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Week 2 chapter notes

Economics for Management Studies
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Iris Au

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Chapter 20 The Measurement of National Income Notes
20.1 National Output and Value Added
x 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
x intermediate goods—all outputs that are used as inputs by other producers in a further stage of production
x final goods—goods that are not used as inputs by other firms but are produced to be sold for consumption, investment,
government, or exports during the period under consideration
x value added—the value of a firm’s output minus the value of the inputs that it purchases from other firms
x value added = revenue – cost of intermediate goods = income to factors of production
x value added is correct measure of each firm’s contribution to total output—amount of market value that is produced by that firm
x 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
x the value of domestic output is equal to the value of the expenditure on that output, and is also equal to the total income claims
generated by producing that output
x gross domestic product (GDP)—the total value of goods and services produced in the economy during a given period
GDP from the Expenditure Side
x total expenditure on final output is the sum of four broad categories of expenditure: consumption, investment, government
purchases, and net exports
1) consumption expenditure—household expenditure on all goods and services; represented by the symbol C as one of the four
components of aggregate expenditure; includes: services, such as haircuts, dental care, and legal advice; non-durable goods,
such as fresh vegetables, clothing, cut flowers, and fresh meat; and durable goods, such as cars, TVs, and air conditioners;
actual measured consumption expenditure is denoted by the symbol Ca
2) investment expenditure—expenditure on the production of goods not for present consumption; represented by the symbol I;
includes inventories, capital goods such as factories, machines and warehouses, and residential housing; such goods are
called investment goods; actual total investment expenditure is denoted by the symbol Ia
3) government purchases—all government expenditure on currently produced goods and services, exclusive of government
transfer payments; represented by the symbol G; actual government purchases of goods and services are denoted Ga
4) net exports—value of total exports minus value of total imports; represented by symbol NX; denoted NXa = Xa – IMa
x inventories—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
x capital stock—the aggregate quantity of capital goods
x fixed investment—the creation of new plant and equipment
x depreciation—the amount by which the capital stock is depleted through the production process
x transfer paymenta payment to an individual or institution not made in exchange for a good or service
x imports—the value of all goods and services purchased from firms, households, or governments in other countries; value of
actual imports is given the symbol IMa
x exports—the value of all goods and services sold to firms, households, and governments in other countries; value of actual
exports is denoted Xa
x GDP = Ca + Ia + Ga + (Xa – IMa)
GDP from the Income Side
x calculation of GDP from income side (IS) involves adding up factor incomes and other claims on the value of output until all of
that value is accounted for
1) national income accountants distinguish 3 main components of factor incomes: wages and salaries, interest, business profits
2) non-factor payments includes indirect taxes and subsidies, and depreciation
3) total national income: from IS, GDP is sum of factor incomes plus indirect taxes (net of subsidies) plus depreciation
20.3 National Income Accounting: Some Further Issues
x gross national product (GNP)—the value of total incomes earned by domestic residents
x difference between GDP and GNP is difference between income produced and income received
x GDP measures the value of all production located in Canada, no matter who receives the income from that production. GNP
measures the income received by Canadian residents, no matter where the production occurred to generate that income.
x GDP is superior to GNP as a measure of domestic economic activity. GNP is superior to GDP as a measure of the income of
domestic residents.
x disposable personal income—the part of national income that accrues to households and is available to spend or save
Real and Nominal GDP
x total GDP valued at current prices is nominal national income; GDP valued at base-period prices is real national income
x GDP deflator = (GDP at current prices) ÷ (GDP at base-period prices) × 100 = (nominal GDP) ÷ (real GDP) × 100
x GDP deflator—index # derived by dividing nominal by real; its change measure average change in price of all items in GDP
x GDP deflator and CPI similarly reflect overall inflationary trends, but changes in relative prices may lead 2 price indices to
change in different ways
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