Chapter 2 Notes

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Western University
Management and Organizational Studies
Management and Organizational Studies 2275A/B
Desmond Mc Keon

Chapter 2: Measurement & Accounting System of National Accounts  Provides accurate and systematic measures of aggregate economic activity of a nation  Uses standardized measurements of macro variables based on accounting principles Gross Domestic Product (GDP)  Market value of all final goods and services produced in an economy during a fixed period of time  Most common measure of economic activity GDP Calculation  Product approach o GDP equals sum of all final goods and services produced in the economy at their market value o Final output must exclude intermediate goods and services (those used up in the production of final goods and services within a given time frame) o Value added of a producer: Value of its output minus the value of its inputs purchased from others  Expenditure approach o GDP equals sum of all final goods and services purchased in the economy o GDP = Personal consumption expenditure (C) + Business and fixed investment (I) + Government Expenditure (G) + Net Exports (NX) + Statistical discrepancy  Income approach o Sum of all income received by workers, the government, and firms o GDP = Workers’ income + Corporate profits + Indirect taxes less subsidies + Statistical discrepancy + Capital consumption allowances (depreciation) Saving  Saving: Current income – current spending  Private disposable income (Yd): o The amount of income that households have to spend o The income received from all sources, less taxes o GDP + Net factor payments (NFP) + Transfers (TR) + domestic Interest payments (INT) – Taxes (T)  Private saving (Spvt): Private disposable income (Y ) – consumption (C) d  Government saving (Sgovt): Net government income – government purchases (G) o If government savings is negative, the government has a budget deficit. o If government savings is positive, the government has a budget surplus.  National saving (s): o Total income – total spending of economy o Private saving + Government saving o Since Y = C + I + G + NX, S = Investment (I) + Net export (NX) + Net factor payments (NFP)  International components in savings: o Current account (CA):  Payments received from abroad
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