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Chapter 20

ECON 2020U Chapter Notes - Chapter 20: Final Good, Intermediate Good, Gross Profit

Course Code
ECON 2020U
Ashfakuddin Rubel

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Chapter 20 – Measuring GDP and Economic Growth
Gross Domestic Product
GDP Defined
GDP is the market value of the final goods and services produced within a country in a
given time period
This definition has four parts:
1. Market Value
To measure total production, you must add together the production of
apples and oranges, computers and popcorn
2. Final Goods and Services
Final good or service is an item that is bought by its final user during a
specified time period
Intermediate goods/service, is an item that is produced by one firm and
purchased by a another firm, and used as a component of a final good or
Whether a good can be intermediate or final depends on what that good is
used for
Some item people buy are neither final nor intermediate good
They are not included in GDP, such examples are stocks and bonds,
secondhand items
3. Produced Within a Country
Only goods and services that are produced within a country count as part
of that country’s GDP
Shirts produced in Taiwan, but sold in Canada, are part of Taiwan’s GDP
4. In a Given Time Period
GDP measures the value of production in a given time period, normally
either a quarter of year – called quarterly GDP – or year – called annual
GDP also measures total income and total expenditure
The equality between the value of total production and total income is
important because it shows the direct link productivity and living
GDP and the Circular Flow of Expenditure and Income
Households and Firms
Households sell and firms buy the service of labour, capital, and land in factor markets
Firms pay income to households: wages for labour services, interest for the use of capital,
and rent for the use of land
Firms retained earnings are profits that are not distributed to households
Consumption expenditure is the total payment for consumer goods and services
Firms buy and sell new capital equipment
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Some of what the firm produces is not sold and put into inventory
Investment is the purchase of new plant, equipment, and buildings and addition to
Government expenditure is goods and service bought by government
The government finance their expenditure with taxes – taxes are not part of the circular
Government also make financial transfers to households, such as social security benefits,
and unemployment benefits, and pay subsidies to firms
Rest of the World
Exports are the goods and services that we sell to people in other countries
Imports are the goods and services that we buy from people in other countries
The value of exports (x) minus imports (m) is called net exports
GDP Equals Expenditure Equals Income
GDP can be measured in two ways: by total expenditure on goods and services or by the
total income earned producing goods and services
Aggregate income is equal to the total amount paid for the services of the factors of
production used to produce final goods and services
Y = C + I + G + (X-M)
GDP equals aggregate expenditure and aggregate income
Why is Domestic Product “Gross”?
Gross means before subtracting the depreciation of the capital
Opposite of gross is net
Depreciation is the decrease in the value of a firm’s capital results from wear and tear
and obsolescence
Gross investment is the total amount spent on purchases of new capital and on replacing
depreciated capital
Net investment is the amount which the value of capital increases – gross investment
minus depreciation
Gross investment is one of the expenditures included in the expenditure approach to
measuring GDP, so the resulting value of total product is a gross measure
Gross profit is one of the incomes included in the income approach to measuring GDP
Measuring Canada’s GDP
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