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Chapter 20

Economics 1022 Chapter 20 notes

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Economics 1022A/B
Jeannie Gillmore

Chapter 20 Gross Domestic Product  Gross Domestic Product (GDP): o Market value of the final goods or services produced within a country in a given time period. o Measures total production, income, and expenditure. o Shows the relationship between productivity and living standards. o Market value: A price at which items are traded in markets o Final good & service: An item that is bought by its final user during a specified time period  Intermediate good & service: An item that is produced by one firm, bought by another firm, and used as a component of a final good.  Double counting: Counting the same item more than once that result from adding the value of the intermediate goods and services to the value of the final good.  Flow of expenditure and income: o Households & Firms:  Households sell and firms buy the services of labour, capital, and land in factor markets (Y)  Return the income to the economy by consuming (C)  Entrepreneurship receives profit. o Governments:  Governments buy and firms sell the services (G).  Government expenditure is financed with taxes.  However, government transactions including taxes and transfers are not part of the diagram. o Rest of the world:  Export: Selling goods and services to the rest of the world  Import: Buying goods and services from the rest of the world  Net exports: Exports – imports (NX)  GDP = Aggregate expenditure = Aggregate income = Y = C + I + G + NX: o Y: Total income (including retained earnings) / Total expenditure o C: Consumption expenditure o I : Firm expenditure (Investment) o G: Government expenditure o X: Exports; M: Imports o NX (X – N): Net exports  Depreciation: The decrease in the value of a firm’s capital that results from wear and tear and obsolescence o Gross investment: Total amount spent buying new capital and replacing depreciated capital o Net investment: Gross investment – depreciation Measuring Canada’s GDP  Expenditure approach: Measures GDP as a sum of C + I + G + NX  Income approach: o Measures GDP by summing the incomes that firms pay households: o Net domestic income at factor cost is the sum of:  Wages, salaries, and supplementary labour income  Other factor incomes o Net domestic income at market price is the sum of:  Net domestic income at factor price  Indirect Taxes  (Subtract) Subsidies o GDP calculated using income approach is the sum of:  Net domestic income at market price  Depreciation o GDP calculated using expenditure approach is the sum of:  GDP calculated using income approach  Statistical discrepancy (Total GDP expenditure – total GDP income)  Nominal GDP: Value of the final goods produced in a given year when valued at the prices of that year o Just a more precise name for GDP. o GDP (2010): B#B + D#D  Real GDP: Value of final goods produced in a given year when valued at the prices of a reference base year o Used to compare GDP in two periods, to reveal the change in production. o GDP (2010 – Base Year Method): B#A + D#C G1 P G 1 Q G 2 P G 2 Q 2000 A #A C #C Uses of Real GDP 2010 B
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