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Economics 2152A/B Study Guide - Midterm Guide: Business Cycle, Budget Constraint, Utility

Course Code
ECON 2152A/B
Desmond Mc Keon
Study Guide

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Chapter 2 Measurement 2/5/2013 1:26:00 PM
Understand how macroeconomic variables are measured.
Measuring GDP
Chief aim on national income accounting is to obtain a measure of
the total quantity of goods and services produced for the market in
a given country over a period of time.
Gross Domestic Product (GDP) dollar value of final value of output
produced during a given period of time within the borders of
National Income and Expenditure Accounts (NIEA) where GDP is
published on a quarterly basis.
Three approaches to measuring GDP
o Product Approach
o Expenditure Approach
o Income Approach
Intermediate Good good that is produced then used as an input to another
production process.
After Tax Profits = total revenue wages interest cost of intermediate
inputs taxes
Product Approach
“value added approach”
The sum of value added to goods and services in production across
all productive units in the economy.
To calculate: add the value of all goods produced in the economy
and subtract all the intermediate goods used in production = total
value added.
If we didn’t subtract intermediate goods we would be double
GDP = good produced intermediate goods used in production
The Expenditure Approach
Total spending on all final goods and services production in the

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C consumption expenditure
I investment expenditure (expenditure on goods that are
produced but not consumed during the period under consideration)
G government expenditure
NX net exports (total exports total imports)
The Income Approach
Add up all incomes received by economic agents contributing to
Incomes include profits made by firms, employee compensation,
corporate profits, net interest, etc. Anything coming into the
Why do they all yield same GDP result?
because the quantity of output, or value, added in the economy is
ultimately sold, thus showing up as expenditure, and what is spent
on all output produced is income, in some form or other, for
someone in the economy.
Let Y be GDP in economy
Y is total aggregate output and also total aggregate income.
* Sometimes referred to as the income-expenditure identity. The quantity on
the left side of the identity is the aggregate income and the right side is the
sum of the components of aggregate expenditure.
Gross National Product (GNP)
At one time was used in Canada as the official measure of
aggregate production.

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However, measures the value of output produced by domestic
factors of production, whether or not production takes place within
or outside of Canada.
Makes big difference in Canada compared to other countries
because a significant fraction of productive plant and equipment in
Canada is foreign owned.
What does GDP leave out?
GDP per person is invalid because does not take into account how
income is distributed across the individuals in the population.
Also leaves out all non market activity.
Underground economy is not measured. Includes all unreported
economic activity.
Invalid values on products. How much really worth.
Components of Aggregate Expenditure
o Accounts for 55% of GDP
o Is the expenditure on consumer goods and services during
the current period, and the components of consumption are
durable goods, semi durable goods and non durable goods.
o Accounts for 20.3% of GDP
o Is the expenditure on goods that are produced but not
consumed during the current period.
o Two typed:
Fixed production of capital, such as plant, equipment
and housing
Inventory good hat are essentially put in storage.
o Smaller than consumption because much more variable and
plays a large role in the business cycle.
Net Exports
o Accounts for 1.9% of GDP
o Accounts for 22.7%
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