Jan 13 Flashcards
most common measure of national income
GDP
gross domestic product
3 diff measures of GDP
national product
national output
national income
3 diff methods for measuring national income (output)
- total VALUE ADDED from domestic production (national product)
- total EXPENDITURES on domestic output (national output)
- total INCOME generated by domestic production (national income)
production occurs in stages - most firms produce output that…
are other firms’ inputs
- intermediate products
- final products
MUST ENSURE WE ONLY INCLUDE FINAL PRODUCTS IN GDP CALCULATIONS
each firm’s contribution to total output is its ______ _____
value added
value added
- value added = revenues - costs of intermediate goods
- value added = payments to factors of production
summing value added avoids what problem?
avoids problem of double counting when measuring total output
total value added in economy is called what?
gross domestic product
GDP
the circular flow of income and expenditure overview
simple circular flow:
- DOMESTIC HOUSEHOLDS > total consumption expenditure is composed of DOMESTIC GOODS AND SERVICES, and IMPORTS/EXPORTS from rest of world
- DOMESTIC PRODUCERS > total income generated by domestic production, minus taxes which go to government, they get payment for factor services
- TOTAL AFTER-TAX INCOME GENERATED BY DOMESTIC PRODUCERS goes back into the domestic households
the circular flow of income and expenditure - TAXES
taxes are deducted from total income generated by domestic production
taxes go to the GOVERNMENT
they fund GOVERNMENT PURCHASES
the circular flow of income and expenditure - saving done by domestic households goes where?
into the FINANCIAL SYSTEM
in the form of INVESTMENT
the circular flow of income and expenditure - total consumption expenditure by households take the form of?
- imports
- consumption of domestic goods and services
the circular flow of income and expenditure - total expenditure on domestically produced output comes from where?
domestic G & S (consumption)
investment
gov purchases
net exports
GDP from expenditure side
4 broad expenditure categories
- consumption
- investment
- gov purchases
- net exports
actual consumption expenditure (Ca) includes…
includes expenditure on ALL FINAL GOODS during the year
actual investment expenditure (Ia)
expenditure on the production of goods not for present consumption
- inventories
- plant and equipment
- residential housing
net investment
gross investment - depreciation
when net investment increases…
capital stock is growing
what does Ia denote?
actual total investment expenditure
GROSS expenditure, not net
actual government purchases (Ga)
purchase of currently produced goods & services by government
examples of government purchases
- street cleaning, firefighting
- expenditures to send soldiers overseas
- civil servant to refile papers from a now-defunct department
is government output valued at cost or market value?
cost
because can’t really assess the market value of something like the law courts
actual government purchases (Ga) is the purchase of…
currently produced GOODS and SERVICES by the government
excluding transfer payments
actual net exports
NXa
it’s the difference between exports and imports
NXa = (Xa - Ima)
exports
exports are purchases of Canadian-produced goods and services by foreigners
we subtract imports because they aren’t produced in Canada
GDP from expenditure side equation
GDP = Ca + Ia + Ga + NXa
specific sub-categories under consumption (C)
durable goods
semi-durable goods
non-durable goods
services
specific sub-categories under investment (I)
plant and equipment
residential structures
inventories
other
specific sub-categories under government purchases
current expenditures
investment
specific sub-categories under net exports
exports of goods & services
imports of goods & services
GDP from expenditure side: which expenditures are included?
- expenditures on automobiles by consumers
- expenditures on automobiles by firms
- expenditures on new machinery by CAD-owned forest companies in CAD
- expenditures on new machinery by CAD owned forest companies in the US
- expenditures on new machinery by US owned forest companies in CAD
- reduction in business inventories
- purchases of secondhand cars and trucks
- the hiring of economic consultants by Manitoba government
- purchase of CAD-produced software by firm in Japan
GDP is also the sum of ________ ______ and other claims on the value of output
factor incomes and non-factor payments
income side!
factor incomes
- wages (labour)
- rent (land)
- interest (capital)
- profits (entrepreneurship)
(net domestic income)
non-factor payments
indirect taxes (net of subsidies)
depreciation of existing physical capital
factor payments versus non-factor payments
FACTOR PAYMENTS = payments made to the FACTORS OF PRODUCTION
^ to land (rent), labour (wages), capital (interest), entrepreneurship
^ essentially, these are the payments made for the use of these resources in the production process
NON-FACTOR PAYMENTS = payments that AREN’T directly related to the FACTORS OF PRODUCTION
^ financial investments, government transfers
GDP from income side equation
GDP = net domestic income + indirect taxes (less subsidies) + depreciation
