Economics 102: Chapter 20

Economics 102: Principles of Macroeconomics Chapter 20 20.1 National Output and Value Added  Production occur in stages, output from one firm may become an input for other firms o Double counting: values of products that are counted more than once  Once as an output, and again as an input for another product  May be counted more than two times if the process continues (inputs to outputs)  Intermediate goods: outputs of firms that are used as inputs by other firms  Final goods: products not used as inputs by other firms (not in the period in consideration) o Difficult to know if outputs at one point become an input  Value added: value that firms add to products beyond the cost of intermediate goods o o  This ignores the value of indirect taxes (GST)  Net value: the firm's value that is added to the final product o This is the firm's contribution to the nation's total output (added to GDP)  The sum of all values added in an economy is a measure of the economy's total output 20.2 National Income Accounting: The Basics  National Income and Expenditure Accounts (NIEA): measures national income and national product o Structured based on the flow of income and economic data o Includes the flow of national income and expenditure  The value of domestic output is equal to the value of the expenditure on that output o Also equal to the total income claims generated by producing that output  Value added, flow of expenditure and flow of income, are used to measure national income o All three methods will output the same calculation GDP from the Expenditure Side:  Total expenditure: sum of consumption, investment, government purchases and net exports o All expenditure of final products falls into one of these categories Consumption Expenditure:  Consumption expenditure (C): household expenditure on all goods and services o Expenditure on all goods and services sold to their final users during that year Investment Expenditure:  Investment expenditure (I): expenditure on production of goods not for present consumption  Investment goods: inventories, capital goods (factories, tools etc.) and residential housing Changes in Inventories:  Inventories: stocks of a firm's inputs and outputs o Allows for constant production and to meet orders despite fluctuations in production  Accumulation of inventories counts as positive investments during the year for a firm o Represents goods produced, but not used for current consumption Economics 102: Principles of Macroeconomics o Counted in national income, including wages and other costs production costs  Includes the profit the firm will make with the sale of the good/service  Decumulation: the lowering of inventories through sale (negative investment) o Represents a reduction in the stock of finished goods that are available for sale New Plant and Equipment:  Capital goods: manufactured aids to production (tools, machinery, factory buildings etc.)  Capital stock: an economy's total quantity of capital goods  Business fixed investment (fixed investment): creating new capital goods (investment) New Residential Housing:  A house or apartment (durable asset) that yields its utility over a period of time o Building a new house counts as investment expenditure o The purchase of homes from others does not count Gross and Net Investment:  Gross investment: total investment that occurs in the economy o Divided into replacement investment and net investment  Replacement investment: investment to replace capital stock lost through depreciation o Depreciation: amount of capital stock that is depleted through the production process  o Positive net investment: the economy's capital stock is growing o Negative net investment: the economy's capital stock is shrinking (rarely happens)  All investment goods are part of the nation's total current output o The production creates income whether it is new or a replacement investment Government Purchases:  Governments provide goods and services that households want  Government purchases (g): government expenditure on produces goods and services Cost Versus Market Value:  Government output is usually valued at cost rather than market value o Difficult to value some services (incomparable to the public sector) o Value may fluctuate with the movement of labour (public to private etc.) Government Purchases Versus Government Expenditure:  Only government purchases of produced goods and services count towards GDP o Most of government expenditure does not count towards GDP o Pensions, welfare, government bond interest etc. does not count towards GDP  Transfer payments: payment to an individual/institution not in exchange for a good/service o Counts the same as any other consumption expenditure Net Exports:  Imports: domestic expenditure on foreign-produced goods and services  Exports: foreign expenditure on domestically produced goods and services Economics 102: Principles of Macroeconomics Imports:  Expenditure on foreign made goods/services mainly contribute to GDP of other countries  Expenditure on domestic products consumed in other countries increase Canadian GDP Exports:  Exports contribute to GDP and to the incomes of contributing workers o Not included in consumption, investment or government expenditure  Total Expenditures:  GDP measured from the expenditure side used the four major expenditure categories o GDP from the Income Side:  National income ensures output generates income equal to the value of production o Labour must be employed, land rented, capital used etc.  Calculation of GDP from the income side involves adding factor income o Also accounts for other clams on the value of output Factor Incomes:  National income accountants distinguish factor incomes as wages/salaries, interest and business profits Wages and Salaries:  Wages/salaries are payments for services of labour (pre-tax labour earnings) o Pre-tax earnings: tax home pay, before income tax deductions, EI, pensions etc.  Wages/salaries represent the part of the value of production that is paid to labour Interest:  Includes interest earned on bank deposits, loans to firms and other investments o Excluded interest income earned from loans to the Canadian government Business Profits  Retained earnings: all profits made after dividends to owners are issued o Dividends and retained earnings are included in the calculation of GDP o Includes profits from corporations, unincorporated, partnerships, Crown corporation  Profits and interest represent the payment for the use of capital o Interest for borrowed capital and profits for capital contributed by owners Net Domestic Income:  Net domesti