Chapter 20 Measuring GDP and Economic Growth
Gross Domestic Product
GDP= Gross domestic product
-market value of the final goods and services produced within a country a given time
-total income and total expenditure is also measured
(i) Market value
-The market value of the product is examined
ie. If price of an apple is 10 cents than the price of 5 apples is $5.
(ii) Final goods and services
-The final good (or service) is an item that is bough by its final user.
Intermediate good (or service): item that is produced by one firm bought by another
firm and used as a component of a final good or service.
-Ford truck is FINAL good, but the Firestone tire on the truck is an INTERMEDIATE
-Dell computer is a final good, but an Intel Pentium chip is an INTERMEDIATE good.
-Only final goods are taken into account because we added value of intermediate goods and
services produced to the value of final goods & services than we will be Double counting.
*Since value of truck includes value of tires, and computer includes value of chip.
*Stocks, bonds, financial assets & second hand goods, used cars or existing homes are not
FINAL OR INTERMEDIATE PRODUCTS.
*A second hand good was part of GDP in the year it was produced, but not the current year.
so if it was produced in 2009 it will be counted but not in 2010.
(iii) Produced within a country
- Only things that are produced within a country are counted as part of country’s GDP.
(iv) Given time period
-Measured either QUARTER GDP (6 months) or ANNUAL GDP (1 year)
GDP and the circular Flow of Expenditure and Income
Households and firms: Households sell resources (labour) to business firms
In return, firms pay income to households (wages, rent for use of land , interest for the use of
-Fourth factor of production, entrepreneurship receives the profit.
1 Aggregate Expenditures: total income received by households including retained services.
1. Consumption Expenditures (C): Personal expenditures on consumer goods and
services by households.
- The purchase of a new car by a Canadian household ; Haircuts.
-Does not include the purchase of new homes.
- New homes are part of investment
2. Business Expenditures (I):
-Firms purchase of plant, equipment and buildings which are part of investment
-Expenditures on new homes by households is included
-Purchase of a car by a company is considered business investment
-Includes additions to the business inventories
-if company produces 1,000 cars and sold 950 cars; the other 50 unsold cars are added
to the inventory which is part of business inventories.
3. Government Expenditures (G):
Government (federal , provincial and local) spending on goods & services from firms
using the money from taxes.
The taxes are not part of the Circular flow of expenditure and income.
-Expenditure on natural defence & garbage collection
-They do not include transfer payments because they are not purchases of goods and
- Net Taxes (NT) = Taxes paid to government – Transfer payments received from
-Transfer payments cash transfers from governments to households and firms
Governments also make financial transfers to households, such as
(i) social security benefits
(ii) unemployment benefits
(iii) subsides to firms (Subsides= financial assistance)
4. Rest of the World
-Firms in Canada sell goods and services to the rest of the world (Exports) and buy
-The value of (X) minus the value of imports (M) is called net exports [X-M]
-If positive (+) then the flow of goods & services is from Canadian firms to the rest of the
-If negative then it’s from rest of the world to Canadian firms.
Aggregate Expenditures or Total expenditures = C+I +G + (X-M)
2 GDP measured in two ways:
(I) Total expenditure on goods and services
(II) Total income earned producing goods and services
Aggregate Incomes (Y): Income earned producing goods and services.
Y= C + I + G + (X-M)
GDP equals aggregate expenditure and aggregate income
Firms pay out incomes for people and firms receive money from the sales of their products
therefore aggregate income = aggregate expenditure.
Capital = The plants, equipment, buildings, inventories of raw materials & semi-finished goods.
-It is used to produce other goods and services.
Gross= before subtracting the depreciation
Net= after subtracting depreciation
Depreciation= decrease in value of a firms capital that results from wear and tear and
obsolescence (means when the service is not needed even though fully functional for
e.g DVD is preferred over Video caste , therefore video caste not being used is
-Depreciation =capital consumption
Total amount on both spending & buying new capital and replacing depreciation capital
is called gross investment.
The amount by which the value of capital increases is called net investment.
-Stock of the capital increases through new investment year to year.
Net investment = Gross investment - Depreciation
Example: Company buys 5 NEW planes and retires 2 Old planes
Gross investment = 5 new airplanes
Depreciation = 2 Old planes
Net Investment= 3 New planes
-GDP grows because capital stock grows. Investment is added to the capital so GDP
grows because of investment.
3 Measuring Canada’s GDP
To measure GDP, statistics Canada uses two approaches
(I) The expenditure approach
(II) The income approach
(I) THE EXPENDITURE APPROACH
GDP= Y = C + I + G + (X-M)
The largest component of GDP from the expenditure approach is expenditures
on consumer goods and services.
-In 2004, GDP measured by the expenditure approac