Chapter 9: Measures of Economic Activity
Chapter 9: Measures of Economic Activity
Major Concepts
National Income Accounts
GDP Identity
GDP – Income Approach
GDP – Expenditure Approach
Limitations of GDP
GNP
National Income Accounting
- What is National Income Accounts and why is it important?
- National income Accounts give various measures of total income and spending in the Cdn economy
- Allow us to evaluate the Cdn economy and compare to other nation’s economy
- What are the 2 ways to calculate national income?
- Expenditure and Income Approach
GDP Identity
- What is the GDP Identity?
- GDP expressed as total income = GDP expressed as total spending
- Draw a diagram to show that all final consumer spending ends up as some form of household income.
GDP Income Side
- GDP from the income side includes factor payments (4) and non-factor payments (3). Lets go over them.
Factor payments
- Wages and salaries
- Corporate profits : includes taxes paid to gov’t, dividends and retained earnings
- Interest income
- Proprietor’s rents and income
Non- factor payments
- Indirect taxes: GST, PST, negative externalities such as taxes on tabacco
- Depreciation: cost of doing business
- Statistical Discrepancy: discrepancy between the two approaches of calculating GDP
GDP Expenditure Side
- Distinguish between final and intermediate product.
- Final products will not be process further and will not be resold ex. bread
- Intermediate good will be process further and resold ex. flour
- What do we mean by the concept of value-added? How does this relate to national income?
- The value added by each business at each product stage is the value of the business’s output, minus its cost of intermediate products.
- You do not include the purchase price of materials in calculating GDP to avoid double counting, otherwise it will lead to an inflated GDP.
- There are two types of excluded purchases? What are they and give an example of each.
- Financial Exchange such as gifts of money are a shift in purchasing power. Nothing is sold or brought.
- Second hand purchases: have already been accounted in their first sale to the consumer
- There are 4 broad categories with which we calculate GDP from the expenditure side. Explain each of the following categories:
a)C = Consumption
Household spending on goods and services
Durable goods: consume over time ex. cars
Non- durable goods: consumer just once ex. food
b)G = Government Purchases
Subsidies and transfer payments from gov’t to households are not included b/c they are a redistribution of power.
c)I = Investment
Purchase of assets intended to produce revenue.
Ex. Equipment and machines
Includes changes in the value of unsold inventory
Must subtract depreciation to get Net Investments
d)X – IM = Net Exports
X = Exports, purchase of CDN goods from the rest of the world
IM = Imports = CDN spending on goods produce from the rest of the world
Loans from the rest of the world to CDN economy are inflows into the economy and loans to the rest of the world are outflows.
- What is the total expenditure equation?
GDP = C + G + I + (X –IM)
Limitations of GDP
- There are 6 limitations of GDP. What are they?
- Excluded activities: non-market such as household work, childcare and underground transactions such as smuggling of drugs
- Product quality
- Composition of output
- Income distribution
- Leisure
- Environment
GNP
- What is the difference between GDP and GNP
- GDP: incomes made in Canada
- GNP: total income acquired by CDNs both within Canada and elsewhere
Practice makes Perfect!
The following applies to the Canadian economy in 2002.
Consumption = 651
Gross investment = 200
Wages before taxes = 595
Capital consumption allowance = 150
Interest = 50
Net exports = 47
Business Profits = 210
Government Purchases = 240
Indirect Taxes minue Subsidies = 133
Net Foreign Investment Income = -26
- GDP measured from the expenditure side is
a) 1.138
b) 1.112
c) 1.0
d) 0.988
e) 1.288
- Net domestic income at factor cost is:
a) 1.138
b) 1.005
c) 0.855
d) 0.829
e) 0.779