econ 1022 Flashcards
Gross Domestic Product (GDP)
The market value of the final goods and services produced within a country in a given time period.
GDP has four parts
Market value
Final goods and services
Produced within a country
In a given time period
Market value
Adding the value of items together at what the market values one unit of a set item.
Final goods
When calculating the GDP we only take the values of the final goods produced.
Final goods
Final goods are goods that are bought by the final user in a specific time period
Intermediate goods are items produced by one firm, bought by another firm, and used as a component to a final good or service
If we added the value of intermediate goods then it would result in double counting
Second-hand goods, financial assets, and stocks and bonds
Produced within a country
Only goods and services produced within that country are a part of its GDP
In a given time period
GDP is normally measured quarterly or yearly
Economy consists of
households, firms, governments, and the rest of the world.
Households sell and firms buy the services of labour, capital, and land in factor markets
A firm’s retained earnings are a part of the household’s income (think of it as income households save and lend back to firms
Households and Factor markets represent
the blue flow, Y, shows total income paid by
firms to households.
Consumption expenditure
The total payment of goods from households to firms.
shown by the red flow labelled C .
Firms buy and sell new capital equipment
(computer systems, airplanes, trucks, assembly line equipment) in the goods market.
Aggregate income =
Aggregate expenditure (Y = C)
Investment
Purchase of new plant, equipment, and buildings, shown by the
red flow labelled I.
Government expenditure
Government expenditure on goods and services, shown as the red flow G.
Government expenditure
Government finances this through taxes, which are not a part of the circular flow diagram
Financial transfers from the government to houses are also not a part of the circular flow
Rest of the World
Firms in Canada sell goods and services to the rest of the world (exports) – and buy goods and services from the rest of the world (imports)
The value of exports (X ) minus the value of imports (M) is
called net exports, the red flow X – M.
net export positive and negative
If net exports are positive, the net flow of goods and
services is from Canadian firms to the rest of the world.
If net exports are negative, the net flow of goods and
services is from the rest of the world to Canadian firms.
Gross Domestic Product
the sum of the red flows equals the blue flow, Y = C + I + G + (X – M)
GDP can be measured in two ways
The total expenditure on goods and services, The total income earned producing goods and services.
The total expenditure on goods and services
This is called aggregate expenditure, which is the sum of all of the red flows in the circular flow diagram (consumption expenditure + investment + government expenditure + net exports)
The total income earned producing goods and services
The total income earned producing goods and services – This is called aggregate income and is equal to the total amount paid for the services of factors of production (wages, interest, rent, profit)
The blue flows in the circular flow diagram demonstrate this
GDP =
C + I + G + X – M.
Gross
Before subtracting the decrepitation of capital.
Net
After subtracting the depreciation of capital.