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Chapter 5

Measuring A Nation - Chapter 5.docx
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Department
Economics
Course
ECON 1010
Professor
Frank Miller
Semester
Winter

Description
Measuring A Nation’s Income - Microeconomics: study of how households and firms make decisions and interact in markets - Macroeconomics: study of economy-wide phenomena; includes inflation, unemployment and economic growth; study of economy as a whole o Explains economic changes that affect many households, firms and markets simultaneously - Gross Domestic Product: measures the total income of a nation (total income of everyone in the economy and total expenditure on the economy’s output of goods/services) The Economy’s Income and Expenditure - Economies with greater GDP can afford better necessities and luxuries; higher standards of living (better housing, food, etc…) - For economy as a whole, income = expenditure; because every transaction has a buyer and seller o Evert dollar of spending by some buyer is a dollar of income for some seller Circular Flow Diagram - Households buy goods/services from firms; expenditures flow though markets for goods and services - Firm uses the money received from sales to pay workers’ wages, rent, the firm owners’ profit; income flows though the market for factors of production - Money flows from the households to the company and back to the households o Can calculate GDP by: adding total expenditure by household or total income (wages, rent, profit) paid by firms o Households do not spend all of their income; some paid to government in taxes and rest saved for future o Some goods and services are bought by the government and others are bought by firms to produce future output Measurement of GDP - GDP: market value of all final goods and services produced within a country in a given period of time o Adds together many different kinds of products into single measure of the value of economic activity; uses market prices to do so o Market price: measures the amount people are willing to pay for different goods; reflect value of those goods o If Good A has price that is 2 times that of Good B, then Good A contributes 2 times as much to GDP than Good B - GDP includes all items produced in the economy and legally sold in the markets - Includes market value for housing services provided by economy’s stock of housing o If you own property, GDP based on assumption that the owner pays rent to him/herself (included in both his/her expenses and income) o GDP excludes: items sold illegally, items produced and consumed at home; never enter the marketplace  Ex: vegetables you buy at the grocery store part of GDP, home grown vegetables are not o Measures of GDP can underestimate true amount of productive activity - GDP only includes values of final goods; value of intermediate goods included in prices of final goods (would result in double counting otherwise) o When intermediate good is added to firm’s inventory to be sold/used later, it is taken to be “final” for the moment; value as inventory investment added to GDP o When later sold, firm’s inventory investment is negative and GDP reduced accordingly - Includes both tangible goods and intangible services as well as goods and services currently produced; does not include transactions involving items produced in the past (selling used car) - Measures value of production within geographic confines of a country and within specific interval of time - Government officials adjust quarterly data to take out seasonal cycle Other Measures of Income - Gross National product: total income earned by nation’s permanent residents regardless of where they were locate at time income was earned - Net National Product: total income of a nation’s residents (GNP) minus losses from depreciation/capital consumption allowance: wear and tear on economy’s stock of equipment and structures - Personal Income: income that households and non-corporate businesses receive; excludes retained earnings (earnings a company has earned but not paid to owners) o Subtracts corporate income taxes and contributions for social insurance o Includes interest income that households receive from holdings of government debt and income households receive from government transfer programs (CPP, EI and Welfare benefits) - National Income: total income earned by nation’s residents in production of goods and services; excludes indirect business taxes and includes business subsidies - Disposable Personal Income: income that households and non-corporate business have left after satisfying all obligations to the government o Perso
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