Chapter 20 â Measuring GDP and Economic Growth ⢠Macroeconomics
Chapter 20 Measuring GDP and Economic Growth
Macroeconomics: The study of the national economy and the global economy. Macroecon issues: 1) unemployment 2)recessions 3) budget deficiet 4) Inflation GDP (Gross Domestic Product) The total market value of all the final goods and services produced within a country in a given time period. Final goods and services produced in Canada by foreigners are part of Canadas GDP. In measuring GDP, economisits: 1) use final goods and services only. This avoids double counting. 2) Use market prices to value production. The value of intermediate goods is not counted in GDP.- intermediate goods are produced by one firm, bought by another firm, and used as a component of a final good or service. An alternate concept in measuring a nations output is GNP (Gross National Product). GNP is the total value of all final goods and services produced by labour, capital, and other resources of a country, regardless of where production occurred. The circular flow model: It illustrates the flow of expendenture and income b/w diff sectors of the economy. - the economy consist of : households, firms, gov’t. the rest of the world. Business firms sell goods and services Households sell resources (labour) to business firms. The purchasers of goods and services are householls, firms, govt nd rest of the world. Aggregrate Expenditures: 1) Consumption Expendentures (C)- Personal Expenditures on consumer goods and services by households. The purchase of a new car by a cadian household. Haircurts Consumption expenditures do not include the purchase of new homes, new homes are counted as investment. 2) Business Investment (I) - Firms make investment expendentures on new plant, equipment, and buildings. This is the purchase of new caital by firms. It includes expendentures on new homes by households. The purchase of a new car by a company is considered a business investment. It also includes aditttions to business inventories ( the change in business inventories.) 3) Govt Expenditures ( G ) Gov’t ( provincial, federal and local), spending on goods and services. Expenditures on national defence and garbage collection. They don’t include transfer payments b/c they arnt purchases of goods and services.
Gov’t uses taxes to pay for their purchases. Net Taxes (NT)= (Taxes paid to govt) – ( transfer payments received from govts) Transfer payments, cash transfers from govts to housholds and firms. Social security benefits, unemployment benefits, subsidies to firms.
4) NET EXPORTS OF GOODS AND SERVICES ( X – M) The value of exports (X) , minus the value of imports (M) AGGREGATIVE EXPENDENTURE OR TOTAL EXPENDENTURES= [ C + I + G+ ( x-m) ]
AGGREGATIVE INCOMES (Y) income earned producing goods and services wages for labour intrest for capital rent for land proft for enterperunship
Firms pay out as incomes everything they reveive from the sale of their output. Therefore, aggregraative expendentures equals aggregative income (y) and equals GDP. GDP= Y = C + I + G (x-m)
Capital: The plant, equipment, buildings, inventories of raw materials and semifinsihed goods. It is used to produce other goods and services.
Gross Investment the total amount spent both buying new capitaland replacing depreciated capital. Depreciation(Or capital consumption) The decrease in the stock of capital that results from wear and tear and absolence.
Net investment equals gross investments minus depreciation. The stock of capital increases by the amount of net investment from one year to the next. GDP grows b/c capital stock grows Investment adds to capital, so GDP grows b/c of investment.
MEASURING CANADAS GDP To measure GDP, statistics Canada uses 2 approaches: 1 )The expenditure approach 2) The income approach
1) THE EXPENDTURE APPROACH: GDP = Y = C + I + G (x-m) The largest component of GDP from the expenditure approach is expendentures on consumer goods and services. In 2004, GDP measured by the expenditure approach was $1290 billion. The cost of adding a new kitchen to your house would be included in the calculation of your GDP The gov’t bond you buy for investment purposes is not counted as part of this years GDP. It doesn’t rep. goods and services produced. The value of intermediate goods is not counted in GDP ( goods that are used in the production of other goods nd services
VALUE ADDED the difference b/w the value of a firms production and the value of intermediate goods bought from other firms. NET DOMESTIC PRODUCT (or net domestic income) NDP at market prices. NDP=GDP – Depreication GDP includes depreciation (or capital consumption.) (example in slide ting )
THE INCOME APPROACH: GDP= wages + salaries and supplementary labour income+corporate profts+intrest and milseanous investment income+farmers income+income of non farmer unicorpoated business+indirected taxes – subsidies + depreciation.
