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Ch 20 - The Measurement of National Income.docx

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University of British Columbia
ECON 102
Lanny Zrill

20.1 National Output and Value Added Production occurs in stages: Some firms produce outputs that are used as inputs by other firms, and these other firms, in turn, produce outputs that are used as inputs by yet other firms. Double Counting  Wrong to just add up the market values of all outputs  total would be in excess of the value of the economy’s actual output  Same output would be counted every time  Aka multiple counting  Adding all the sales of firms  Intermediate goods – outputs that are used as inputs by other producers in a further stage of production  Final goods – goods that are sold for consumption, investment, government or exports Value Added  amount of value that firms and workers add to their products over and above the costs of intermediate goods  Value added = Revenue – Cost of Intermediate Goods  Payments made to factors of production (wages to workers or profits to owners) are not purchases o Firm’s revenue = Cost of intermediate goods + Payments to factors of production o Therefore Value added = Payments to factors of production  Value added is the measure of each firm’s contribution to total output (amount of market value produced by the firm, firm’s contribution to nation’s total output)  Value added = net value of the output  Value of the nation’s total output = Sum of all the individual values added 20.2 National Income Accounting: The Basics Circular Flow of Expenditure and Income  Value of domestic output = value of expenditure on that output = total income claims generated by producing that output  National income = National product  Red lines: households  producers  Blue lines: injections to circular flow – export, investment, government purchases  Green lines: withdrawals – imports, savings, taxes Three Ways of Measuring National Income: 1. GDP by value added – Add up the value of all goods and services produced (concept of value added) 2. GDP on the expenditure side – Add up total flow of expenditure on final domestic output 3. GDP on the income side – Add up the flow of income generated by domestic production GDP from the Expenditure Side  Adding up the expenditures needed to purchase the final output produced in that year o How much did it cost you to produce this?  Four categories: Consumption, Investment, Government Purchases, Net Exports Consumption Expenditure o Expenditure on goods and services sold to their final users during the year o Services – hair cuts, dental care, legal advice, etc. o Non-durable goods – clothing, vegetables, fresh meat o Durable goods – TVs, cars, air conditioners Investment Expenditure – expenditure on goods not for present consumption o Changes in Inventories  Inventory – stocks of raw materials, goods in process, and finished goods held by firms to mitigate the effect of short-term fluctuations in production or sales  Inventory of inputs/raw materials  allows firms to maintain a steady stream of production despite interruptions in the deliveries of inputs bought from other firms  Inventory of outputs  allow firms to meet orders despite fluctuations in the rate of production  Accumulation of inventories  positive investment  Included at market value, including wages and costs needed in producing them and the profit that the firm will make when they are sold in the future  Drawing down of Inventories – decumulation – disinvestment/negative investment o New Plant and Equipment  Capital goods – manufactured aids to production: tools, machinery, factory buildings  Capital stock – Total quantity of capital goods  Fixed business investment – creating new capital goods o New Residential Housing  Building of a new house ≠ selling of an old one o Gross and Net Investment  Gross investment = total investment that occurs in the economy  Replacement investment – investment required to replace capital stock lost through the process of depreciation  Depreciation – amount by which the capital stock is depleted through the production process  Net investment = Gross investment – Depreciation  Capital stock is growing  + NI  Gross investment is what is included in the calculation, not just net investment  Government Purchases o All government-provided goods and services that households want o Street cleaning, firefighting o Government output is valued at cost rather than market value o Only government purchases are included and government expenditures are not  No market transaction  Payments to retired person, employment insurance, welfare, interest on national debt  Transfer payments – payment to an individual or institution not made in exchange for a good or service  Net Exports o Net Exports = Exports – Imports o Imports – domestic expenditure on foreign-produced goods o Exports – foreign-expenditure on domestically produced goods  Gross domestic product from the expenditure side = C + I + G + NX GDP
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