Chapter 20 Flashcards
What are the 3 methods for measuring national income (output)?
- total value added from domestic production
- total expenditures on domestic output
- total income generated by domestic production
value added formula
value added= revenues - non-labour costs
or value added = payments to factors of production
Summing value added avoids the problem of _________ when measuring total output
double counting
total value added in the economy is called_______________
Gross Domestic Product (GDP)
What are the four broad expenditure categories to calculate GDP from the expenditure side?
- consumption
- investment
- government purchases
- net exports
what does actual consumption expenditure include?
expenditure on all
final goods during the year
def. actual investment expenditure (Ia)
expenditure on the production of goods not for present consumption, including: • inventories • plant and equipment • residential housing
net investment formula
net investment= gross investment - Depreciation
what happens when net investment increases?
capital stock is growing
def. actual government purchases
the purchase of currently produced goods and services by government
• excluding transfer payments.
**valued at cost rather than at market value
def. actual net exports (NXa)
the difference between exports and imports: NXa = (Xa – Ima)
Exports are purchases of Canadian-produced goods and services by
foreigners. We subtract imports because they are not produced in
Canada
GDP from the expenditure side formula
GDP = Ca + Ia + Ga + NXa
GDP from the income side
sum of factor incomes and other claims on the value of output.
What does factor income include?
- wages
- rent, interest, and profits
what do non-factor payments include?
- indirect taxes (net of subsidies)
- depreciation of existing physical capital
GDP from the income side formula
GDP = Net domestic income + Indirect taxes (less subsidies) + Depreciation
what is the difference between GDP and GNP (Gross National Product)
the difference between income produced and income received
GDP is superior as a measure of ___________
domestic economic activity.
GNP is superior as a measure of _______________
living standards of residents
what is a more “refined” measure of living standards
disposable personal income:
GNP minus:
- any part not actually paid to households
- personal income taxes
- PLUS transfer payments received by households
def. nominal GDP
GDP that is valued at current prices
real GDP
GDP that is valued at constant base-period prices, it measures real national income
how is the value of output in each period computed?
using a common set of base-period prices
changes in nominal GDP reflect changes in ________
price and quantities
changes in real GDP reflect changes in ________
quantities
GDP Deflator
GDP deflator = (Nominal GDP/Real GDP) x 100
**implicitly defines a price index
*a comprehensive index of prices because it includes the prices of all goods and services produced in the country
do CPI and the GDP deflator move together?
–Not necessarily.
Because CPI tracks consumer prices and GDP deflator tracks the prices of goods produced in Canada, there will be some differences
Omissions from the GDP (5)
National income accountants cannot measure economic activity that takes place outside of regular, legal markets: • illegal activities • leisure • the underground economy • home production • economic "bads"
Why is the current GDP approach useful?
- It would be difficult to correct the major omissions.
- The level of GDP may be inaccurate but the change in GDP is a good indication of the changes in economic activity.
- To design policies to control inflation it is necessary to know the flow of money payments made to produce and purchase Canadian output.
describe GDP and Living Standards
“Well-being” is a broader concept than material living standards:
• GDP is not a complete measure of economic well-being
• but income is a very important part of well-being and GDP is a good measure of income.
