Module 5 Reading

Question 1

what are national income accounts

Answer 1

An accounting framework most countries have that is used in measuring economic activity

Question 2

what idea are the national income accounts based on

Answer 2

the idea that the amount of economic activity that occurs during a period of time can be measured in terms of:
1. The amount of output produced, excluding output used up in intermediate stages of production (the product approach)
2. Incomes received by the producers of output (the income approach)
3. The amount of spending by the ultimate purchasers of output (the expenditure approach)

Question 3

what does each national income approach give

Answer 3

a different perspective of the economy

Question 4

what is the fundamental principal of national income accounting

Answer 4

that all 3 approaches give identical measurements of the amount of current economic activity (except for if there are problems like incomplete or misreported data)

Question 5

what is the product approach

Answer 5

• Measures economic activity by adding the market values of goods & services produced, excluding any goods & services used up in intermediate stages of production
• Uses the value added concept

Question 6

what is the value added of any producer

Answer 6

The value of its output - the value of the inputs purchased from other producers

Question 7

how does the product approach calculate economic activity

Answer 7

by adding the value added of all producers

Question 8

what is the income approach

Answer 8

• Measures economic activity by adding all income received, including wages, taxes, and after-tax profits (to get total income)
• total income = total value added from product approach

Question 9

what is the expenditure approach

Answer 9

Measures activity by adding the amount spent by all ultimate users of output

Question 10

who are the ultimate users of output

Answer 10

• those who consume the output
• not those that use it up in production to sell

Question 11

why must the 3 approaches always be the same answer?

Answer 11

1. The market value of goods and services produced in a given period = the amount buyers must spend to purchase them
2. What the seller receives must equal what the buyers spend

Question 12

what does it mean: The market value of goods and services produced in a given period = the amount buyers must spend to purchase them

Answer 12

• the market value of a good is a certain amount because its the amount people are willing to spend on it
• Market value of a good or service and spending on that good or service are always the same, so the product approach (which measures market values) and the expenditure approach (which measures spending) must give the same measure of economic activity

Question 13

what does it mean: What the seller receives must equal what the buyers spend

Answer 13

• Seller’s receipts = total income generated by the economic activity (aka revenue)
• Total income/revenue is what the company made before salaries paid to workers and suppliers, taxes paid to the government, and profits (whatever is left over)
• Therefore, total expenditure must = total income generated, meaning expenditure and income approaches must also produce the same answer

Question 14

what is gross domestic product

Answer 14

• GDP
• Broadest measure of aggregate economic activity

Question 15

how are the 3 approaches equal

Answer 15

Because product value = expenditure, and income = expenditure

Question 16

what is the fundamental identity of national income accounting

Answer 16

Total Production = Total Income = Total Expenditure
- where production, income, and expenditure are all measured in the same units (ex. dollars)

Question 17

what are market values

Answer 17

they are the prices goods/services are sold for

Question 18

how can GDP be measured

Answer 18

• by any of the approaches from earlier
• All 3 approaches gives the same value for GDP, but sees GDP differently
• Using all 3 gives a complete picture of an economy’s structure

Question 19

what is an issue with using market values to measure GDP

Answer 19

that some useful goods and services are not sold in formal markets since they are hard to measure

Question 20

what is a capital good

Answer 20

• A good that is produced (except for natural resources like land) to be used to produce other goods, but are not used up in the same period that its produced in
• Ex. factory equipment, office equipment, factories, office buildings
• For example, you built a factory in one year
• The factory was built so you can make other goods
• But you’re not done using the factory in the same year you built it, you plan to use it for a long time, making more goods for the years to come

Question 21

how does the product approach measure/define GDP

Answer 21

Defined as the market value of final goods and services newly produced within the nation during a fixed period of time

