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Chapter 9. Measures of Economic Activity
By: Mike, Gloria, Sophia, Belinda
Section 9.1 ：Gross Domestic Product
National income accounts
-Statistics Canada prepares the country’sNational Income Accountswhich give various measures of totalincome and spending in the Canadian economy.
-They allow us toevaluate the performance of the Canadian economy and to compare it with other nation’s economies.
Measuring Gross Domestic Product
-The most common measure in Canada is Gross Domestic Product (___GDP______) , it is the totaldollar value of all finalgoods and servicesproduced in the economy over a given period.
-GDP is calculated at current prices and the period is typically a year.
-GDP uses dollar value , it is a way to quantify and combine a wide range of goods and services
Two views of GDP
-There are _2__ approaches for calculating GDP in Canada, one is for measuringincome, the other is for measuring spending.
-The incomeapproach to GDP involves adding together all theincomein the economy, including wages, salaries, corporate profits etc.
-The expenditure approach to GDP involves adding together all the spendingin the economy.
The GDP identity
-GDP calculated as total income is identical to gross domestic product calculated as total spending.
-The relationship between the two approaches is calledGDP identity.
-GDP expressed as total income = GDP expressed as total spending.
-The GDP identity applies not only to the simplified economy but also the entire Canadian economy
Income approach
-There are four payments that form the basis of GDP calculated using the income approach
- Wages and Salaries
- is the largest income category
- includes Direct paymentsto workers as well as employee benefits
- Corporate Profits
- all corporate profits are a payment toShare owning households
- Retained earnings profits kept by businesses for new investment
- Interest Income
- interest paid on Business loans, bonds and royalty payments
- Proprietors Incomes and Rents
- includes earnings of sole proprietorships and partnerships
- income are received by owners for supplying various types of Resources
to their businesses
-In addition to the four classes of income, there are three other categories. They help in balancing GDP calculated using the expenditure approach:
- Indirect Taxes are taxes that cannot be seen and is charged on products
- Depreciation
- Durable assets such as buildings and equipments become old and needs to
replaced. This is considered as a cost to the business. - Statistical Discrepancy
- is the discrepancy in the GDP figures for the two approaches
The Expenditure Approach
-Finding GDP using the expenditure approach is the sum of purchases in product markets.
-There are two things to remember: categories of products, and categories of expenditure.
Categories of Products
Final product are those that will not be processedfurther and will not be resold.
Intermediate productare those that will be processed further or will be resold.
*How a product is used determines whether it is final or intermediate.
-If the values of all products final and intermediate -were included in the GDP calculations, we might have the problem of double - counting: adding to GDP the same item at different stages in its production, causing estimates of GDP to be too high and not reflect the real activity in the economy.
-We use the concept of value addedto avoid double-counting. This concept helps quantify the extra worth of the product at each stage in its production.
-The value added by each business at each production stage is the value of the business’s output, minus its cost of intermediate products.
*The final price of a product or the price at which a product is sold is the sum of the values added at all stages of production.
Excluded Purchases (purchases that not included in GDP calculation)
Financial Exchanges
-Monetary transaction between family members, bank deposits and purchases of stocks are excluded from GDP, because theses transactions just shift purchasing power from one to another.
-Payments for any financialserviceare included.
Second-Hand Purchases
-Purchases of used goods are excluded from GDP, because these products have already been counted in GDP at their first sale.
-Including second-hand purchases would double-count, or overestimate the value of products sold.
Included Purchases (purchases included in GDP calculation)
Expenditure equation states that GDP is the sum of personal consumption(C) , gross investment(I), government purchases(G), and net exports(X-M).
GDP= C+I+G+(X-M)
Personal Consumption(C)
- Household spending on goods and services, making up about 60 percent of GDP.
- Nondurable goods are consumed just once (i.e. food)
- Durable goods are consumed over time(i.e. vehicles)
Gross Investment(I)
- Includes purchases of assets that are intended to produce revenue, making up between 15-25 percent of GDP.
- Machines and equipment are the most important spending in this category.
- Gross investment also includes inventories(stocks of unsold goods), construction of
all buildings, and capital stock (the total value of productive assets that provide a flow of revenue).
- Net investment represents the yearly change in capital stock, or, gross investment
minus depreciation.
- Personal saving and businesses’ retained funds are used by businesses to make investment
Government Purchases_ (G)
-is the current government spending on goods and services.
-transfer paymentand government subsidiesare excluded from government purchases because they are simply a redistribution of purchasing power.
-Both transfer payments and government subsidies are viewed as negative taxes, so they are tax payments in reverse.
-Government spending is partly financed through taxes from households and businesses. Or governments can be financed through borrowing, which takes place in financial markets
Net Exports (X-M)
-Export(X) are foreign purchases of Canadian goods and services
-Import (M) are Canadian purchases of goods and services from the rest of the world
-Net exports is calculated by X minus M
Section 9.2：GDP and living standards
-How do living standards in Canada today compare with past living standards?
Per capita GDP Or GDP per person is frequently used in answering this question.
-Depending on how per capita GDP is to be used, either of two adjustments can be made to it: inflation adjustment or exchange rate adjustment.
-Because prices change over the years, per capita GDP must be adjusted when comparing economic well-being in the same country in different year.
-To compare various countries’ per capita GDP for a given year, we must adjust for the different currencies.
-Per capita real GDP: GDP expressed in constant dollars from a given year.
-What is the formula to calculate Per capita GDP?
Per capita GDP=GDP/population
What are the six limitations of GDP?
Excluded activitie
-Nonmarket activities: productive activities that take place outside the marketplace.
-Underground economy: all the market transactions that go unreported.
Product quality
Composition of output
Income distribution
Leisure
The environment
Section 9.3 ：Other economic measures
Gross National Product
-GNP is the total income acquired by Canadiansboth within Canada and elsewhere.
-GDP focuses on incomes made in Canada, GNP focuses on the earningof Canadians.
-To calculate GNP, two adjustments must be made:
- Income earned from Canadian financial investmentby the rest of the worldis deducted from GDP to find GNP (i.e. interest payments on a Canadian government bold held in Japan)
- Income earned from financial investment by Canadians in the rest of the world is added to GDP to find GNP. (i.e. a stock dividend from an American company paid to a Canadian shareholder)
Disposable income
-Disposable income or DI is an income measure, which is income after payment of income taxes, which can be either consumed or saved.
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Adding the Human Dimension
-Mahbub ul Haq was instrumental in devising the Human Development Index(HDI) published annually for various countries by the United Nations Development Programme.
-This index is based on per capita GDPadjusted for purchasing power parity, the rate of adult literacy, the percentage of youth enrolled in school and life expectancy at birth.
The Debate Over HDI
-There are four issues with the HDI that its critics highlight
- The HDI rankings for rich countries are numerically very close, making it difficult to use these rankings in any meaningful way.
- Literacy figures for many countries are open to dispute.
- Increases in per capita GDP for rich countries are discountedat higher and higher rates, a method criticized by some observers.
- Life expectancystatistics change very gradually and are difficult to estimate..
Refining HDI
-Haq was aware of these suggestions, and realized that the HDI would be modified over time.
-Each year, the UNDP has been including adjusted HDIs that highlight income disparities within countries and disparities between men and women. Such extensions are certain to continue.