Jan 20 Flashcards
components of factor incomes
- wages, salaries, supplementary incomes
- interest and other investment incomes
- business profits (including rent)
non-factor payments
- depreciation
- indirect taxes less subsidies
depreciation
refers to the DECREASE in VALUE OF AN ASSET over time
due to factors like wear and tear, obsolescence or age
applied to capital goods like machinery, equipment, buildings
capital goods
machinery, equipment, buildings
formula for NDP
NDP = GDP - depreciation
chart: what goes into GDP from expenditure side?
- personal consumption
- government purchases
- net exports (exports - imports)
- net private investment
- depreciation
chart: what goes into GDP from income side?
- wages and salaries (pre-tax)
- interest income
- business profits
- indirect taxes
- minus subsidies
- depreciation
GNP
gross national product
measure of national output closely related to GDP
difference between GDP and GNP is the difference between INCOME PRODUCED and INCOME RECEIVED
GDP versus GNP
difference between GDP and GNP is the difference between INCOME PRODUCED and INCOME RECEIVED
because some money generated leaves the circular flow of income and goes overseas, and we also receive income from abroad
GNP includes these distinctions - gets us closer to real income
Toyota factory in Canada: GDP versus GNP
value added: $100 but $5 remitted to Toyota’s foreign owners
GDP would count $100
GNP would minus the $5, coming out to $95 for CAD citizens
Cad-owned business located outside Canada: GDP versus GNP
value added: $100 but $5 remitted to Canadian owners
GDP of foreign country counts $100
Canadian GNP counts $5
GDP is superior than GNP for measuring…
domestic economic activity
GNP is superior than GDP for measuring…
living standards of residents
what is a measure even more refined than GNP?
disposable personal income
disposable personal income
start with GNP
- MINUS any part not actually paid to households
- MINUS personal income taxes
- PLUS transfer payments received by households
changes in NOMINAL GDP reflect…
changes in PRICE and QUANTITIES
because uses current prices
changes in REAL GDP reflect…
changes in QUANTITIES
because uses base year prices
GDP deflator equation
(nominal GDP / real GDP) x 100
ie. GDP deflator2002 = (P2002 x Q2002) / (P2000 x Q2002) x 100
what does the GDP deflator implicitly define?
a price index
is the GDP deflator a comprehensive index of prices?
yes
because it includes prices of ALL GOODS and SERVICES produced in the country
recap: what does the GDP deflator tell you?
measures the level of prices of all new, domestically produced, final goods and services in an economy
tells you how much prices have RISEN/FALLEN over time, ADJUSTING INFLATION for GDP
shows how much CHANGE IN GDP IS DUE TO PRICE CHANGES rather than actual GROWTH IN OUTPUT
GDP deflator shows how much change in GDP is due to…
changes in PRICE
rather than growth in output
graph of nominal and real GDP - the two lines cross at what year?
cross at the year used as base year in the computation of real GDP
nominal GDP tells us about the _____ value of output, while real GDP tells us about the _______ of _______ output
nominal: MONEY value of output
real: QUANTITY of PHYSICAL output
when would the GDP deflator be 100?
at the base year
when nominal GDP equals real GDP
do the CPI and GDP deflator move together?
not always
CPI tracks CONSUMER PRICES and GDP deflator tracks PRICES OF GOODS PRODUCED IN CANADA
ie. price of coffee increases - this will affect the CPI but not the GDP
ie. if there are goods that we export that change in price (wheat) - will change the GDP but less the CPI (because don’t consume these domestically)
look at GDP deflator to see how prices of goods…
that WE PRODUCE are changing
whereas CPI tells us how prices of goods WE CONSUME are changing
while GDP is an excellent measure of flow of economic activity in organized markets in a given year…
much economic activity TAKES PLACE OUTSIDE MARKETS that the national income accountants survey
activities that take place outside the markets surveyed by national income accountants
- illegal activities
- underground economy (paid in cash)
- home production, volunteering, leisure
- free products in the digital world
- economic “bads”
although current approach to measuring GDP isn’t perfect, it’s useful because…
- would be hard to correct the major omissions
- 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’s necessary to know the FLOW OF MONEY PAYMENTS made to produce and purchase Canadian output
to what extent does GDP provide a useful measure of our living standards?
- changes in real per capita income are a good measure of AVERAGE MATERIAL LIVING STANDARDS
- but material living standards are ONLY PART of what most people consider their overall wellbeing
human development income (HDI)
measure includes large number of factors that contribute to human welfare - of which GDP is only one
- crime rates
- pollution
- congestion
- longevity
- scenic beauty
- income distribution
- educational achievement
- political freedom
although Canada’s real per capita GDP doesn’t place among the top few countries…
it is highly ranked on the HDI
(accounts for things like crime rates, pollution, congestion, longevity, scenic beauty)