Question 22

with the product approach, how are goods and services counted in GDP

Answer 22

they’re counted in their market values

Question 23

why are market values used in GDP

Answer 23

• because it’s adding the production of different goods and services together based on their prices, not their quantity
• it takes into account differences in the relative economic importance of different goods and services (more expensive = more important)
• ex. the total output in an economy is 7 cars and 100 pairs of shoes
  
  • can’t say total output = 107, (7 + 100) since the two have different prices
  • it should be the value of each good added

Question 24

which types of goods and services are included in GDP

Answer 24

only final goods

Question 25

what are examples of non-market goods/services that aren’t included in GDP

Answer 25

• Ex. unpaid homemaking and childcare services performed in a family are not included, but paid homemaking and childcare services (ex. Professional housecleaners, private daycare centres) are included
• Ex. we don’t buy and sell the benefits of clean air and water in markets, so money spent to reduce pollution or improve environmental quality isn’t included in the GDP

Question 26

what are some non-market goods/services that are partially incorporated in the GDP

Answer 26

Ex. Activities that happen in the underground economy
- Includes legal activities hidden from the government to do things like avoid taxes or comply with regulations
- Also includes illegal activities like drug dealing, prostitution, gambling, etc.

Question 27

how are activities that happen in the underground economy included in the GDP

Answer 27

these activities usually use cash, so Statistics Canada estimates the size of the underground economy by calculating the possible amount of cash in circulation and add it to the GDP

Question 28

what are other important parts of economic activity that isn’t sold in markets

Answer 28

• ones the government provides
• like national defence, police and fire protection, public education, etc.

Question 29

what are intermediate goods and services

Answer 29

• Those used up in production of other goods & services in the same period that they themselves were produced
• Ex. you made flour, and in the same year, you made bread with the flour, so the flour is an intermediate good
• The trucking company that delivered the flour to the bakery would also be an intermediate service

Question 30

what are final goods and services

Answer 30

• Those goods & services that are not intermediate
• They are the end products of a process
• Ex. the bread from the earlier example would be the final good
• The bus ride home from the bakery is the final service

Question 31

why aren’t the government activities included in the GDP

Answer 31

Because its not sold in markets/doesn’t have a market value, the GDP they wouldn’t show the government’s contribution to the GDP

Question 32

what kind of economic activity does GDP measure

Answer 32

• current economic activity
• only goods/services that are newly produced in the current period and not any purchases or sales that were done in previous periods
• Ex. the price paid for a newly built house would be included in the GDP, but not the price paid for an already existing house
  
  • The value for the existing house would’ve been included in the GDP for the year it was built
  • But the value for the service of a real estate agent that sold the existing house would be included in the GDP

Question 33

how are government contributions added to the GDP

Answer 33

• the cost of production for these contributions are added into the GDP
• Ex. the contribution of national defence to the GDP = the wages of the soldiers’ salaries, costs of military equipment, etc.

Question 34

what are inventories

Answer 34

Stocks of unsold finished goods, goods in process, and raw materials held by firms

Question 35

what is a way to differentiate between an intermediate and final goods

Answer 35

based on the treatment of inventory investment

Question 36

what are capital goods considered as

Answer 36

• capital goods are considered final goods
• so new capital goods that are made are included in the GDP

Question 37

what is inventory investment

Answer 37

• the amount inventories increase during the year (not just the amount purchased, since some of it could’ve been used up)
• Ex. a baker had $1k worth of flour in the beginning of the year, and ended the year with $1.1k worth of flower
• The difference between the beginning and the end of $100 ($1.1k - $1k) is the inventory investment during the year
• Even though the purpose of flour is to make bread, an increase in inventory represents flour produced that isn’t used in the year

Question 38

what are inventory investment considered as

Answer 38

• final goods, so they are included in the GDP

Question 39

what is gross national product

Answer 39

• GNP
• The market value of final goods and services newly produced by domestic factors of production during the current period

