Management and Organizational Studies 2275A/B Study Guide - Net Domestic Product, Factor Cost, Income Approach

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Measuring GDP and Economic Growth
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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 =
Y
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
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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,
C,
governments,
G
, other firms (and themselves),
I
, and the rest of the
world,
NX
.
o
Y = C + I + G + NX
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DP
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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
(billions of
dollars)
Percentage of
GDP
Personal expenditures on consumer
goods and services
C 885 56.1
Business investment
I 304 19.3
Government expenditures on goods
and services
G 357 22.6
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
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