Textbook Notes (362,812)
Canada (158,056)
Economics (480)
ECO102H1 (54)
Chapter 20

ECO100Y Chapter 20 Notes

9 Pages
Unlock Document

University of Toronto St. George
Robert Gazzale

ECO100Y1 Textbook Notes Chapter 20 20.1 National Output and Value Added  Central topic of macroeconomics is the overall level of economic activity (aggregate output and the income that is generated by its production).  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: counting up the value of output that becomes part of another output and so on and so forth.  The problem of double counting can be solved by distinguishing two types of output: o Intermediate goods: all outputs that are used as inputs by other producers in a further stage of production. o 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.  It is generally extremely difficult to distinguish final from intermediate goods.  To avoid double counting, economists use the concept of value added. o Value added: the value of a firm’s output minus the value of the inputs that it purchases from other firms.  Value added is the correct measure of each firm’s contribution to total output – the amount of market value that is produced by that firm.  The firm’s value added is the net value of its output.  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  The measure of national income and national product derive from an accounting system called the National Income and Expenditure Accounts (NIEA). o Produced by Stats Canada.  The accounts have a logical structure of the circular flow of income.  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.  National income = national product.  The circular flow of income suggests three different ways of measuring national income: o Value added o Expenditure  Add up the total flow of expenditure on final domestic output. o Income  Add up the total flow of income generated by the flow of domestic production.  Gross domestic product (GDP): the total value of goods/services produced in the economy during a given period. o Value added  When this method is used, it is called the GDP by value added. o Expenditure  When this method is used, it is called the GDP on the expenditure side. o Income  When this method is used, it is called the GDP on the income side.  The conventions of double-entry bookkeeping require that all value produced must be accounted for by a claim that someone has to that value. o Income side = expenditure side.  GDP for a given year is calculated from the expenditure side by adding up the expenditures needed to purchase the final output produced in that year.  Total expenditure on final output is the sum of four broad categories of expenditure: o Consumption  Includes expenditure on all goods and services sold to their final users during the year (households).  Includes:  Services o I.e. haircuts, dental car, legal advice etc.  Non-durable goods o I.e. fresh vegetables, clothing, cut flowers etc.  Durable goods o I.e. cars, TVs, air conditioners etc.  (in picture) Semi-durable goods  Actual measured consumption expenditure is denoted by the symbol C a o Investment  Expenditure on the production of goods not for present consumption.  Includes:  Inventories o 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.  Allows firms to meet orders despite fluctuations in the rate of production. o The accumulation of inventories during a given year counts as positive investment for that year because it represents goods produced but not used for current consumption. o These goods are included in the national income accounts at market value (includes costs incurred in producing them and the profit made by the selling of them). o Decumulation: the drawing down of inventories.  Counts as disinvestment (- investment) because it represents a reduction in the stock of finished goods that are available to be sold.  Capital goods o Manufactured aids to production, such as tools, machines, and factory buildings. o Capital stock: the economy’s total quantity of capital goods. o [Business] Fixed investment: the creation of new plant and equipment.  Residential housing. o A house or an apartment building is a durable asset that yields its utility over a long period of time. o Thus, the building of a new house is counted as investment expenditure rather than as consumption expenditure. o Only when a new house is built does it appear as residential investment in the national accounts.  These goods are called investment goods.  The total investment that occurs in the economy is called gross investment.  Gross investment is divided into:  Replacement investment o The amount of investment required to replace that part of the capital stock lost through the process of depreciation.  Depreciation: the amount by which the capital stock is depleted through the production process.  Net investment o Net investment = gross investment – depreciation. o If net investment is > 0, the economy’s capital stock is growing (vice-versa).  All investment goods are part of the nation’s total current output, and their production creates income whether they’re part of replacement/net investment.  Actual total investment expenditure is denoted by the symbol Ia. o Government purchases  When governments provide goods/services that households want, such as street-cleaning and firefighting, they are adding to the sum of valuable output in the economy.  National income statisticians include all government purchases of goods and services as part of national income.  Government purchases: all government expenditure on currently produced goods and services, exclusive of government transfer payments. o Represented by the symbol G.  Government output is typically valued at cost rather than at market value.  I.e. what is the market value of the law courts? Easier to record the costs incurred by the government to provide this service.  Curious consequence: o If, for example, one civil servant can do what two used to do and the extra worker moves to the private sector, the government’s measured contribution to national income will fall, yet production hasn’t changed (vice-versa).  Only government purchases of currently produced goods and services are included as part of GDP.  Transfer payment: a payment to an individual or institution not made in exchange for a good or service.  I.e. welfare payment, EI, payments through CPP etc. o Net exports  Imports: the value of all domestically produced goods and services purchased from firms, households, or governments in other countries.  Exports: the value of all goods and services sold to firms, households, and governments in other countries.  A country’s national income is the total value of final goods produced in that country.  To arrive at total expenditure on Canadian products, we need to subtract from total Canadian expenditure any expenditure on imports.  The value of actual imports is given the symbol IM a  All goods and services that are produced in Canada and sold to foreigners must be counted as part of Canadian production and income.  They are produced in Canada, and they create incomes for the Canadian residents who produce them.  To arrive at the total value of expenditure on Canadian output, it is necessary to add the value of Canadian exports of goods and services.  The value of actual exports is given the symbol Xa.  Net exports: the value of total exports minus the value of total imports.  Represented by the symbol NX . a o GDP measured from the expenditure side is equal to:  GDP = C a I a G +a(X –aIM ) a  GDP from the income side involves adding up factor incomes and other claims on the value of output until all of the value is accounted for. o Factor incomes  National inco
More Less

Related notes for ECO102H1

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.