Question 40

what does factors of production include

Answer 40

capital and labour

Question 41

what is the difference between GDP and GNP

Answer 41

• GDP is anything that is produced in the country (including foreign capital/labour used in Canada)
• the foreign capital/labour wouldn’t be in the Candian GNP, but the foreign GNP
• Ex. Ex. Japanese cars made in Canada
  The value of the cars made would be counted in the Canadian GDP and the Japanese GNP
• GNP is anything that is produced by the country’s factors of production (labour, capital, etc.)
• ex. A road in Saudi Arabia is built by a Canadian construction company
• The value of the road that is paid by the Saudi government to the company would be in the Canadian GNP but not the Canadian GDP

Question 42

why are the GDP and GNP numbers different

Answer 42

When foreign firms invest in a country, the interest and profits they earn are goes into GDP not GNP

Question 43

What is net factor payments from abroad (NFP)

Answer 43

Income paid to domestic factors of production by the rest of the world - income paid to foreign factors of production by the domestic economy

Question 44

how does the expenditure approach measure GDP as

Answer 44

as total spending on final goods and services produced within a nation during a specified period of time

Question 45

what are the four major categories of spending that are added to get GDP in the expenditure approach

Answer 45

• Consumption = C
• Investment = I
• Government purchases of goods and services = G
• Net exports of goods and services = NX

Question 46

what is consumption

Answer 46

Spending by domestic households on final goods and services, including those produced abroad

Question 47

what are the 4 categories in consumption expenditure

Answer 47

1. Durable goods: Long-lived items
   - Ex. motor vehicles, furniture, and appliances
   - Don’t include houses
2. Semi-durable goods: Shorter-lived goods
   - Ex. clothes
3. Nondurable goods: Ex. foods & utilities
4. Services
   - Ex. health care, financial services, rent, restaurant meals

Question 48

what is investment

Answer 48

Both spending for new capital goods (fixed capital investment) and increases in firms’ inventory holdings (inventory investment)

Question 49

who makes fixed capital investments

Answer 49

• the governments and the private sector
• this type of government spending is under I instead of G

Question 50

what is the fixed capital investment done by the private sector like

Answer 50

physical structures and products that are from intellectual property and research and development

Question 51

what else is also included in investment

Answer 51

• spending on foreign-produced goods
• Increases in inventories

Question 52

what are government purchases of goods and services

Answer 52

• Include any expenditure by the government for a currently produced good (other than capital goods) or service, foreign or domestic
• They include purchases made by the federal, provincial, municipal, and territorial governments

Question 53

what are transfers

Answer 53

• a form of spending that isn’t for making purchases of currently produced goods or services
• A category that includes transfers between levels of government, and government payments to individuals from public pensions, unemployment insurance benefits, welfare payments, etc.

Question 54

what are not included in government purchases

Answer 54

• transfers
• Interest payments on the national debt

Question 55

what are exports

Answer 55

goods/services produced in a country that are purchased by foreigners

Question 56

what are imports

Answer 56

goods/services produced abroad that are purchased by a country’s residents

Question 57

what is negative net exports

Answer 57

when exports < imports

Question 58

what is positive net exports

Answer 58

when exports > imports

Question 59

why are exports added to total spending (GDP)

Answer 59

because its money foreigners spend on final goods and services produced in a country

Question 60

why are imports subtracted from total spending

Answer 60

because consumption, investment, and government purchases already include imported goods and services

Question 61

how does the income approach measure GDP

Answer 61

Calculates GDP by adding the incomes received by producers, including profits, and taxes paid to the government

Question 62

what are the components of the income approach

Answer 62

1. Compensation of Employees
2. Gross Operating Surplus
3. Gross Mixed Income
4. Taxes Less Subsidies on Production
5. Taxes Less Subsidies on Products and Imports
   - these are all added up to get an estimate of income-based GDP

Question 63

what is the compensation of employees

Answer 63

• Total amount in cash or payable a company needs to pay an employee
• Usually one of the largest component of the income approach to measuring GDP

