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ECN 104 (388)

ch5 econ.docx

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Ryerson University
ECN 104
Frank Trimnell

CHAPTER 5- MEASURING THE ECONOMY’S OUTPUT  National Income Accounting-measures the overall performance of the economy.  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 a year. o GDP is a monetary measure as it measures the value of the output in monetary terms. Avoid Multiple Counting  GDP involves only the market value of final goods, ignoring all intermediate goods  Intermediate goods are purchased for resale or further processing and manufacturing  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 added  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 currently provided 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 GDP 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 output” o Increase I inventory is an investment because it is unconsumed output. 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 consumption allowance Net Investment= gross investment- depreciation  When gross investment exceeds depreciation during a year, net investment occurs  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 service  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. Net Exports(Xn)  E
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