Chapter 8 - Measures of Economic Activity

Chapter 8 - Measures of Economic Activity

Measures of Economic Activity

8.1 Gross Domestic Product (GDP)

●  Statistics Canada is responsible for preparing Canada's national income accounts.

●  GDP (Gross Domestic Product) is on measure of economic activity developed from ______accounts. It is the total dollar value at ______prices of all ______goods and services produced in Canada over a given period.

2 approaches can be adopted to calculate GDP:

1.  ______approach (a method of calculating GDP by adding all incomes in the economy)

○  Statistics Canada classifies Canadian income into 7 categories

i.  Wages and Salaries (about 50%)

●  payment to workers in both business and government

ii.  Corporate Profits

●  Payment to share-owning households

iii.  Interest Income

●  Interest paid on business loans and bonds

iv.  Proprietors’ incomes and rents

●  Earnings of sole proprietorships and partnerships

●  Landlords receiving rents

v.  Indirect Taxes

●  To balance the two approaches

vi.  Depreciation

●  To balance the two approaches

vii.  Statistical Discrepancy

●  To balance the two approaches

2.  ______approach (a method of calculating GDP by adding all spending in the economy)

a.  Two category of products:

i.  ______products: products that will not be processed further and will not be resold

ii.  ______products: products that will be processed further or will be resold

b.  the value of intermediate products are subtracted from GDP using value added (the extra worth of a product at each stage in its production) to avoid ______

c.  excluded purchases:

i.  financial exchanges (money is only transferred from one account to another, no consumption of goods/service is involved)

ii.  ______Purchases (product is already been counted at first sale)

d.  Included purchases:

i.  expenditure equation: GDP = ___ + ___ + ___ + (___ - ___)

●  personal consumption (C)

●  gross investment (I)

●  government purchases (G)

●  net exports (X-M)

Personal Consumption (C): / Household spending on goods and services (about 55% of GDP), includes ______goods (consumed over time) and ______goods (goods and services that are consumed only once).
Gross Investment (I): / Purchases of assets that will produce revenue (about 15% and 25%). This also includes goods and materials that are not sold (inventories).
Gross investment builds up the economy’s capital stock, which is the total value of productive assets. The decrease in the value of capital assets is called ______.
Net investment = Capital Assets – Annual Depreciation
Funds for capital investment usually came from businesses______and households’ ______.
Government Purchases (G): / Includes current spending by all levels of government on goods and services (about 20% of GDP). This does not include ______payments.
Net Exports
(X-M): / Net Exports = ______- ______

GDP identity:

GDP expressed as total income = GDP expressed as total spending

8.2 GDP and Living Standards

Per capita GDP = ______/ <- Frequently used to compare past and current living ______and economic ______between nations.

Example: In 2010, Canada’s GDP was $1 621 529 million and its population was 34.1088 million. Find Canada’s per capita GDP.

There are two types of adjustments that can be made to per capita GDP

1. ______Adjustment - this adjustment allows economists to make comparisons despite of changes in price.

______GDP - GDP expressed in constant dollars from a given year. / Per Capita ____ GDP = ______

2. ______adjustment - expressing all countries' GDPs in one currency, usually the US dollar.

Limitations of GDP

●  Excluded activities: Non-market activities and underground economy

○  Non-market activities - Productive activities that take place outside the marketplace but have impact on living standard

○  Underground economy - unreported market transactions, including smuggling and unreported cash transactions that intentionally avoids tax.

●  Product quality

○  GDP can only reflect changes in selling price, but does not show quality improvement and technology advancement in consumer goods.

●  Composition of output

○  GDP does not show what is produced or purchased

●  Income distribution

○  Income inequalities are not shown in GDP values.

●  Leisure

●  The environment

○  GDP does not differentiate between economic activities that are harmful to the environment and those that are not. Thus, it does not show the spillover costs and benefits.