Question 64

what is gross operating surplus

Answer 64

• Income earned from the production of goods/services that is paid to the owners of incorporated companies
• Owners can be: corporations, governments, households, non-profit institutions
• Ownership is usually stocks that they can earn dividends or other investment income one
• This is the second-largest component of the income approach

Question 65

what is gross mixed income

Answer 65

• Income paid to unincorporated companies
• For these companies it’s hard to separate the payments made to employees and payments made to owners, they are just combined and put under this, called “mixed income”

Question 66

what are taxes less subsidies on production

Answer 66

Taxes minus any subsidies received, that companies pay for the use of labour, machinery, buildings or other assets used in the production of goods/services

Question 67

what are taxes less subsidies on products and imports

Answer 67

Taxes payable after a product is produced and sold in Canada or imported from abroad

Question 68

what is statistical discrepancy

Answer 68

• a final category of the income approach that is the difference between between the averaged Statistics Canada’s estimates of GDP from an expenditure approach and its estimate from the income approach
• the difference is added to the income approach to make the income approach = expenditure approach

Question 69

why would the total income need to be split up into the private sector and the government sector

Answer 69

Ex. if you want to predict the demand for consumer goods, looking at the income available to the private sector (where consumers are) is better than looking at the income of the whole economy (which includes the governments)

Question 70

who is considered in the private sector

Answer 70

households and businesses

Question 71

what is private saving

Answer 71

Saving of the private sector

Question 72

who is considered in the government sector

Answer 72

federal, provincial, territorial, and municipal governments

Question 73

what is private disposable income

Answer 73

(Income of the private sector) Measures the amount of income the private sector has available to spend

Question 74

what do you need to know to know how well off a household is and why?

Answer 74

• their current income, what they own (assets), and what they owe (liabilities)
• because someone can make a lot of money but have a lot of debts, vs someone could make no money but have no debts and a lot of expensive assets

Question 75

what are 3 important measures of saving

Answer 75

• Private saving
• Government saving
• National saving

Question 76

what is really important in determining wealth

Answer 76

• The rate of saving
• Ex. a family that puts aside money will accumulate wealth must faster than a family that’s spends all of theirs

Question 77

what is wealth (net worth)

Answer 77

The difference between assets and liabilities

Question 78

how are the rates of saving and wealth closely related

Answer 78

The rate at which national wealth increases also depends on the rate individuals, businesses, and governments in the economy save

Question 79

how is the saving rate of an economic unit calculated

Answer 79

saving / income

Question 80

how is saving (of any economic unit) calculated

Answer 80

= Is unit’s current income - its spending on current needs

Question 81

what is government budget surplus

Answer 81

Another name for government saving

Question 82

what is budget deficit

Answer 82

• If government revenue < government expenditure (they don’t have enough revenue to cover their spending)
• When there is a budget deficit, government saving is negative

Question 83

what is national saving

Answer 83

• The saving of the economy as a whole (private saving + government saving)
• also the total income of the economy

Question 84

what is private saving used for

Answer 84

• Fund new capital investment
• Provide resources the government needs to finance its budget deficits
• Acquire assets from or lend to foreigners

Question 85

what is current account balance (CA)

Answer 85

= payments received from abroad in exchange for currently produced goods and services (including factor services) - Analogous payments made to foreigners by the domestic economy

Question 86

what is the uses of saving identity

Answer 86

States than an economy’s private saving is used in 3 ways:
1. investment (I)
2. government budget deficit (-Sgovt)
3. current account balance (CA)

Question 87

how is private saving used in investment

Answer 87

Firms borrow from private savers to finance constructions and purchase of new capital (including residential capital) and inventory investments

Question 88

how is private saving used in the government budget deficit

Answer 88

When a government has budget deficits and needs to borrow from private savers to cover the difference

Question 89

how can you tell if there is a budget deficit or not

Answer 89

• budget deficit = Sgovt (negative)
• no budget deficit = -Sgovt (positive)

