Economics 2HH3Chapter 2Measurment

THE PRODUCT APPROACH TOMEASURING GDP

THE EXPENDITURE APPROACH

THE INCOME APPROACH

AN EXAMPLE WITH INVENTORY INVESTMENT

AN EXAMPLE WITH INTERNATIONAL TRADE

GROSS NATIONAL PRODUCT (GNP)

WHAT DOES GDP LEAVE OUT?

COMPONENTS OF AGGREGATE EXPENDITURE

Consumption

Investment

Net Exports

Government Expenditures

REAL GDP

MEASURES OF THE PRICE LEVEL

PROBLEMS WITH MEASURING REAL GDPAND THE PRICE LEVEL

gross domestic product (GDP)

the dollar value of final output produced duringa given period of time within a country's borders

National Income and ExpenditureAccounts (NIEA)

the official Canadian accounts of aggregate economicactivity, which include GDP measurements conducted byStatistics Canada

product approach

the approach to GDP measurement that determines GDP as thesum of value added to goods and services in production accrossall productive units in the economy

expenditure approach

the approach to GDP measurement that determines GDPas a total spending on all final goods and services productionin the economy

income approach

the approach to GDP measurement that determines GDPas the sum of all incomes received by economic agentscontributing to production

intermediate goods

a good that is produced and then used as an input in anotherproduction process

value added

the value of goods produced, minus the value of intermediategoods used in production

income-expenditure identity

Y = C + I + G + NX

Y - aggregate income

output

C - Consumption expednitures

I - Investment expenditures

G - Government expenditures

NX - Net Exports

gross national product (GNP)

GNP = GDP + Net Factor payments to Canadianresidents from abroad

underground economy

all unreported economic activity

consumption

goods and services produced and consumed during the current period

investment

goods produced in the current period but not consumed in the current period

fixed investment

Investment in Plant, equipment, and housing

inventory investment

goods produced in the current period that are setaside for future periods

Net exports

Expenditures on domestically produces goods and servicesby foreigners (exports), minus expenditures on foriegn-producedgoods and services by demestic residents (imports)

government expenditures

expenditures by federal, provincial, territorial, andmunicipal governments on final goods and services

transfers

government outlays that are transfers of purchasing power from onegroup of private economic agents to another

price index

a weighted average of prices accross all goods and service inthe economy

price level

the average level of prices across all goods and services in the economy

inflation rate

the rate of change in the price level from one period to another

nominal change

the change in the dollar value of a good, a service, or an asset

real change

the change in a quantity of a good, a service, or an asset

chain-weighting

an approach to calculating real GDP that uses a rollingbase year

implicit GDP price deflator

nominal GDP divided by real GDP, all multipied by 100

consumer price index (CPI)

current-year total expenditures, divided by current-yeartotal expenditures at base year prices, all multiplied by 100

flow

a rate per unit time

stock

quantity in existance of some object at a point of time

private disposable income

GDP plus net factor payments, plus transfers from thegovernment, plus interest on the government debt,minus taxes

private sector saving

private disposable income minus consumption expenditures

government saving

taxes minus transfers, minus interest on government debt,minus government expenditures

government surplus

identical to government saving

government deficit

the negative of government surplus

national saving

private sector saving plus government saving

current account surplus

net exports plus net factor payments from abroad

national wealth

the stock of assets held by the country as a whole

capital stock

the quantity of playn, equipment, housing, and the inventoriesin existence in an economy at a point in time

employment

in the Stats Can monthy household survery, those who workedpart-time or full-time during the past week

unemployment

in the Stats Can monthly household survey those who were notemployed during the past week but actively searched for workat some time during the last four weeks.

not in the labour force

in the Stats Can household survey, those who are neitheremployed or unemployed

unemployment rate

the number of unemployed divided by the number in the labourforce

participation rate

the number in the labour force dived by the working-age population

labour market tightness

the degree of difficulty firms face in hiring workers

discouraged workers

those who are not in the labour force and have stoppedsearching for work, but actually want to be employed

1.

What are the three approaches used to measure GDP

product

income

expendature

2.

explain the concept of value added

for each producer, value added is equal to the valueof the total production mins the value of intermediategoods

3.

why is the income-expenditure indentity important

the identity emphasizes the point that all sales ofoutput provide income somewhere in the economy

he identity also provides two separte ways of measuringtotal output in the economy

4.

What is the difference between GDP and GNP

GNP is equal to GDP (domestic production) plus net factorpayments from abroad

net factor payments represent income for domestic residentsthat is earned from production that takes place in foriegncountries

5.

is GDP a good measure of economic welfare

GDP provides a reasonable approximation ofeconomic welfare

why or why not

however, GDP ignores the value of non-marketed economy activity

GDP also measures only total income withoutreference to how that income is distributed

6.

what are the two difficulties in the measurment of aggregrateoutput using GDP

measured GDP does not include production in the underground economy

this is difficult to estimate

GDP also measures the value of a governmentspending at its costs of production

which may be greater or less than its true value

7.

What is the largests expenditure component of GDP

Consumption

Government Spending

Investment

Net Exports

8.

What is investment

Investment is equal to private domestic expenditure on goodsand services

those that are produced but non consumed during the current period

I = Y - C - G - NX

Investment includes

Residential investment

non residential investment

inventory investment

9.

What are government transfers

transfers are outlays transferring purchasing power from one groupof economic agents to another

transfers include payments under Old age security - Including

Old age security

The CPP

Employment insurance

explain why they are not included in GDP

transfers are no included in the measurement of GDPas they are money tranfers and do not represent incomefrom production activity

10.

Why does the base year matter in calculatingreal GDP?

GDP values production at market prices

real GDP compares different years' production at a specific set of prices

those that prevailed in the base year

real GDP is therefore a weighted average of individualproduction levels

the weights are determined according to prevailing relativeprices in teh base year

because relative prices change over time, comparisons of realGDP accross time can differ according to the chosen base year

11.

Explain what chain-weighted is

chain weighted directly compares production levels onlyin adjacent years

the price weights are determined by averaging the prices of theindividual goods and services over the two adjacent years

12.

Explain 3 problems in the measurment ofreal GDP

Real GDP is difficult to measure due to

changes over timein relative prices (SUB BIAS)

difficulties in estimating the extent of quality changes

and the value of newly introduced goods

13.

What are the differences and simularities amongprivate sector savings

private savings measures additions to private sectorwealth

government savings

measures reductions in government debt

increase in government wealth

national savings

measures additions to national wealth

is equal to private savings pus government savings

14.

What are the two ways in which national wealthis accumulated

National wealth is accumulated as increases in the domestic stockof capital (domestic investment)

and increases in claims against foreigners (a current account surplus)

15.

give two reasons why the unemployment ratemay mismeasure the degree of labour market tightness

Measured unemployment excludes discourages workers

measured unemployment only accounts for thenumber of individuals unemployed

without reference to how intensive they search for new jobs