Indirect taxes: provincial sales taxes GST, taxes on gasoline Subsidies: payments by the gov’t to producers (grain growers and dairy farmers) Direct taxes: a tax on income
Normal GDP: GDP valued aat current prices (or market prices) Normal GDP will increase only if : 1) the average level of prices rises. 2) the quantity of goods and services produced increases Normal GDP incorporates the influence of inflation
REAL GDP (or GDP at constant prices) : GDP valued at base year prices The yearly value of all goods and services produced in an economy measured in the prices of a base year. Real GDP changes if the volume of goods and services produced changes. A rise in real GDP is associated with a decline in the unemployment rate. The uses and limitions of real GDP Economists use real GDP to measure economic welfare. Economic welfare is a measure of the general state of well being.
REAL GDP PER CAPITA=total real GDP/ total pop’l The standard of living improves when the production per person of all the goods and services grows. In Canada real gdp per person was $40070 in 2007. Real GDP is not a perfect measure of total production Real gdp captures only market production It doesn’t include illegal activities and things we produce for ourself Prodctive activities such as cutting the grass and preparing meals at home is not counted as part of GDP Underground economic activity is unreported and therefore it iss omitted from gdp
The GDP measure tends to underestimate the total production of an economy b/c non-market exchanges are not recorded in the GDP. Real GDP is used to make international welfare comparisons Compare real GDP per person in Canada with real GDP per person in China. For that real GDP in China must be computed using the canadain prices
PURCHASING POWER PARITY ( PPP ) are the prices of goods from only one country used when making international comparisions of real GDP.
POTENTIAL GDP:the GDP when all available resources (land, labour, capital) are fully employed. Real GDP fluctuates around potential GDP
BUSINESS CYCLE: the periodic but irregular up and down movement in production They are measured by fluctuations of in real GDP around potential GDP. Every business cycle has 2 phases: 1) recession 2) expansion And 2 turning points: peak and trough During a recession real output decreases Trough: when a recession ends and expansion begins During an expansion real output increases Peak: when expansion ends and recession begins
FLOWS AND STOCKS IN MACECON a flow is a quantity per unit of time GDP of a country in a given time period Saving and investment are flows A stock is a quantity that exists at a point in time Wealth and capital are stocks The flows of savings and investments change these stocks Wealth and savingwealth is the value of all the things that people own (stocks money bonds houses ) Saving adds to wealth
Macroeconomics: The study of the national economy and the global economy. Macroecon issues: 1) unemployment 2)recessions 3) budget deficiet 4) Inflation GDP (Gross Domestic Product) The total market value of all the final goods and services produced within a country in a given time period. Final goods and services produced in Canada by foreigners are part of Canadas GDP. In measuring GDP, economisits: 1) use final goods and services only. This avoids double counting. 2) Use market prices to value production. The value of intermediate goods is not counted in GDP.- intermediate goods are produced by one firm, bought by another firm, and used as a component of a final good or service. An alternate concept in measuring a nations output is GNP (Gross National Product). GNP is the total value of all final goods and services produced by labour, capital, and other resources of a country, regardless of where production occurred. The circular flow model: It illustrates the flow of expendenture and income b/w diff sectors of the economy. - the economy consist of : households, firms, gov’t. the rest of the world. Business firms sell goods and services Households sell resources (labour) to business firms. The purchasers of goods and services are householls, firms, govt nd rest of the world. Aggregrate Expenditures: 1) Consumption Expendentures (C)- Personal Expenditures on consumer goods and services by households. The purchase of a new car by a cadian household. Haircurts Consumption expenditures do not include the purchase of new homes, new homes are counted as investment. 2) Business Investment (I) - Firms make investment expendentures on new plant, equipment, and buildings. This is the purchase of new caital by firms. It includes expendentures on new homes by households. The purchase of a new car by a company is considered a business investment. It also includes aditttions to business inventories ( the change in business inventories.) 3) Govt Expenditures ( G ) Gov’t ( provincial, federal and local), spending on goods and services. Expenditures on national defence and garbage collection. They don’t include transfer payments b/c they arnt purchases of goods and services.
Gov’t uses taxes to pay for their purchases. Net Taxes (NT)= (Taxes paid to govt) – ( transfer payments received from govts) Transfer payments, cash transfers from govts to housholds and firms. Social security benefits, unemployment benefits, subsidies to firms.
