CHAPTER 5- MEASURING THE ECONOMY’S OUTPUT
National Income Accounting-measures the overall performance of the
Assess health of economy
Track long run course to see whether the economy is expanding or not
annual total output of goods and service is the main measure of the
economy’s performance- also known as aggregate output.
GDP is the best way to measure aggregate output
o Defines aggregate output as the dollar value of all final gods and
services produced in within the borders of a country typically within
o GDP is a monetary measure as it measures the value of the output in
Avoid Multiple Counting
GDP involves only the market value of final goods, ignoring all intermediate
Intermediate goods are purchased for resale or further processing and
Final goods are products that are purchased by their end users.
o Eg crude oil is an intermediate good and gasoline is a final good.
Since the value of intermediate goods is already added in the value of the
final good, counting the intermediate good in the GDP would be multiple
counting Avoid multiple counting by only the counting the cumulative of the value
Value added is the market value of a firms output less the value of the
input that the firm bought from others.
by summing up the values added, you can find the market value of the gdp
GDP excludes non production transactions
2 types of non-production transactions:
1. Purely financial
Public Transfer Payments- Social insurance payments that
government makes directly to households. Recipients
contribute nothing to current production in return and
including this payment in GDP would overstate it output.
Privately Transferred Payments-simply transfer of funds from
one person to another. No output.
Stock Market Transactions- do not contribute to the current
production and are not included in GDP but payments for the
services provided are included because their service are
2. Second hand sales contribute nothing to current production
therefore are excluded from GDP
Two Ways of Calculating GDP: Expenditure and Income Expenditure Approach- Add up all the spending on final goods and services
that has taken place throughout the year.
o All final goods are bought either by 3 domestic sectors (households,
business, government) or by buyers abroad.
1. Personal consumption expenditure (consumption expenditure by household)
o 10% on durable goods- products that have expected lives of 3 years
or more. E.g automobiles, furniture,
o 30% on non-durable goods –products with less than 3 years of
life.E.g food clothing gasoline
o 60% on services-work done by lawyers, hair stylists, doctors,
mechanics. Becusse this is such a high percentage economists refer
to the Canadian economy as the “service economy”.
o Symbol “C” is used to designate personal consumption component of
2. Gross Investment
o Includes 1)all final purchases of machinery, equipment, and tools by
firms, 2)all construction, and 3) all changes in inventory
o All new output that is not consumed is known as “unconsumed
o Increase I inventory is an investment because it is unconsumed
o Noninvestment transactions are merely transactions in which there is
an exchange in assets therefore are not included in GDP o Gross investments include products that investment in replacement
capital AND added capital.
o Net investment includes only investments of added capital and
amount of capital that is used up over the year is called capital
Net Investment= gross investment- depreciation
When gross investment exceeds depreciation during a year, net investment
When gross investment and depreciation are equal, net investment is 0 and
there is no change in the size of the capital stock.
When gross investment is less than depreciation there is a negative
investment and the economy is disinvesting
The symbol / is used for private domestic spending Government Purchases (G)
Expenditure for the goods that the government invests in to provide public
Government purchases DO NOT include: government transfer payments,
because it is a transfer and not an investment.
Examples of government purchases are employment insurance benefits,
welfare payments and pension plans.