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ECON 1010 - Class Notes - Chp 20 Wk 2.docx

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ECON 1010
Jean Adams

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CHAPTER 20: MEASURING GDPAND ECONOMIC GROWTH ECON 1010 WEEK 3 • GDP is the market value of all final goods and services produced in a country in a given time period • The above definition of GDP covers four parts: o Market value o Final goods and services o Produced within a country o In a given time period • GDP measures the value of production, which also equals total expenditure on final goods and total income • Equality of income and value of production shows the link between productivity and living standards • The circular flow diagram of expenditure links the transactions between households, firms, governments and the rest of the world • Y represents the income received by factors of production o Income flows from firms to factor markets to households • C represents consumption expenditures which flow from households to goods markets to firms • I represents investment expenditure which flows from firms to goods markets and from goods markets to firms • G represents government expenditures which flow from governments to goods markets and then to firms • X represents exports and M represents imports o X-M flows from goods markets to firms and from the rest of world to goods markets • The combination of Y, C, I, G, and X-M shows the circular flow of expenditure and income • The blue flow (Y) equals the sum of the red flows (C+I+G+(X-M)) o Y = C+I+G+(X-M) • GDP = Expenditure = Income • GDP = Y = C + I + G + (X-M) • Domestic product is gross before deducting the depreciation of capital • Net domestic product occurs after deducting the depreciation of capital • Depreciation is the decrease in the value of a firm’s capital that occurs from natural wear and tear and obsolescence • Gross investment is total amount spent on purchases of new capital and on replacing capital • Net investment is gross investment - depreciation • NI = I - Depreciation o and GDP = C+I+G+(X-M) o then NDP = C+NI+G+(X-M) • The Bureau of EconomicAnalysis uses two GDP measurement methods: o ExpenditureApproach: GDP = C+I+G+(X-M) o Income Approach:  Combination of wages (plus benefits and pension contributions)  Other factor incomes:  Interest  Rent  Proft  Labour income from self-employment  All above factors are included in OFI (the income flow, Y)  Sum of all factor incomes is net domestic income at factor cost  Two adjustments made to get GDP:  Indirect taxes less subsidies are added to get from factor cost to market prices  Depreciation is added to get
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