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Chapter 20

Economics 1022A/B Chapter Notes - Chapter 20: Gross Domestic Product, Income Approach, Final Good

Course Code
ECON 1022A/B
Jeannie Gillmore

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 
Gross Domesc Product (GDP)- Market value of the nal goods and services produced within a
country in a given me period. This denion 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 counng – 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 countrys GDP.
4. In a Given Time Period
GDP measures the value of producon 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 producon but also total income and total
The equality between the value of total producon and total income is important because it
shows the direct link between producvity and living standards.
Rising incomes and a rising value of producon go together.
-They are two aspects of the same phenomenon: Increasing producvity.
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 prot.
-Firms retained earnings - Prots not distributed to households – are part of the household
sectors income.

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oCan think of retained earnings as being income that households save and lend back
to rms.
Firms sell and households buy consumer goods and services in the goods markets.
-Consumpon 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 addion 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
of expenditure).
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 posive, 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 producon used to produce nal goods/services –
wages, interest, rent, and prot. 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 consumpon
expenditure (C).
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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