Textbook Notes (363,608)
Economics (697)
Chapter 20

# Chapter 20 (Measuring GDP and Economic Growth)

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School
Western University
Department
Economics
Course
Economics 1022A/B
Professor
Jeannie Gillmore
Semester
Winter

Description
Measuring GDP and Economic Growth Gross Domestic Product • GDP or Gross domestic product is the market value of all the final goods and services produced within a country in a given time period. • A Final good (or service) is an item that is bought by its final user during a specified time period. Example: Big Mac • An Intermediate Good (or service) is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service. Example: Raw Steel before its made into a car • Study Figure 20.1 on p. 469 of your textbook. This figure shows the circular flow of expenditure and income and gives the following information: • The economy consists of:  Firms (Companies)  Households  Governments  Rest of the world • Aggregate economic markets are:  Goods markets (goods and services)  Factor markets (productive resources) • Define the following:  Y = Income  C = Consumption expenditure  I = Investment  G = Government expenditure  X = Exports, M = Imports  NX = Net exports = X – M • Let’s summarize what the circular flow diagram tells us. • Households:  Sell factor services to firms and receive incomes = Y  Spend C (consumption expenditure) on goods and services • Governments:  Spend G (Government expenditure) on goods and services • The Rest of the World:  Spend NX on goods and services • Firms:  Buy the services of factors of production from households and pay incomes Y  Produce goods and services, which they sell to households, C, governments, G, other firms (and themselves), I, and the rest of the world, NX.  Y = C + I + G + NX Measuring Canada’s GDP • Statistics Canada measures Canada’s GDP in two ways:  Expenditure approach  Income approach • Expenditure approach  Y = C + I + G + NX • Table 20.1 on p. 471 shows Canada’s GDP using the expenditure approach in 2011. • Income approach:  Sums incomes paid by firms to households.  Wages, salaries, and supplementary labour income + Other factor incomes = Net domestic income at factor cost  Net domestic income at factor cost + Indirect taxes – Subsidies = Net domestic income at market prices  Net domestic income at market prices + depreciation = GDP (income approach)  GDP (income approach) + statistical discrepancy = GDP (expenditure approach) • Table 20.2 on p. 472 shows Canada’s GDP using the income approach in 2011. Nominal GDP and Real GDP • Because GDP in 2012 was greater than in 2011, we know that one or two things must have happened during 2012:  We produced more goods and services in 2012 than in 2011  We paid higher prices for our goods and services in 2012 than we paid in 2011 • Economists at Statistics Canada split GDP into two parts. • One part tells us the change in production, and the other part tells us the change in prices. • Real GDP is the value of final goods and services produced in a given year when valued at constant prices. • By comparing the value of the goods and services produced at constant prices, we can measure the change in the volume of production. • Nominal GDP is the value of the final
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