ECN 204 Chapter Notes - Chapter 5: Old Age Security, Real Interest Rate, Nominal Interest Rate

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8 Apr 2012
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Chapter 5: Measuring a nation’s income
GDP measures total income of everyone in economy, measures total expenditure on economy’s
output of goods and services
Factors of production inputs like labour, land and capital
Factor payments payments to factors of production like wages, rent
Circular-flow Diagram
- Both actors buyers and sellers
- Income flow and expenditure flow, income = expenditure
- Households: owns factor of production sells to firms, buy and consume g&s
- Firms: buy factor of production use them to produce g&s, sells g&s
- Diagram omits the gov’t, financial system and foreign sector
Gross Domestic Product is the market value of all final goods and services produced within a country in a
given period of time
Four components of GDP
- Consumption, Investment, Government purchases, Net exports
GDP = C + I + G + NX
Consumption: total spending by households on g&s
Investments total spending on goods that will be used in the future to produce more goods (firms)
Government purchases spending on g&s by local, territorial, provincial and federal gov’t, excludes
transfer payments
Net Exports: exports imports
- Imports are portions of C, I and G that are spent on g&s produced abroad
Nominal GDP values output using current prices, not corrected for inflation
Real GDP values output using prices of a base year, corrected for inflation
GDP Deflator: measure of overall level of prices
`= 100 x Nominal GDP/ Real GDP
- Computing percentage increase in the GDP deflator from one year to next measures inflation
rate
GDP Does Not Value
- Quality of environment
- Leisure time
- Non-market activity, such as the child care a parent provides for their chiled
- Equitable distribution of income
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