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Chapter 7

ECN 204 Chapter 7: Week 2 - Measuring the Economy's Output

5 Pages
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Department
Economics
Course Code
ECN 204
Professor
Salewa Yinka Olawoye

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Chapter Seven – Measuring the Economy’s Output GDP: - National Income Accounting = measures the economy’s overall performance/how well the economy is doing with respect to policies  Allows economists/policymakers to compare levels of production at regular intervals, track the long-run course of the economy, and formulate policies that will maintain/improve the economy’s health  Ex: Statistics Canada compiles the national income accounts for the Canadian economy - GDP = the main measure of an economy’s performance through its total aggregate output  Aggregate Output = the total dollar value of all final goods/services produced within the borders of a country during a specific period of time, typically a year  Aggregate output is a monetary measure because if it were not, there would be no way to compare the relative values of the number of goods/services produced in different years  Shows how much society is willing to pay for a particular combination of goods/services during the year  This only includes final goods and ignores intermediate goods to avoid multiple counting  Intermediate Goods = products that are purchased for resale or further processing/manufacturing; include labour and capital goods  Final Goods = products that are purchased by their end users - Value Added = the market value of a firm’s output less the value of the inputs the firm bought from others  This is another way of avoiding multiple counting - GDP excludes the following nonproduction transactions:  Financial Transactions = public transfer payments (e.g. welfare, employment insurance, etc.), private transfer payments (e.g. the transfer of funds from one individual to another), stock market transactions (e.g. the buying/selling of stocks and bonds)  Second-Hand Sales = generate no current production (e.g. buying textbooks from a friend) - GDP can be calculated in two ways:  Expenditures Approach = the sum of all the money spent buying goods/services  Income Approach = the total income derived from producing final goods/services The Expenditures Approach: - GDP = C + Ig+ G + X n - Personal Consumption Expenditures (C) = all expenditures by households on goods/services; ten percent of personal consumption expenditures are on durable goods, thirty percent are on non- durable goods, and sixty percent are on services  Durable Goods = products that have expected lives of at least three years  Ex: automobiles, furniture, etc.  Nondurable Goods = products with less than three years of expected life  Ex: food, clothing, etc. - Gross Investment (I g = includes all final purchases of machinery/equipment/tools by firms, construction, changes in inventories, and intellectual property products  Does not include noninvestment transactions  Ex: the transfer of paper assets, the resale of tangible assets, etc.  Differs from net investment  Net Investment = includes only the investment of added capital  When gross investment and depreciation are equal, there is no change in the size of the capital stock  Capital Consumption Allowance = the depreciation of capital over the course of a year  Net Investment = Gross Investment – Depreciation  Construction = includes both residential construction as well as the construction of new factories/warehouses/stores  Positive and Negative Changes in Inventories = positive changes in inventory (increased production), which includes inventory that remained unsold at the end of the year, is added to GDP; negative changes in inventory (increased selling of goods), which includes the sale of inventories produced in prior years, is subtracted from GDP - Government Purchases (G) = consist of expenditures for goods and services that the government consumes in providing public services, expenditures for publicly owner capital (e.g. schools, highways, etc.), and government expenditures on R&D and other activities that increase the economies stock of know-how  Include expenditures at all levels of government on final goods, investment goods, and direct purchases of resources (including labour) - Net Exports (X n = international trade transactions  Net Exports
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