Question 90

how is private saving used in the current account balance

Answer 90

• When its positive it means the money foreigners get from Canada is not enough to cover the money they give to Canada
• To make up the difference, foreigners must either borrow from Canadian private savers or sell some of their assets to Canadian savers (assets can be land, factories, stocks, and bonds)
• Therefore, financing the current account balance is a use of a country’s private savings
• If CA is negative (such as during the post-war period) Canada got more money from foreigners and couldn’t cover the payments to foreigners
• To make up the difference, Canada needs to borrow from foreigners or sell assets to them
• In this case, foreigners use their saving to lend to Canada or to acquire Canadian assets

Question 91

what are flow variables

Answer 91

• Variables that are measured per unit of time
• They can be per quarter or per year
• Ex. annual GDP measures the economy’s production per year

Question 92

what are stock variables

Answer 92

• Variables that are defined at a point in time
• Ex. the amount of money in your bank account on a specific date
• Many times, a flow variable is the rate of change in a stock variable

Question 93

what kind of variables are wealth and saving

Answer 93

• saving is a flow variable
• wealth is a stock variable

Question 94

what is national wealth

Answer 94

the total wealth of the residents of the country

Question 95

what are the 2 parts of national wealth

Answer 95

1. The country’s domestic physical assets
2. Net foreign assets

Question 96

what are the country’s domestic physical assets

Answer 96

Like stock of capital goods and land

Question 97

what are the net foreign assets of a country

Answer 97

= country’s foreign assets - foreign liabilities

Question 98

what are foreign assets

Answer 98

like foreign stocks, bonds, and factories owned by domestic residents

Question 99

what are foreign liabilities

Answer 99

domestic physical and financial assets owned by foreigners

Question 100

why are domestic financial assets not part of national wealth but net foreign assets are

Answer 100

• Net foreign assets are a part of national wealth because it shows if there is a difference between foreign assets and liabilities
• Domestic financial assets held by domestic residents aren’t part of national wealth because the asset is offset by the liability
• ex. having an account at the bank
• A Canadian putting money into a Canadian bank = an asset for the Canadian and a liability for the bank (it cancels out)
• Vs. A Canadian putting money into a foreign bank = an asset for the Canadian and a liability for the foreign bank = adds to Canadian national wealth

Question 101

what are the 2 ways national wealth can change over time

Answer 101

• Value of existing assets or liabilities that make up national wealth
• National saving

Question 102

how can the national wealth change from the value of existing assets or liabilities that make up national wealth

Answer 102

• The increase of the value of domestic and foreign assets increases national wealth
• The decrease in assets (like depreciation) decreases national wealth

Question 103

how can national saving change national wealth

Answer 103

• Over any period, when the value of existing assets and liabilities are held constant, each additional dollar of national savings = an additional dollar to national wealth
• With national savings (S) = I + CA, it means that national savings has 2 uses:
  1. Increase the stock of domestic physical capital through investment (I)
  2. Increase the nation’s stock of net foreign assets by lending to foreigners or acquiring foreign assets in an amount equal to the current account balance (CA)
• So if either I or CA increases by a dollar, national wealth will increase by a dollar
• Since national savings increases national wealth dollar to dollar, the faster national savings increase, the faster national wealth will increase

Question 104

If the government budget deficit (that only part of it can be offset with increased private saving) increases, what will happen

Answer 104

national savings will decrease, and national wealth will also decrease

Question 105

what are nominal variables

Answer 105

Variables that are measured in terms of current market values

Question 106

what is a good thing and a bad thing about nominal variables

Answer 106

• good thing: it allows you to sum up different types of goods and services
• bad thing: not good to use when comparing an economic variable at two different points in time
• Ex. If the current market value of the goods/services included in GDP changes over time, you can’t tell if its because of the changes in quantities produced, the changes in prices, or both

Question 107

what is a real variable

Answer 107

• An economic variable that is measured by the prices of a base year
• Measures the physical quantity of economic activity

