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ECON 295 (70)
Chapter 20

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Economics (Arts)
ECON 295
Christopher Ragan

Chapter20 The measurement of National Income National Output and Value Added Production occurs in stages: Some firms produce outputs that are used as inputs by other firms, and these other firms, in turn, produce outputs that are used as inputs by yet other firms. Intermediate goods: All outputs that are used as inputs by other producers in a further stage of production. Final goods: Goods that are not used as inputs by other firms but are produced to be sold for consumption, investment, government, or exports during the period under consideration. Value added: The value of a firm’s output minus the value of the inputs that it purchases from other firms. Value added = Revenue – Cost of intermediate goods Value added = Payments to factors of production (such as wages paid to workers or profits paid to owners) Value added is the correct measure of each firm’s contribution to total output –the amount of market value that is produced by that firm. The sum of all values added in an economy is a measure of the economy’s total output. National Income Accounting: The Basics The value of domestic output is equal to the value of the expenditure on that output and is also equal to the total income claims generated by producing that output. Gross domestic product: The total value of goods and services produced in the economy during a given period. GDP from the Expenditure Side Consumption Expenditure Consumption expenditure: Household expenditure on all goods and services. Represented by the symbol . Includes services (haircuts, etc.), durable goods (cars), and non-durable goods (food). Actual measured consumption expenditure is denoted by the symbol . Investment expenditure Investment expenditure: Expenditure on the production of goods not for present consumption. Represented by the symbol I. CHANGES IN INVENTORIES Inventories: Stocks of raw materials, goods in process, and finished goods held by firms to mitigate the effect of short-term fluctuations in production or sales. NEW PLANT AND EQUIPMENT Capital stock: The aggregate quantity of capital goods (such as tools, machines, factory buildings) Fixed investment: The creation of new plant and equipment. NEW RESIDENTIAL HOUSING The building of a new house is counted as investment expenditure. GROSS AND NET INVESTMENT Gross investment is divided into two parts: replacement investment and net investment. Replacement investment is the amount of investment required to replace that part of the capital stock lost though the process of depreciation. Depreciation: The amount by which the capital stock is depleted through the production process. Actual total investment expenditure is denoted by the symbol . Government Purchases Government purchases: All government expenditure on currently produced goods and services, exclusive of government transfer payments. Represented by the symbol . Actual government purchases of goods and services are denoted . COST VERSUS MARKET VALUE Government output is typically valued at cost rather than at market value. GOVERNMENT PURCHASES VERSUS GOVERNMENT EXPENDITURE Only government purchases of currently produced goods and services are included as part of GDP. Transfer payment: A payment to an individual or institution not made in exchange for a good or service (payments for employment insurance and welfare for example). Net Exports Imports: The value of all domestically produced goods and services purchased from firms, households, or governments in other countries. Exports: The value of all goods and services sold to firms, households, and governments in other countries. IMPORTS To arrive at total expenditure on Canadian products, we need to subtract from total Canadian expenditure any expenditure on imports. The value of actual imports is given by the symbol . EXPORTS To arrive at the total value of expenditure on Canadian output, it is necessary to add in the value of Canadian exports of goods and services. The value of actual exports is denoted. Net exports: The value of total exports minus the value of total imports. The value of actual next exports is denoted . Total Expenditures GDP = ( ) GDP from the Income Side Factor Incomes WAGES AND SALARIES In total, wages and salaries represent the part of the value of production that is paid to labour. INTEREST Interest includes interest that is earned on banks deposits, loans, etc… BUSINESS PROFITS Some profits are paid out as dividends to owners of firms; the rest are held by firms and are called retained earnings. NET DOMESTIC INCOME The sum of wages and salaries, interest, and profits is called net domestic income at factor cost. Non-factor Payments INDIRECT TAXES AND SUBSIDIES A portion of the market value of the product is made up by indirect taxes (provincial sales tax and the federal Goods and Services Tax). You need to add up these taxes to get the GDP. On the other hand,
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