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Canada (158,173)
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EC140 (329)
Chapter 20

Chapter 20 EC140.docx

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Wilfrid Laurier University
Angela Trimarchi

EC140 Chapter 20-Measuring GDP and Economic Growth Week 2 Gross Domestic Product -The market value of the final goods and services produced within a country in a given time period -Has 4 parts: -Market value -Final goods and services -Produced within a country -In a given time period Market Value -The price at which items are traded in markets -By using market prices to value production, we can add apples and oranges together – two items that are not similar Final Goods and Services -A final good is an item that is bought by its final user during a specified time period -It contrasts with an intermediate good, which 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. a Ford truck is a final good, but a Good wrench tire on it is an intermediate good -The value of the truck already included the value of the tires -Some items people buy are neither final goods nor intermediate goods and they are not part of GSP -Examples of such items include financial assets - stocks and bonds, and second-hand goods Produced Within a Country -Only goods that are produced within a country count as part of that country’s GDP In a Given Time Period -Normally measured in either a quarter or a year – quarterly GDP data – or a year – called the annual GDP data GDP and the Circular Flow of Expenditure and Income EC140 Chapter 20-Measuring GDP and Economic Growth Week 2 Households and Firms -Households sell and firms buy the services of labour, capital, and land in factor markets -Firm’s retained earnings – profits that are not distributed to households – are part of the household sector’s income -Firms sell and households buy consumer goods and services – such as inline skates and haircuts - in the goods market -The total payment for these goods and services is consumption expenditure -The purchase of firm’s new plant, equipment, and buildings are investments Governments -Governments buy goods and services and their expenditure on goods and services is called government expenditure -Governments finance their expenditures with taxes Rest of the World -Firms in Canada sell goods and services to the rest of the world – exports – and buy goods and services from the rest of the world – imports -The value of the exports minus the imports is called net exports GDP Equals Expenditure Equals Income -Aggregate income is equal to the total amount paid for the services of the factors of production used to produce final goods and services – wages, interest, rent and profit Why is Domestic Product “Gross”? -Depreciation is the decrease in the value of a firm’s capital that results from wear and tear and obsolescence. -The total amount spend both buying new capital and replacing depreciated capital is called gross investment -The amount by which the value of capital increase is called net investment -Net investment equals gross investment minus depreciation. Measuring Canada’s GDP -There are two approaches available for measuring GDP, and both are used. They are: -The expenditure approach -The income approach 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). EC140 Chapter 20-Measuring GDP and Economic Growth Week 2 The Income Approach -Measures GDP by summing the incomes that firms pay households for the factors of production they hire – wages for labour, interest for capital, rent for land, and profit for entrepreneurship -Divides income into 5 categories: 1. Wages, salaries, and supplementary labour income 2. Corporate profits 3. Interest and miscellaneous investment income 4. Farmer’s income 5. Income from non-farm incorporated businesses -Wages, salaries and supplementary labour income is the payment for labour services. -Corporate profits are the profits of corporations -Interest and miscellaneous investment income is the interest households receive on loans they make minus the interest households pay on their own borrowing -Farmer income and income from non-farm unincorporated businesses are mixtures of the previous three items -A subsidy is a payment by the government to a producer -Total expenditure is a gross number because it includes gross investment -To get from net income to gross income, we must add depreciation -The gap between the expenditure approach and the income approach is called the statistical discrepancy EC140 Chapter 20-Measuring GDP and Economic Growth Week 2 Nominal GDP and Real GDP -Real GDP is the value of final goods and services produced in a given year when valued at the prices of a reference base year. By comparing the value of production in the two years at the same prices, we reveal the change in production -Currently, the reference base year is 2002, and we describe GDP in 2002 dollars -Nominal GDP is the value of final goods and services produced in a given year values at the prices of that year. It is a more precise name for GDP Calculating Real GDP -We’ll calculate real GDP for an economy that produces one consumption good, one capital good, and one government service. Net exports are 0. EC140 Chapter 20-Measuring GDP and Economic Growth Week 2 The Uses and Limitations of Real GDP -Economists use estimates of real GD
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