ECMA06 readings

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Economics for Management Studies
Iris Au

SUPPLEMENTARY READINGSSUPPLEMENT A MEASURING THE TOTAL VALUE OF PRODUCTION IN A COUNTRY MEASURING GROSS DOMESTIC PRODUCTSUPPLEMENT BUNEMPLOYMENT AND INFLATION HOW DO WE MEASURE THEMSUPPLEMENT C THE AGGREGATE DEMAND CURVE AND HOW IT SHIFTS THE LINKED DIAGRAMS APPROACHSUPPLEMENT DAN INTRODUCTION TO MONETARY POLICYSUPPLEMENT E THE FOREIGN EXCHANGE MARKETSUPPLEMENT AMEASURING THE TOTAL VALUE OF PRODUCTION IN A COUNTRY MEASURING GROSS DOMESTIC PRODUCTThe key variable in macroeconomics is the total value of production in a country measured by the Gross Domestic Product or GDPGDP measures the value of production that occurs over a period of time usually a year but sometimes a quarter of a yearThe rate of increase of real GDP is considered to be a marker of the health of an economyGDP can be measured in two different ways by adding up all the expenditures on final goods and services over the course of a year or by adding up all the incomes earned in producing goods and services over the course of a yearThe first of these is called the Expenditures Approach and the second is the Factor Incomes Approach or simply the Income ApproachIt is useful to know something about these two different approachesBecause there are many different stages of production that any good goes through avoiding double counting is an important objective when measuring GDPIn the expenditure approach this is avoided by only counting the value of each good oncewhen it has reached its final destinationIn other words statisticians only add up expenditure on final goods and services and not expenditures on intermediate goodsExpenditures by consumers by investors buying capital goods by governments and by people in other countries on our exports are added together to get the total value of spending on final goods and services over a yearDouble counting is avoided in a different way in the Income ApproachInformation is collected from each and every stage of production both those producing final goods and those producing intermediate goodsHowever only the valueadded at each and every stage of production is included in this way of measuring GDPThe valueadded at each stage of production corresponds to the value of the incomes earned by all factors of production at that stageTherefore the statisticians collect information on the wages and benefits paid to employees the interest payments the rental payments and the amount paid in profits at each stage of productionThere are two items which are part of valueadded which are not exactly income items these must be added tooThese items are an allowance for depreciation of the firms productive assets sometimes called the Capital Consumption Allowance and the amount of indirect taxes paid by the firm minus the subsidies receivedThe Expenditure Approach and the Income Approach never quite come up with the same total so the Statistical Discrepancy item adds half of the difference to one side of the ledger and subtracts half of the difference from the other side of the ledger so that both methods produce the same result The main categories of the Expenditure Approach are1 Personal expenditure on consumer goods and services2 Business and Government Investment Expenditure3 Government current expenditure on goods and services
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