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Chapter 20

Chapter 20.docx

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Queen's University
ECON 110
Ian James Cromb

Chapter 20 The Measurement of National Income National Output and Value AddedIf you were to add up the market values of all the outputs the total would be in excess of the value of the economys actual outputdouble counting in productionThe problem in principle could be solved by distinguishing two diff types of outputs o Intermediate goods All outputs used as inputs by other producers in production o Final goods Goods that are not used as inputs by other firms but are produced to be sold for consumption investment or export during the periodTo avoid double counting economists use the concept of value addedthe value of a firms output minus the value of the inputs that it purchases from other firms o This is the correct measure of each firms contribution to total output o Sum of all values added in an economy is a measure of the economys total outputNational Income Accounting The BasicsCircular Flow of IncomeThe value of domestic outputthe value of expenditure on that output and alsothe total income claims generated by producing that outputThe circular flow of income suggests three different ways of measuring national income o Add up the value of all ps produced in an economyvalue added o Add up the total flow of expenditure on final domestic output o Add up the total flow of income generated by the flow of domestic productionAll three measures yield the same total the Gross Domestic Productthe total value of goods and services produced in the economy during a given periodGDP from the Expenditure SideAdding up the expenditures needed to purchase the final output produced in that yearTotal expenditure is the the sum of four broad categories of expenditure o Consumption investment govt purchases and net exports Consumption ExpenditureIncludes expenditure on all goods and services sold to final users during the year Investment ExpenditureExpenditure on goods not for present consumptioninventory factories housing Changes in InventoriesInventory is stocks of raw materials goods in process and finished goods held by firms to mitigate the effect of shortterm fluctuations in production of salesThe accumulation of inventories during the year counts as positive investment for that year because it represents goods produced but not used for consumptionNew Plant and EquipmentAll production uses capital goods such as tools machines and factory buildingsCapital Stock is the economys total quantity of capital goodsCreating new capital goods is the act of investment and is called fixed investment
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