8.3 Other Economic Measures

Gross National Product (GNP)

●  GNP refers to the total income made by Canadians both domestically and ______

○  Differs from GDP as this focuses on money made by Canadians, rather than money made in Canada

●  GNP can be calculated by making two adjustments to GDP

○  Deduct income earned from ______by the rest of the world (as these aren’t earnings from Canadians)

○  Add income earned by financial investments of Canadians in the rest of the world (Not domestic earnings, but earnings of Canadians)

●  Typically these adjustments are made in an ______since the financial investments by the rest of the world in Canada out-weigh those made abroad by Canadians

○  This account then gives the ______which is subtracted from GDP to find GNP

●  Most countries are similar to Canada where GDP>GNP, however there are exceptions such as the United Kingdom where it is the reverse

●  GNP is typically used when ______with other countries that stress GNP over GDP

Disposable Income (DI)

●  Is the income that households can either ______or _____

●  Typically much less than GDP and GNP

Open Discussion Questions:

1.  Think about second-hand goods, such as used cars or machineries. If they are not included in the expenditure approach, why do you think the salary of used cars dealers be included? What if the owner sells his/her car directly without a dealer, should the value still be added?

2.  Do you think a country’s per capita is an accurate indicator of average income and living standard? Why or why not?

2.  What factors cause certain countries choose GDP over GNP and vice-versa? And should DI be compared to these?

Chapter 8: Questions

1.  Identify whether or not each of the following transactions would be included in GDP. In each case, explain which component of GDP the transaction represent, if it is included in the expenditure part of GDP.

a.  a consumer purchases a used television

b.  a toy store adds to its stock of inventories

c.  a consumer buys a new car

d.  a low income family receives welfare money from the government

e.  the municipal government builds more bus stations

f.  a farmer purchases a piece of machinery

2.  The table shows the national accounts for a hypothetical economy

($ billions)
Government Purchases / 40
Exports / 14
Gross Investments / 33
Net Investment / 24
Personal consumption / 83
Statistical Discrepancy / 2

a.  From the table above, can you calculate the value of the economy’s GDP? Explain

b.  If the country has $16 billions of import, what is the economy’s GDP?

c.  What is the value of this economy’s depreciation? How did you calculate this figure?

d.  Can you calculate the amount of income-based GDP? Explain the method you would use and calculate the value.

3.  How do you think each components of the economy will work together? On a single graph, illustrate how the financial markets, government and the rest of the world will be fit into the circular flow model.

4.  In a given year, country A’s GDP in terms of its own currency is $150 billion.

a.  If the country’s population is 5 million, what is its per capita GDP?

b.  If the country’s real GDP is $ 163 billion, what can you tell about the country’s inflation rate and the purchasing power of people in this country?

c.  If each of the country’s own dollars is worth $0.85 US, then what is the country’s per capita GDP in terms of U.S. dollars?

5.  When is a country’s GNP higher than its GDP? Outline the effects on citizens when a country’s GNP is higher than its GDP.

Chapter 8 Study Guide:

Key Terms:

1.  National Income Accounts

2.  Gross Domestic Product (GDP)

3.  Income Approach

4.  Expenditure Approach

5.  GDP Identity

6.  Final Products

7.  Intermediate Products

8.  Double-counting

9.  Value added

10. Expenditure Equation

11. Personal Consumption

12. Gross Investment

a.  Inventories

b.  Capital Stock

c.  Depreciation

d.  Net Investment

e.  Personal Saving

f.  Retained Earnings

13. Government Purchases

a.  Transfer Payments

14. Net Exports

15. Per Capita GDP

16. Real GDP

17. Non-market GDP

18. Underground GDP

19. Gross National Product (GNP)

20. Disposable Income

Key Concept:

1.  Two Approaches to calculate GDP (especially expenditure approach)

a.  Expenditure Equation

2.  4 Circular Flow Models

1)Circular Flow in a Simple Economy / 2)Financial Market and the Circular Flow

3)Government and the Circular Flow / 4)The Rest of the World and the Circular Flow

3.  Per Capita GDP and GDP Adjustment formulas

4.  GNP