Textbook Notes (362,809)
Canada (158,054)
Economics (923)
ECN 204 (281)
Eric Kam (28)
Chapter 5

Chapter 5 & 6.docx

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Ryerson University
ECN 204
Eric Kam

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 Chapter 6: Measuring the Cost of Living Consumer Price Index (CPI): measures the typical consumer’s cost of living How CPI is Calculated 1. Determine the “basket”: determines what typical consumers buy 2. Find the Prices: StatsC. Collects data on prices of all goods in basket 3. Compute basket’s cost: use data on prices to compute total cost of basket 4. Choose a base year and compute the index: CPI in any year 100 x Cost of basket current year/ cost of basket base year 5. Compute inflation rate: CPI this year – CPI last year/ CPI last year x 100 Problems with the CPI Commodity substitution bias - Over time some prices rise faster than others - Consumers substitute towards cheaper goods - CPI misses this substitution because it uses a fixed basket of goods - Thus, CPI overstates increases in the cost of living Introduction of new goods - Increases variety, allows consumers to find products that closely meet their needs
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