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

  1. 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
  1. What are the 2 ways to calculate national income?
  2. Expenditure and Income Approach

GDP Identity

  1. What is the GDP Identity?
  2. GDP expressed as total income = GDP expressed as total spending
  1. Draw a diagram to show that all final consumer spending ends up as some form of household income.

GDP Income Side

  1. 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

  1. 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
  1. 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.
  1. 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
  1. 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.

  1. What is the total expenditure equation?

GDP = C + G + I + (X –IM)

Limitations of GDP

  1. There are 6 limitations of GDP. What are they?
  2. Excluded activities: non-market such as household work, childcare and underground transactions such as smuggling of drugs
  3. Product quality
  4. Composition of output
  5. Income distribution
  6. Leisure
  7. Environment

GNP

  1. What is the difference between GDP and GNP
  2. GDP: incomes made in Canada
  3. 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

  1. GDP measured from the expenditure side is

a) 1.138

b) 1.112

c) 1.0

d) 0.988

e) 1.288

  1. Net domestic income at factor cost is:

a) 1.138

b) 1.005

c) 0.855

d) 0.829

e) 0.779