Chapter 5 - The Measurement of National Income Flashcards
What is called the error arising from estimating the country’s output by adding all sales from all firms
Double counting
A Canadian farmer pays $400 for seeds to grow organic beets, which she sells to a produce distributor for $1200. The distributor sells the beets to a restaurant for $1500, who then sells $3000 worth of beet salads
What is the value added
$2,600
What is the difference between final and intermediate goods
Final goods are not used as inputs by other firms
What is value added definition?
The correct measure of each firm’s contribution to total output
How do you calculate the economy’s total output
By summing all the values added
What is the value added equation?
Value Added = Revenues - Cost of intermediate goods
In Shoetown, a rancher takes $80 worth of inputs and produces animal skins, which he sells to the tanner for $410. The tanner then sells leather to the shoemaker for $750, and the shoemaker then sells $1,200 worth of shoes. The value added from these transactions is
$1,120
What are the 3 different ways to measure national income
- The concept of value added.
- Sum the total flow of expenditure on final domestic output.
- Sum the total flow of income generated by the flow of domestic production.
True or false?
The value calculated with GDP from the expenditure side is equal to the value calculated with GDP from the income side.
True
What is the GDP equation?
GDP=C_a+ I_a+ G_a+ 〖NX〗_a
What are the 4 broad categories of expenditures?
be careful with one
- Consumption
- Investment
- Government Purchases
- Net exports
GDP from the income side, what are the 3 main components of factor income?
- Wages and salaries
- Business profits
- Interest
GDP from the income side, what are the non-factor payments?
- Indirect taxes less subsidies
- Depreciation
What type of expenditure is this:
Expenditure on all goods & services sold to their final users
Consumption
What type of expenditure is this:
Expenditure on goods not for present consumption
Investment
What type of expenditure is this:
All government purchases of goods & services are included as part of national expenditure
Government expenditure
Expenditures on automobiles are included in which category for consumers? For firms?
Consumer –> Consumption
Firms –> Investment
Purchases of second-hand appliances are included in which category
Not included
What is included in consumption expenditures (3 things)
Services
Non-durable goods
Durable goods
What is included in investment expenditures (3 things)
Inventories
Capital goods
Residential housing
What is the capital stock?
The economy’s total quantity of capital goods (also called plant & equipment)
What is fixed investment?
Adding to the existing stock of capital goods/creating new capital goods
What is the net investment equation ?
Net investment =
Gross investment - depreciation
Government output is valued at cost or at market value?
At cost because with don’t know the market value of things like courts or police protection
Only government purchases of ________ are included as part of GDP
Currently produced goods and services
e.g., Canada Pension Plan for retirees does not count
GDP = Ca + Ia + Ga + (NX)a
is what type of causation?
Bi-directionnal
meaning an increase in one will lead to an increase in the other
(two things cause each other)
Is it true that an increase in imports reduces GDP? Why?
No because a bi-directional causation between GDP and imports exists.
What is the net domestic income formula?
Net domestic income =
Wages & Salaries + Interest + Business Profits
What is the GDP from the income side formula?
GDP =
Factor incomes + Indirect taxes (less subsidies) + Depreciation
What is statistical discrepancy?
“Fudge factor” to make sure that the independent measures of income and expenditures come to the same total. Clear indication that national income accounting is not error-free.
Which of the following transactions would not be included in the calculation of GDP on the expenditure side?
A. The purchase of an Airplane by Air Canada.
B. The purchase of a new boat by a household.
C. The purchase of ground beef by McDonald’s.
D. The purchase of a plumber’s services by a household.
C. The purchase of ground beef by McDonald’s.
(not a final good)
If nominal GDP increases over a time period, it is unclear how much the increase is due to what (2 things)
Increases in output
Increases in prices
GDP / Total Population
gives us what?
A measure of
average material living standards
If nominal GDP increases by 35 percent over a 10-year period, then it is unclear how much of this increase is due to increases in output and how much is due to increases in prices. To overcome this problem, we look at GDP valued at _____ prices and we refer to this measure as _____ national income.
constant
real
What is the GDP deflator and what does it measure?
An index number
Its change measures the average change in price of all items in the GDP
What is the GDP deflator equations (2)?
GDP deflator =
(GDP at current price / GDP at base period) * 100
=
(Nominal GDP / Real GDP) * 100
True or false?
The GDP deflator changes in line with the CPI
False
CPI: Change in the average price of consumer goods
GDP defl: change in the average price of goods produced in Canada
True or false?
If the country produces only consumer goods and does not engage in trade with other countries, GDP deflator and CPI would be the same?
True
What does the HDI contains that isn’t part of GDP?
Non-economic factors
(life expectancy, educational attainment)
The measures of real GDP growth (and growth in the deflator) depend on the choice of base year because of the different
relative prices in different years
What are the 5 things omitted from GDP?
- Illegal activities
- Underground economy
- Home production, volunteering, and leisure
- Free products in the digital world
- Economic “bads”
Paying a carpenter with cash so there is no transaction is an example of ?
The underground economy
To what extent does GDP provide a useful measure of our living standards
Changes in real per capita (per person) income are a good measure of average material living standards.
But material living standards are only part of what most people consider their overall well-being.
Which terms have approximately the same value when measuring macroeconomic activity
Production and income
In the circular flow model, who supplies factors of production in exchange for income?
Households
National income accounting focuses on the relationship between income and ______
real GDP in the short run
What is the GNP (name and definition)
Gross National Product
The total dollar value of all goods and services produced by the citizens of a country
What is the GDP per capita equation?
Real GDP / Population
What is a function that the financial system provides for savers and borrowers?
Matching savers and borrowers
What is the largest component of GDP from the expenditure side in Canada?
Consumption
What is the largest component of GDP from the income side?
Wages, Salaries, and Supplementary Income
How does the CPI differ from the GDP deflator?
The CPI includes goods produced in prior years, as well as imported goods, which the GDP deflator does not
Which measure of GDP represents changes in the quantity of goods and services produced in the economy, holding prices constant?
Real GDP
What are some earnings by factors of production (3)
Wages, tools, and equipment
What is not subtracted when computing value added?
Earnings by factors of production, such as the wage to the apprentice, tools, and equipment, are not subtracted from the output when computing value added.
Why is depreciation part of the GDP from the expenditure side?
Because it’s part of the investment category
Investment expenditure = NET private Investment + Depreciation
(Depreciation not included if it is written as investment expenditure)
How to calculate the increase in nominal GDP that is due (in part) to an increase in quantities ?
(Real GDP year x - Real GDP year 0)
/
Real GDP year 0
