-GDP can also be measured by the income approach which sums the incomes that firms
pay households for the factors of production they hire-wages for labor, interest for
capital, rent for land, and profit for entrepreneurship. We divide the incomes into two
broad categories:
Wages, salaries, and supplementary labor income.
Other factor incomes.
-Wages salaries and supplementary labor income is the payment for labor services. It
includes gross wages plus benefits such as pension contributions.
-Other factor incomes include corporate profits, interest, farmer’s income, and income
from non-farm unincorporated businesses. These incomes are a mixture of interest, rent
and profit and include some labor income from self-employment.
-an indirect tax is a tax paid by consumers when they buy goods and services(In contrast
to direct tax which is a tax paid on income.) An indirect tax makes the market exceed
factor cost.
-A subsidy is a payment by the government to a producer. With subsidy, factor cost
exceeds market price. To get from factor cost to market price, we add indirect taxes and
subtract subsidies. Making this adjustment brings us to net domestic income at market
prices.
-Net domestic income at market prices is a net income measure because corporate
profits are measured after deducting depreciation. They are a net income measure. To
get from net income to gross income, we must add depreciation.
-The gap between the expenditure approach and the income approach is called the
statistical discrepancy and is calculated as the GDP expenditure total minus the GDP
income total.
- The formula for income approach is as followed:
Wages salaries, and supplementary labor+other factor incomes=net domestic factor at
cost+indirect taxes less subsidies=net domestic income at market
prices+depreciation=GDP income approach.
Nominal GDP and Real GDP
-Real GDP is the value of final goods and services produced in a given year when
valued at the prices if a reference base year.
-Nominal GDP is the value of final goods and services produced in a given year when
valued at the prices of that year. Nominal GDP is just a more precise name for GDP.
-Economists use estimates of real GDP for two main purposes:
To compare the standard of living over time
To compare the standard of living across countries
-The Real GDP per person can tell us long-term trends and the short-term cycles in the
standard of living over time.
-Potential GDP is the maximum level of real GDP that can be produced while avoiding
shortages of labor, capital, land and entrepreneurial ability that would bring rising
inflation.
-Fluctuations around real GDP per person and sometimes-real GDP per person shrinks.
-The fluctuations in the pace of expansion of real GDP is referred to as the business
cycle.
-The business cycle isn’t a regular predictable cycle like the phases of the moon, but
every cycle has two phases:
Expansion
Recession
And two turning points
Peak
Trough
-Some of the factors that influence the standard of living and that are not part of GDP are:
Household production
Underground economic activity
Health and life expectancy
Leisure time
Security
Environmental quality
Political freedom and social justice
Chapter 21-Monistering Jobs and Inflation
Employment and Unemployment
-Unemployment is a serious personal and social economic problem for two main reasons.
It results in:
Lost incomes and production
Lost human capital
-Unemployment benefits provide a safety net for lost incomes and production, however
do not fully replace lost earnings.
-Destroying human capital lowers the living standard in both the present and the future.
-Every month, statistics Canada conducts a labor force survey in which it asks 54, 000
households a series of questions about the age and job market status of each household.
-The working age population is the total number of people aged 15 years and over, the
people who are in the labor force and those who are not divide it.
-The labor force is the sum of the employed and the unemployed.
-The employed are either full-time or part time workers; and part time workers either
want part-time work (voluntary part-time) or want full-time work (involuntary part-time).
-To be counted as unemployed, a person must be available for work and must be in one of
three categories.
1.Without work but has made specific efforts to find a job within the previous four
weeks.
2.Laid off from a job and be waiting to be called back to work.
3. Waiting to start a new job within four weeks.
-People in the working-age population who are neither employed nor unemployed are
classified as not in the labor force.
-Statistics Canada calculates four indicators of the state of the labor market. They are:
The unemployment rate

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Description
Economics1022ReviewChapter20GDPEconomicGrowthGrossDomesticProductGDPorgrossdomesticproductisthemarketvalueofthefinalgoodsandservicesproducedwithinacountryinagiventimeperiodThisdefinitionhasfourpartsMarketvalueFinalgoodsandservicesProducedwithinacountryInagiventimeperiodAfinalgoodorserviceisanitemthatisboughtbyitsfinaluserduringaspecifiedtimeperiodIncontrasttoafinalgoodisanintermediategoodorservicewhichisanitemthatisproducedbyonefirmboughtbanotherfirmandusedasacomponentofafinalgoodorserviceSomeitemsthatpeoplebuyareneitherfinalgoodsnorintermediategoodsandtheyarenotpartofGDPExamplesofsuchitemsincludefinancialassetsandstocksandbondsandsecondhandgoodsusedcarsorexistinghomesGDPandTheCircularFlowofExpenditureandIncomepg469HouseholdssellandfirmsbuytheservicesoflaborcapitalandlandinfactormarketsForthesefactorservicesfirmspayincometohouseholdswagesforlaborservicesinterestfortheuseofcapitalandrentfortheuseoflandThetotalpaymentforconsumergoodsistheconsumptionexpenditureshownbytheredflowlabeledCHouseholdsmakeconsumptionexpendituresCfirmsmakeinvestmentsIgovernmentsbuygoodsandservicesGandtherestoftheworldbuysnetexportsXMFirmspayincomesYtohouseholdsAggregateincomeequalsaggregateexpenditureGovernmentexpenditureongoodsandservicesiscalledgovernmentexpenditureGovernmentsfinancetheirexpenditurewithtaxeshowevertaxesarenotapartofexpenditureandincomeGovernmentsmakepaymentslikesocialsecurityandsubsideshoweverthesearenotapartofexpenditureandincomeaswellAggregateexpenditurecanbedeterminedbytheformulaYCIGXMBecauseexpenditureequalsaggregateincomethetwomethodsofmeasuringGDPgivethesameanswersoGDPequalsaggregateexpenditureandequalsaggregateincomeThetotalamountspentbothbuyingnewcapitalandreplacingdepreciatedcapitaliscalledgrossinvestmentTheamountbywhichthevalueofcapitalincreasesiscallednetinvestmentNetinvestmentequalsgrossinvestmentminusdepreciationGrossinvestmentisoneoftheexpenditureincludedintheexpenditureapproachtomeasuringGDPGDPcanalsobemeasuredbytheincomeapproachwhichsumstheincomesthatfirmspayhouseholdsforthefactorsofproductiontheyhirewagesforlaborinterestfor
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