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Chapter 20

EC140 Chapter Notes - Chapter 20: Fixed Investment, Intermediate Good, National Accounts

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Ken Jackson

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Chapter 20
National Output and Value Added
Production occurs in stages: some firms produce outputs that are used as inputs by other firms, and these other firms, in
turn, produce outputs that are used as inputs by other firms
double counting: error in estiatig the atio’s output y addig all sales of all fis; sae output ould e outed eey
time it was sold by one firm to another
o summing value added avoids the problem
intermediate good: all outputs that are used as inputs by other producers in a further stage of production
final goods: goods not used as inputs by other firms; produced to be sold for consumption, investment, gov, or export during
period under consideration
Value Added: alue of a fi’s output ius alue of the iputs that it purchases from other firms
o idiidual fi’s alue added: Value Added = Sales revenue Cost of intermediate goods (purchased from other
o pmts made to factors of production (i.e. wages/profits) not purchases from other firms not subtracted from fi’s
revenue when finding value added
o Value added = payets owed to the fir’s factor of productio
o Value added is the orret easure of eah fir’s otriutio to total output the amount of market value that is
produced by that firm
o Fi’s alue added is the net value of its output
o “u of all values added i eooy is easure of eooy’s total output
National Income Accounting: The Basics
The value of domestic output is equal to the value of the expenditure on that output and is also equal to the total income claims
generated by producing that output
the market value of all final goods and services produced in a country in a given time period
o market value
o final goods and services
o produced within a country
o in a given time period
Circular flow of income:
- 3 different ways of measuring national income (GDP):
1. add up values of goods and services produced in the economy
2. add up total flow of expenditure on final domestic output = GDP on expenditure side
3. add up total flow of income generated by flow of domestic production = GDP on income side
- exports
- investment
- gov. purchases
- imports
- savings
- taxes
*do’t hage asi relatioship;
when all income claims are
correctly added equal total
value of production
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GDP from Expenditure Side:
adding up expenditures needed to purchase final output produced in that year
Sum of: 1) consumption
2) Investment
3) gov. purchases
4) net exports
1) Consumption Expenditure (Ca):
Actual Consumption Expenditure: all expenditure on all goods and services sold to their final users during the year
services: e.g. haircuts, dental care etc
non durable goods: e.g. fresh veggies, clothes, flowers, fresh meat etc
durable goods: e.g. as, TV’s
2) Investment Expenditure (Ia):
Actual Investment Expenditure: expenditure on production of goods NOT for present consumption
Changes in Inventories: firms hold stocks of their inputs and own outputs
o Inventories: stocks of new materials, goods in process and finished goods held by forms to mitigate the effect of short0term
fluctuations in production or sales
o Accumulation of inventories counts as positive investment for the yr represents goods produced but not used for current
o Drawing down of inventories decumulation counts as disinvestment/ negative investment > reduction in stock of finished
goods that are available to be sold
New Plant & Equipment: all production uses capital goods manufactured aids to production (i.e. tools factor etc).
o Capital stock: aggregate (total) quantity of capital goods
o Fixed investment: creation of new plant and equipment
New Residential Housing: house/apartment is a durable asset that yields its utility over long period of time
o Building of a new house counted as investment exp. Rather than consumption exp.
o when you buy existing house from a builder or another person, ownership of existing asset transferred not part of national
o only appears as residential investment in national accounts when a new house is build
Gross and Net Investment: total investment that occurs in economy called gross investment
2 parts: replacement investment and net investment
o Replacement Investment: amount of investment required to replace part of capital stock that loses its value through wear and
Depreciation: amount by which the capital stock is depleted through production process
Net Investment = Gross Investment Depreciation
o + et iestet = eooy’s apital stok growing
o net investment = capital stock is shrinking rarely happens
3) Government Purchases (Ga):
all government expenditure on currently produced goods and services, exclusive of government transfer pmts
e.g. street-cleaning; firefighting etc - adding to sum total of valuable output in economy
include all gov. purchases of goods and services as part of national income
Cost Versus Market Value: gov output typically valued at cost rather than at market value
o Do not know costs gov provides to services value them at their cost of production
o Valuing at cost only possible way to measure many gov activities does’t hae oe oseuee
If an increase in productivity causes one to do what 2 used to, and the worker shifts to the private sector -> go’s
easued otiutio to atioal ioe ill fall, ut piate seto’s otiutio ill ise
2 okes do hat oe oke used to: go’s otiutio ill ise
Gov Purchases Versus Gov Expenditure: only gov purchases of currently produced goods/services are included in GDP
o Most go spedig does’t out as pat of GDP
E.g. gov making pmts to etied peso though CPP: o aket tasatio as go is’t puhasig uetly podued
goods/services from them does’t add to total output
Same for payments of EI and welfare, and interest on national debts (trasfers income from taxpayers to holders
of gov. bonds.
Examples of transfer payments (excluded): payments to an individual/institution not made in exchange for
4) Net Exports (NXa )
The value of total exports minus value of total imports
Aggregate expenditure arising from foreign trade
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