Ch.20 The measure of national income Flashcards
What are the 3 ways of measuring GDP?
- Value Added or “Product” Method
- Expenditure method
- income method
What is one issue of the value added method?
Double or multiple counting
When calculating National income using the production approach, the expenditure approach, and the income approach, what are the 2 components that need to be excluded in order for these method to yearn the same result?
Indirect taxes and depreciation of the capital stock
What is value added in production equal to?
Sales revenue (or total value of output) - cost of intermediate goods = payments owed to firm’s factors of production
Define Intermediate Goods
All G&S used as inputs into further stage of production
What are the four broad categories of Final expenditure method?
- Consumption
- Investment
- Government expenditures
- Net exports
These expenditures are needed to purchase the final output produced in that year.
What is included in the consumption category of the expenditure method?
Household expenditure on all G&S
- Durable goods
- Semi-durable goods
- Non-durable goods
- Services
What do the measure of GDP calculate?
The total value of G&S produced in the economy during a given period.
What is included in the investment category of the expenditure method?
Expenditure on the production of goods not for present consumption
- Plant and Equipment
- Residential structures
- Inventories
- Other
Define Capital Stock
The economy’s total quantity of capital goods
Define Fixed investment
The action of creating new capital goods
How do we calculate the total value at stock inventory?
of unit unsold x market price if I would sell
In what section would residential housing be in and why?
Investment (Y1) - Made for future use/profit.
In future year, if bought, not accounted into revenue (otherwise we double count) - It is only a transfer of value
What is gross investment?
The total investment that occurs in the economy at Year 1.
Net investment = gross investment - depreciation
If 0 = decreasing bc of depreciation
If negative = capital stock decreases
If positive = capital stock increases
What is included in the government purchases category of the expenditure method?
Expenditure on currently (in this year) produced G&S, exclusive of government transfer payments
- Current expenditure (evaluated at cost value bc public goods) : PURCHASES, NOT TRANSFER (e.g., welfare, interest payment, etc)
- Investment
What is included in the net exports category of the expenditure method?
Net exports = exports - imports
- exports of g&s
- imports of g&s (-)
What is the formula to calculate GDP from the expenditure side?
GDP = C + I + G + NX
What does calculating GDP from the input side involve?
adding up all factor incomes and other claims on the value of output until all of that value is accounted for.
What are the two categories of GDP calculation from income side? What are their main components?
- Factor incomes
- wages and salaries
- interest
- business profits - Non-factor payments
- Indirect taxes
- Subsidies
What is included in wages and salaries in the income side method?
Income paid to factors of production (pre-tax)
What is included in interest in the income side method?
Interest earned on
- bank deposit
- loans to firms
- other investment
DOESN’T include interest on bonds from the government (inc. as transfer payment in govn’t expenditure)
What is included in business profits in the income side method?
Dividends (paid to shareholders) and retained earnings (invested in the company for next year)
What is the formula to calculate GDP from income side?
GDP = Factor incomes + Indirect taxes - subsidies + depreciation
Define Depreciation
Loss in value of capital from wearing off
What is “Statistical Discrepancy”?
It is a “fudge factor” that makes sure that the independent measures of income and expenditure come to the same total to correct slight error there might exist in practice
Define Nominal GDP
Total GDP valued at current prices
Define Real GDP
GDP valued at base-period prices
What does the GDP deflator point at?
If there is differences between nominal and real GDP over a given time period, then prices must have changed over that period
What is the GDP deflator formula?
GDP Deflator = (Nominal GDP/Real GDP)*100
<100 : Real GDP > Nominal GDP
>100 : Real GDP < Nominal GDP
What is the difference between GDP Deflator and CPI (Consumer price index)?
Movements in CPI measure the change in the average price of consumer goods
Movements in GDP Deflator reflect the change in the average price of goods produced in Canada
What component are omitted by GDP?
- Illegal activities
- The underground economy
- Home production, volunteering, and Leisure
- Economics “Bad”
What are 3 leakages happening in the circular flow of expenditure and income?
- Tax deduction from salaries that goes to the government
- Savings (not spending everything)
- Buy G&S from outside the country (imports)
What are 3 ways of bringing back the money from leakages into the cycle (injections)?
- Investment
- Government purchases
- Exports
How to calculate Net domestic income at factor cost?
Wages & salary + interest + profits
When measuring GDP through the expenditure approach, can investment be negative?
Yes
Government purchases are calculated by their
COST
Is pension included in measures of the govn’t expenditure component of aggregate expenditure? Why?
No - it is a transfer payment
Is depreciation or replacement investment include in Gross domestic product?
Yes
What is the formula to measure Labour productivity?
GDP/total number of hours worked
What is the GNP formula?
GDP - net payments to foreigners
