Chapter 9 Measures of Economic Activity Inez Chu, Michelle Huynh, Sydney, Winfield Chung, Leo Tsang.
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Transcript of Chapter 9 Measures of Economic Activity Inez Chu, Michelle Huynh, Sydney, Winfield Chung, Leo Tsang.
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Chapter 9Measures of Economic Activity
Inez Chu, Michelle Huynh, Sydney, Winfield Chung, Leo Tsang
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9.1 Gross Domestic Product
Sydney
Inez
Michelle
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National Income Accounts
Canada’s national income accounts show the levels of total income and spending in the Canadian economy
Among other measures these accounts include Gross Domestic Product (GDP)
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Gross Domestic Product
GDP is the total dollar value of all final goods and services produced in an economy during a particular period
GDP is calculated using two approaches the income approach the expenditure approach
The GDP identity states that GDP expressed as total income GDP expressed as total spending
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Calculating Gross Domestic ProductFigure 9.1, Page 215
Product Current Price(P)
Annual Product(Q)
Total Dollar Value(P x Q)
Surgical lasers $1000 3 $3000Milkshakes 2 1000 2000
GDP = $5000
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Circular Flow in a Simple EconomyFigure 9.2, Page 216
Economic Resources(natural, capital, and
human resources
Expenditure Approach
Businesses Households
Household Incomes(rent, interest, wages
and profit)
Consumer Spending
Consumer Products
Resource Markets
Product Markets
Income Approach
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The Income Approach (a)
Four classes of incomes include:Wages and SalariesCorporate ProfitsInterest IncomeProprietors’ Incomes and Rents
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The Income Approach (b)
To balance the GDP that is calculated using the income approach three other classifications are included:
Indirect TaxesDepreciationStatistical Discrepancy
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The Expenditure Approach (a)
GDP found: sum of purchases in product markets.This is distinguished between two categories:1) Final products: products that will not be
processed further and will not be resold. Example: Flour bought for home use
2) Intermediate products: products that will be processed and will be resold
Example: Flour bought to make bread and is sold in bakeries
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The Expenditure Approach (b)
Double Counting: problem adding to GDP the same item at different stages in its production.
To avoid this problem we can use the concept of Value Added: the extra worth of a product at each stage of production
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Excluded Purchases
Expenditure-based GDP is calculated on the basis of almost all purchases in the Canadian economy. It is excluded in GDP because it is not related to current production, there are two types.
1) Financial Exchanges(transaction just shifts purchasing power from one
party to another. Payments for any financial service—bank service charges, or commission to a stockbroker is included)
2) Second-Hand Purchases
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Included Purchases (a)
Purchases included in GDP calculations fall into four categories
1) Personal Consumption (C): household spending on goods and services (The largest component of purchases takes up 60% of GDP)
2) Gross Investment (I) usually includes purchases of assets that are intended to produce revenue ( second largest component varies within 15-25% of GDP )
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Included Purchases (b)3) Government Purchases (G) current government spending on goods and
services (20% of GDP)
ResourceMarkets
FinancialMarkets
Households
ProductMarkets
Businesses
Investment (I)
Income Income
Saving (S)
Consumption (C)Spending
Retained Earnings
Investment Funds
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Included Purchases (c)
4) Net Exports (X-M)purchases of Canadian goods and
services by the rest of the world also known as Exports (X)
Expenditure equation: shows that GDP is simply the sum of these 4 types of spending
GDP= (C)+(I)+(G)+(X-M)
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Government and the Circular Flow
Income Income
Consumption (C)Spending
Government Borrowing
Household Taxes(- Transfer Payments)
Government Purchases (G)
ResourceMarkets
FinancialMarkets
HouseholdsGovernmentBusinesses
ProductMarkets
Business Taxes(-Subsidies)
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The Rest of the World and the Circular Flow
Income Income
Consumption (C)Spending
Foreign Lending(-Foreign Borrowing)
Export (X)
ResourceMarkets
FinancialMarkets
HouseholdsRest of theWorld
Businesses
ProductMarkets
Imports (M)
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Questions
Practice Questions Page 210
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9.2GDP and Living Standards
Winfield
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GDP and Living Standards
Per capita GDP is GDP per person and equals GDP divided by population
Per capita real GDP is per capita GDP expressed in constant dollars
from a given year is used to compare living standards in a given
country over timePer capita GDPs for various countries are
measured in a single currency
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Limitations of GDP (a)
GDP has limitations as an indicator of living standards because it does not include non market activities and those that
take place in the underground economy fully capture improvements in product quality indicate the composition of output indicate the distribution of income
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Limitations of GDP (b)
indicate how much leisure is enjoyed by a country’s citizens
distinguish between activities that are and are not harmful to the environment
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9.3 Other Economic Measures
Leo Tsang
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Gross National Product (GNP)
the total income acquired by Canadians both within Canada and elsewhere.
Note GDP focuses on incomes made in Canada; GNP focuses on the earnings of Canadians.
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Calculating GNP
To calculate GNP, two adjustments to GDP must be made
A. Income earned from Canadian financial investment by the rest of the world Ex. Interest payments on a Canadian bond held in Japan Deduct from GDP to find GNP
B. Such earnings are not part of earnings of the world
Ex. A stock dividend from an American Company paid to a Canadian shareholder
Added to GDP to find GNP
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Winner!
GDP – A. + B. = GNP
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GNP continued
When the countries financial assets are owned by foreigners there is an outflow of financial investment income. Which makes the GNP less than GDP.
[Foreign Financial asset > Nation’s citizens financial asset = GDP > GNP ]
When nation’s citizens’ foreign financial investment are greater than the amount owned by nation’s assets owned by Foreigners makes GNP greater than GDP
[Foreign Financial asset < Nation’s citizens financial asset = GDP < GNP ]
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Disposable Income
Income after the payment of income taxes, that households can either consume or save.
This measure is significantly lower than GDP and GNP
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Questions
Class work: 9.3 #1.a)
Homework: 9.3 #1.b)c)d),#2a)b)
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Human Development Index
• an index combining normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide.
Debate over HDI• 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
discounted at higher and higher rates, a method criticized by some observers.
• Life expectancy statistics change very gradually and are difficult to estimate.
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2007/2008 UNDP HDI Report
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Bibliography
Lovewell, Mark. Understanding Economics A Contemporary Perspective. Third ed. 214-21.
Lovewell, Mark. 2002. McGraw-hill Ryerson. 7 Dec. 2008 <http://highered.mcgraw-hill.com/sites/dl/free/0070891478/33799/lovewell2_ppt09.pdf>.
"Human Developement Index." Wikipedia. 7 Dec. 2008 <http://en.wikipedia.org/wiki/human_development_index>.