Chapter 20 Flashcards
Intermediate goods are:
All outputs used as inputs by other producers in a further stage of production
Final goods are:
Goods not used as inputs by other firms but produced to be sold for consumption, investment, government, or export during period under consideration
Value added equation:
Value added = sales revenue - cost of intermediate goods
How do economists avoid double counting?
Using the concept of value added… the amount of value that firms and workers add to their products over and above the costs of purchased intermediate goods
value added is equal to
payments owed to the firm’s factors of production
value added is the correct measure of
each firm’s contribution to total output - the amount of market value produced by that firm
How is the economy’s total output (GDP) found?
By finding the sum of all values added
How do you find GDP on the expenditure side?
Adding total expenditure for each of the main components of final output
How do you find GDP on the income side?
By adding up all income claims generated by the act of production
What are the four categories of expenditure?
Consumption, investment, government purchases, and net exports
Consumption (C) expenditure is:
household expenditure on all goods and services
Investment (I) expenditure is:
expenditure on the production of goods not for present consumption (capital goods - factories, computers, machines, warehouses, housing)
inventories are:
stocks of raw materials, goods in process, and finished goods held by firms to mitigate effect of short-term fluctuations in production
why do firms hold inventories?
to ensure they will have enough materials in case of production delays
accumulation of inventories counts as positive investments because
it represents goods produced but not used for current consumption
decumulation counts as
disinvestment because it represents a reduction in the stock of finished goods available to be sold
fixed investment is:
creating new capital goods to be added to economy’s total quantity of capital stock (tools, machines, etc)
net investment equation:
net investment = gross investment - depreciation
gross investment is:
the total investment that occurs in the economy
replacement investment is:
the amount of investment required to replace that part of the capital stock that loses its value through wear and tear
Why is gross investment included in the calculation of national income?
The production of new investment goods is part of nation’s total current output, and production creates income whether they are part of net or replacement investment
government (G) purchases are:
all government expenditure on currently produced goods and services
transfer payments are:
payments made by the government not in exchange for a good or service (pension, employment insurance, welfare, interest on debt)
why are transfer payments not counted as part of GDP?
because there is no market transaction involved.. no purchase of any currently produced goods or services
why are exports considered part of canadian gdp and what denotes the value of actual exports?
Exports constitute expenditure on Canadian output - goods and services produced in Canada but sold outside create incomes for Canadian residents. Denoted by X.
How does one calculate total expenditure on Canadian products considering imports? What is this denoted by?
Must subtract total expenditure the economy’s total expenditure on imports. Actual imports is denoted by IM.
How do you find net exports, and what is it denoted by?
Total exports - total imports (X - IM) denoted by NX.
What is the equation for total expenditure (GDP on the expenditure side?)
GDP = C + I + G + (X - IM)
Factor incomes include:
wages, interest and business profits
the sum of factor incomes is called
net domestic income at factor cost
non-factor payments include:
indirect taxes and subsidies and depreciation
gdp from the income side is calculated by:
adding factor incomes + indirect taxes + depreciation
nominal GDP is:
total GDP valued at current prices
real GDP is:
GDP valued at base-period prices
the GDP deflator is:
an index number derived by dividing nominal GDP by real GDP. Its change measures the average change in price of all items in the GDP
what is the GDP deflator equation?
GDP at current prices (Nominal)/GDP at base-period prices (Real) x 100
Why are the GDP deflator and the CPI indices different?
GDP deflator index measures changes in average price of goods produced in Canada.
CPI measures the change in average price of consumer goods
What is not included in GDP?
Illegal activities, underground economy, home production (non-market activities), economic “bads”
what is the underground economy?
people doing jobs under the table to avoid having income taxed
what is an economic “bad”?
things like pollution, environmental damage
why is the conventional approach to measuring GDP used rather than including the omitted factors?
impossible to measure illegal activities and home production. economic bads would change the nature of the measurement, no longer giving accurate measure of level of economic activity
what are the three reasons for using the current way of measuring GDP?
correcting major omissions would be impossible, change in GDP from one year to the next is a good indication of economic activity, and policymakers need to measure the amount of market output to design policies to control inflation and tax rates
what is not included in the calculation of GDP on the income side?
consumption
Because the focus of long-run economic growth is on the standard of living of the average person, we measure the standard of living in terms of:
real GDP per capita
How does Statistics Canada measure GDP?
by adding the value in dollar terms of all the final goods and services produced domestically.
What tends to be the final stage of a nation’s economic development?
Services
The GDP per capita is computed by dividing a country’s:
real GDP by its population
The total national income actually received by a country’s residents is:
smaller than the value of GDP
In the circular flow model, who supplies factors of production in exchange for income?
Households
Which of these is not a shortcoming of GDP as a measure of welfare?
It only counts final goods and services and not intermediate goods.
In the classical model, when households save:
business investments will offset that savings
Which measure of GDP represents changes in the quantity of goods and services produced in the economy, holding prices constant?
real GDP
What has approximately the same value when measuring macroeconomic activity?
Production and income
Using the income approach, how do you find GDP?
From the income side, GDP is the sum of factor incomes plus non-factor payments. The factor incomes consist of wages and salaries, interest income, and business profits. Non-factor payments consist of indirect taxes (net of subsidies) plus depreciation.
Suppose national accounting was done by adding up the market values of all outputs of all firms. This approach would
overestimate the value of production in the economy
is the best description of the business cycle?
the short-run fluctuations of national income around its trend value
The Canadian-U.S. exchange rate is defined as the number of Canadian dollars to buy one U.S. dollar. If one Canadian dollar ($1 CDN) buys $1.10 USD, the Canadian-U.S. exchange rate is:
1CDN/1.10US = 0.91
In national-income accounting, “depreciation” refers to
the amount by which the capital stock is depleted through the production process