Question 108

what is real gdp (constant-dollar gdp)

Answer 108

Measures the physical volume of an economy’s final production using the prices of a base year

Question 109

what is nominal GDP (current-dollar GDP)

Answer 109

The dollar value of an economy’s final output, measured at current market prices

Question 110

how do you calculate the value of a real variable (like GDP)

Answer 110

• To determine how much of the total % increase is caused from an increase in physical output is to measure the value of production in each year, using the prices from a base year
• in the base year, the real GDP will always = nominal GDP

Question 111

what is a price index

Answer 111

A measure of the average level of prices for some specified set of goods and services relative to the prices in a specified base year

Question 112

what is GDP deflator

Answer 112

• a price index that measures the overall level of prices of goods/services included in GDP
• its calculated quarterly

Question 113

what is the consumer price index (CPI)

Answer 113

• Measures the prices of consumer goods
• its calculated monthly

Question 114

how is CPI calculated

Answer 114

• Statistics Canada calculates the CPI by finding the current prices of a fixed list/basket of consumer goods and services (like specific foods, clothing, housing, and fuel) each month and divides it by the same basket of goods/services in the base year
• the base year basket of goods and services should be updated occasionally so it better resembles the basket of goods/services that consumers choose in the current year

Question 115

what is the rate of inflation measured with

Answer 115

price indexes

Question 116

what is the rate of inflation

Answer 116

• the % rate of increase in the price index per period
• Ex. CPI rises from 100 in year 1, to 105 in year 2
• The rate of inflation = (105 - 100)/100 = 5% per year

Question 117

what is an interest rate

Answer 117

• A rate of return promised by a borrower to a lender
• ex. the interest rate on a one year loan of $100 is 8%
• Borrow needs to pay back $100 + ($100 x 8%) = $100 (principal)+ $8 (interest) in one year

Question 118

how does interest rates differ

Answer 118

different based on factors like who is the one borrowing, how long they are borrowing for, etc

Question 119

which assets don’t have a specific interest rate

Answer 119

like shares of a corporate stock that don’t pay a specific interest rate, but pay a return in the form of dividends and share price appreciation

Question 120

what do interest rates and other rates of return indicate

Answer 120

• how quickly the nominal/dollar value of an interest-bearing asset increases over time, but it doesn’t show how quickly the value of the asset changes in real/purchasing power terms
• Ex. a savings account has $300 and 4% interest per year
• After a year, the account has $312
• But that is only if inflation is 0%, which allows the account to gain 4% in interest
• But if inflation was 4%, then what costed $300 before now costs $312 and in real terms your gain from interest is none (since inflation rate is the same as the interest rate)

Question 121

what is the nominal interest rate (nominal rate of return

Answer 121

• The rate at which the nominal value of an asset increases over time (i)
• conventionally measured interest rates, those that are reported

Question 122

what is real interest rate (real rate of return)

Answer 122

• The rate at which the real value or purchasing power of the asset increases over time
• ex. If the saving account pays 4% interest (nominal interest rate), and the inflation rate is 0, the real interest rate on that savings account = 4% - 0% = 4%
• A 4% real interest rate on the account means the owner of the account can buy 4% more goods & services by the next year compared to the current
• If inflation is 4%, the real interest rate on that savings account = 4% - 4% = 0%
• This means the purchasing power of the account isn’t any different from the current year to the next

Question 123

can you calculate the real interest rate

Answer 123

• Usually when you borrow, lend, or make a bank deposit, you know the nominal interest rate beforehand
• if you also have the inflation rate, you can calculate the real interest rate
• but the inflation rate isn’t determined until the end of the period
• Ex. the period of the loan or deposit is a year, you won’t know what the inflation rate is during the year until the year is over
• So when you make a loan or deposit, you won’t be able to know what the real interest rate is
• but you can calculate what you expect it to be to help you determine how much to borrow, lend or deposit