Economics 1022A/B Chapter Notes - Chapter 20: Gross Domestic Product, Income Approach, Final Good
Course CodeECON 1022A/B
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Gross Domesc Product (GDP)- Market value of the nal goods and services produced within a
country in a given me period. This denion has 4 parts:
1. Market Value
Market Values - Price at which items are traded in markets.
2. Final Goods and Services
To calculate GDP, we value the nal goods and services produced.
-Final Good – Is an item bought by its nal user (Ford truck).
-Intermediate Good – Item that is produced by one rm, bought by another rm, and used as
a component of a nal good or service (re on Ford truck).
Double counng – If we add the value of intermediate goods/services produced to the value of
nal goods/services, we would count the same thing many mes.
3. Produced within a Country
Only goods and services produced within a country count as part of the country’s GDP.
4. In a Given Time Period
GDP measures the value of producon in a given me period – normally either a quarter of a
year (quarterly GDP data) or a year (annual GDP data).
GDP measures not only the value of total producon but also total income and total
The equality between the value of total producon and total income is important because it
shows the direct link between producvity and living standards.
Rising incomes and a rising value of producon go together.
-They are two aspects of the same phenomenon: Increasing producvity.
The economy consists of households, rms, governments and the rest of the world, which trade
in factor markers and goods (and services) markets.
Households and Firms
Households sell and rms but the services of labor, capital, and land in factor markets.
-For these factor services, rms pay; income (Y) to households, wages for labor services,
interest for the use of capital, and rent for the use of land. Entrepreneurship receives prot.
-Firms retained earnings - Prots not distributed to households – are part of the household
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oCan think of retained earnings as being income that households save and lend back
Firms sell and households buy consumer goods and services in the goods markets.
-Consumpon Expenditure (C) – Total payment for these goods/services (doesn’t include
expenditure on houses – this is included in investment).
Firms buy and sell new capital equipment in the goods market. Some of what rms produce is
not sold but is added to inventory (can think of this as the rm buying goods/services from
-Investment (I) – The purchase of new plant, equipment, buildings, and the addion to
Government Expenditure (G) – Government expenditure of goods and services.
-Governments nance their expenditure with taxes (but taxes are not part of the circular <ow
Rest of the World
Exports (X) - Good/services sold by Canada, to the rest of the world.
Imports (M) - Good/services bought by Canada, from the rest of the world.
Net Exports (NX) – (X-M), the value of exports minus the value of imports.
-If NX is posive, the net <ow of goods/services is from Canadian rms to the rest of the
GDP Equals Expenditure Equals Income
GDP can be measured in 2 ways:
1. Total expenditure on goods/services
2. Total income earned producing goods/services.
Total Expenditure is the sum of the red <ows.
Total Expenditure = C + G + I + (X-M)
Total income = total amount paid for the services of the
factors of producon used to produce nal goods/services –
wages, interest, rent, and prot. Sum of ble <ows.
Total Income = Y
Because rms pay out as incomes everything they
receive from the sale of their output:
Total Income = Y = C + G + I + (X-M) = Total Expenditure
-The 2 methods of measuring GDP give the same
Households make consumpon
Firms make investments (I).
Governments buy goods/services (G).
Rest of the world buys net exports (NX)
Firms pay income (Y) to households.
Total Income = Total Expenditure
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