Textbook Notes (363,103)
Canada (158,195)
Economics (923)
ECN 204 (281)
Chapter 5

Chapter 5 Review.docx

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Ryerson University
ECN 204
Thomas Barbiero

Chapter 5 Review Summary: 5.1 – Measuring the economy’s performance: GDP  Gross Domestic Product (GDP), a basic measure of economic performance, is the market value of all final goods and services produced within the borders of a nation in a year.  Final goods are those purchased by end users. o Intermediate goods are those purchased for resale or for further processing or manufacturing. o Intermediate goods, nonproduction transactions, and second-hand sales are purposely excluded in calculating GDP.  GDP may be calculated by summing total expenditures on all final output or by summing the income derived from the production of that output.  By the expenditures approach, GDP is determined by adding consumer purchases of goods and services, gross investment spending by businesses, government purchases, and net exports: GDP = C + Ig + G + Xn  Gross investment is divided into: o (a) Replacement investment (required to maintain the nation’s stock of capital at its existing level) o (b) Net investment (the net increase in the stock of capital)  Positive net investment – associated with an expanding production capacity  Negative net investment – with a declining production capacity  Personal consumption expenditures consist of expenditures on goods (durable goods and nondurable goods) and services. o About 60 percent of consumer expenditures in Canada are on services, leading economists to refer to the Canadian economy as a service economy.  By the income approach, GDP is calculated as the sum of: o Wages and salaries o Profits of corporations and government enterprises before taxes o Interest and investment income o Net income of farmers and unincorporated businesses o And two noninvestment transactions  Indirect taxes less subsidies  Capital consumption allowances 5.2 – Nominal GDP versus real GDP  Price indexes are computed by dividing the price of a specific collection or market basket of output in a particular period by the price of the same market basket in a base period and multiplying the result (the quotient) by 100.  The implicit price index, or GDP deflator, is used to adjust nominal GDP for inflation or deflation and thereby obtain real GDP.  Nominal (current-dollar) GDP measures each year’s output valued in terms of the prices prevailing in that year.  Real (constant-dollar) GDP measures each year’s output in terms of the prices that prevailed in a selected base year. o Because real GDP is adjusted for price-level changes, differences in real GDP are due only to difference in production activity.  A chain-weighted index to compute real GDP is constructed using an average of current and past prices as weights. It is particularly useful in an economy in which the prices of some outputs are declining. 5.3 – Shortcomings of GDP  GDP is a reasonably accurate and very useful indicator of a nation’s economic performance, but it has it limitations. o It fails to account for  Nonmarket and illegal transactions  Changes in leisure and in product quality  The environmental effects of production  The composition and distribution of output  GDP should not be interpreted as a complete measure of well-being. Key Terms:  National income accounting – the techniques used to measure the overall production of the economy and other related variables for the nation as a whole.  Gross domestic product (GDP) – the total market value of all final goods and services produced with the boundaries of Canada.  Intermediate goods – products purchased for resale or further processing or manufacturing.  Final goods – goods and services purchased for final use and not for resale or further processing or manufacturing.  Multiple counting – wrongly including the value of intermed
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