Chapter200.pdf

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 2275A/B
Professor
Henry Meredith
Semester
Winter

Description
Chapter 20 Chapter 20 Measuring GDP and Economic Growth Gross Domestic Product • GDP or Gross domestic product is the market value of all the 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. • An intermediate good (or service) is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service. • Study Figure 20.1 on p.469 of your textbook. This figure shows the circular flow of expenditure and income and gives the following information: • The economy consists of: o Firms o Households o Governments o Rest of world • Aggregate economic markets are: o Goods markets (goods and services) o Factor markets (productive resources) • Define the following: o Y Income o C Consumption expenditure o I Investment o G Government expenditures o X Exports, M Imports o NX Net exports = X - M • Let’s summarize what the circular flow diagram tells us. • Households: o Sell factor services to firms and receive incomes = o Spend C on goods and services • Governments: o Spend G on goods and services • The Rest of the World: o Spend NX on goods and services • Firms: o Buy the services of factors of production from households and pay incomes Y o Produce goods and services, which they sell to households,, governments, G, other firms (and themselves), I, and the rest of the world, NX. o Y = C + I + G + NX Measuring Canada’s GDP • Statistics Canada measures Canada’s GDP in two ways: o Expenditure approach o Income approach • Expenditure approach: o Y = C + I + G + NX • The table below shows Canada’s GDP using the expenditure approach in 2008. Item Symbol Amount in 2008 Percentage of (billions of GDP dollars) Personal expenditures on consumer C 885 56.1 goods and services Business investment I 304 19.3 Government expenditures on goods G 357 22.6 and services Net exports of goods and services X – M 32 2.0 Gross domestic product Y 1,578 100.0 • Income approach: o Sums incomes paid by firms to households o Wages, salaries, and supplementary labour income + Corporate profits + Interest and miscellaneous investment income + Farmers’ income + Income from non-farm unincorporated businesses = Net domestic income at factor cost o Net domestic income at factor cost + Indirect taxes - Subsidies = Net domestic product at market prices o Net domestic product at market prices+ depreciation = GDP • The table below shows Canada’s GDP using the income approach in 2008. Item Amount in 2008 Percentage of GDP (billions of dollars) Wages, salaries, and supplementary 815 51.6 labour income Corporate profits 226 14.3 Interest and miscellaneous 75 4.7 investment income Farmers’ income 1 0.1 Income from non-farm 93 5.9 unincorporated businesses Indirect taxes less subsidies 165 10.5 Capital consumption (depreciation) 202 12.8 Statistical discrepancy 1 0.1 Gross domestic product 1,578 100.0 Nominal GDP and Real GDP • Because GDP in 2008 was greater than in 2007, we know that one or two things must have happened during 2008: o We produced more goods and services in 2008 than in 2007 o We paid higher prices for our goods and services in 2008 than we paid in 2007 • Economists at Statistics Canada split GDP into two parts. • One part tells us the change in production, and the other part tells us the change in prices. • Real GDP is the value of final goods and services produced in a given year when valued at constant prices. • By comparing the value of the goods and services produced at constant prices, we can measure the change in the volume of production. • Nominal GDP is the value of the final goods and services produced in a given year valued at the prices that prevailed in that same year. • The table below gives GDP data for 2007 for an economy that produces only two goods. Item Quantity Price Balls 100 $1.00 Bats 20 $5.00 • Nominal GDP in 2007 is $200 (the sum o
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