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Economic Notes - Jan 11.docx

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Western University
Economics 1022A/B
Jeannie A Gillmore

Economics – Textbook Notes Measuring GDP and Economic Growth Gross Domestic Product GDP Defined GDP is the market value of the final goods and services produced within a country in a given time period.  Market Value o The price at which items are traded in markets  Final Goods and Services o A Final Good is an item bought by its final user during a specific time period  Ex: Ford Truck o An Intermediate Good is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service  Ex: Firestone tire o Some goods can be both a final good or intermediate good depending on what it is being used for  Ice cream at home or ice cream in a sundae at a restaurant o Some goods are neither a final good nor an intermediate good  Stocks, bonds, second-hand goods  Produced within a Country o Within the boarders of the country  In a Given Time Period o Either quarterly or annually GDP measures not only the value of total production, but also total income and total expenditure. GDP and the Circular Flow of Expenditure and Income  Households and Firms o Households sell and firms buy the services of labour, capital, and land in factor markets o Firms sell and households buy consumer goods and services in the goods market  The total payment for these goods and services is consumption expenditure o Firms buy and sell new capital equipment in the goods market  The purchase of new plant, equipment, and buildings and the additions to inventories are investment  Governments o Governments buy goods and services from firms and their expenditure on goods and services is called government expenditure o Governments finance their expenditure with taxes and have financial transfers such as benefits  Rest of the World o Net Exports is the value of exports – the value of imports  GDP Equals Expenditure Equals Income o GDP can be measured in 2 ways:  The Total Expenditure  Equals consumption expenditures plus investment plus government expenditure plus net exports  C + I + G + (X – M)  Total Income  Equals the total amount paid for the services of the factors of production used to produce final goods and services – wages, rent, interest, and profit Why Is Domestic Product “Gross”?  “Gross” means before subtracting the depreciation of capital  Depreciation is the decrease in the value of a firm’s capital that results from wear and tear and obsolescence  The total amount spent both buying new capital and replacing depreciated capital is called gross investment o The amount by which the value of capital increases is called net investment o Net investment = gross investment – depreciation Measuring Canada’s GDP The Expenditure Approach  Measures GDP as the sum of consumption expenditure (C), Investment (I), government expenditure on goods and services (G), and net exports of goods and services (X-M)  C  personal expenditures on consumer goods and services  I  Business Investment  G  Government expenditures on goods and services  X-M  Net exports of goods and services The Income Approach  Measures GDP by summing the incomes that firms pay households for the factors of production they hire o Wages for labour o Rent for land o Interest for capital o Profit for entrepreneurship Incomes are divided into five categories: 1. Wages, salaries, and supplementary labour income a. The payment for labour services 2. Corporate profits a. The profit of corporations, some of which are paid to households in the form of dividends 3. Interest and miscellaneous investment income a. Interest households receive on loans they make minus the interest households pay on their own borrowing 4. Farmers’ income a. Compensation for the owner’s labour, payment for the use of the owner’s capital, and profit 5. Incomes from non-farm unincorporated businesses
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