4) NET EXPORTS OF GOODS AND SERVICES ( X – M) The value of exports (X) , minus the value of imports (M) AGGREGATIVE EXPENDENTURE OR TOTAL EXPENDENTURES= [ C + I + G+ ( x-m) ]
AGGREGATIVE INCOMES (Y) income earned producing goods and services wages for labour intrest for capital rent for land proft for enterperunship
Firms pay out as incomes everything they reveive from the sale of their output. Therefore, aggregraative expendentures equals aggregative income (y) and equals GDP. GDP= Y = C + I + G (x-m)
Capital: The plant, equipment, buildings, inventories of raw materials and semifinsihed goods. It is used to produce other goods and services.
Gross Investment the total amount spent both buying new capitaland replacing depreciated capital. Depreciation(Or capital consumption) The decrease in the stock of capital that results from wear and tear and absolence.
Net investment equals gross investments minus depreciation. The stock of capital increases by the amount of net investment from one year to the next. GDP grows b/c capital stock grows Investment adds to capital, so GDP grows b/c of investment.
MEASURING CANADAS GDP To measure GDP, statistics Canada uses 2 approaches: 1 )The expenditure approach 2) The income approach
1) THE EXPENDTURE APPROACH: GDP = Y = C + I + G (x-m) The largest component of GDP from the expenditure approach is expendentures on consumer goods and services. In 2004, GDP measured by the expenditure approach was $1290 billion. The cost of adding a new kitchen to your house would be included in the calculation of your GDP The gov’t bond you buy for investment purposes is not counted as part of this years GDP. It doesn’t rep. goods and services produced. The value of intermediate goods is not counted in GDP ( goods that are used in the production of other goods nd services
VALUE ADDED the difference b/w the value of a firms production and the value of intermediate goods bought from other firms. NET DOMESTIC PRODUCT (or net domestic income) NDP at market prices. NDP=GDP – Depreication GDP includes depreciation (or capital consumption.) (example in slide ting )
THE INCOME APPROACH: GDP= wages + salaries and supplementary labour income+corporate profts+intrest and milseanous investment income+farmers income+income of non farmer unicorpoated business+indirected taxes – subsidies + depreciation.
Indirect taxes: provincial sales taxes GST, taxes on gasoline Subsidies: payments by the gov’t to producers (grain growers and dairy farmers) Direct taxes: a tax on income
Normal GDP: GDP valued aat current prices (or market prices) Normal GDP will increase only if : 1) the average level of prices rises. 2) the quantity of goods and services produced increases Normal GDP incorporates the influence of inflation
REAL GDP (or GDP at constant prices) : GDP valued at base year prices The yearly value of all goods and services produced in an economy measured in the prices of a base year. Real GDP changes if the volume of goods and services produced changes. A rise in real GDP is associated with a decline in the unemployment rate. The uses and limitions of real GDP Economists use real GDP to measure economic welfare. Economic welfare is a measure of the general state of well being.
REAL GDP PER CAPITA=total real GDP/ total pop’l The standard of living improves when the production per person of all the goods and services grows. In Canada real gdp per person was $40070 in 2007. Real GDP is not a perfect measure of total production Real gdp captures only market production It doesn’t include illegal activities and things we produce for ourself Prodctive activities such as cutting the grass and preparing meals at home is not counted as part of GDP Underground economic activity is unreported and therefore it iss omitted from gdp
The GDP measure tends to underestimate the total production of an economy b/c non-market exchanges are not recorded in the GDP. Real GDP is used to make international welfare comparisons Compare real GDP per person in Canada with real GDP per person in China. For that real GDP in China must be computed using the canadain prices
PURCHASING POWER PARITY ( PPP ) are the prices of goods from only one country used when making international comparisions of real GDP.
POTENTIAL GDP:the GDP when all available resources (land, labour, capital) are fully employed. Real GDP fluctuates around potential GDP
BUSINESS CYCLE: the periodic but irregular up and down movement in production They are measured by fluctuations of in real GDP around potential GDP. Every business cycle has 2 phases: 1) recession 2) expansion And 2 turning points: peak and trough During a recession real output decreases Trough: when a recession ends and expansion begins During an expansion real output increases Peak: when expansion ends and recession begins
FLOWS AND STOCKS IN MACECON a flow is a quantity per unit of time GDP of a country in a given time period Saving and investment are flows A stock is a quantity that exists at a point in time Wealth and capital are stocks The flows of savings and investments change these stocks Wealth and savingwealth is the value of all the things that people own (stocks money bonds houses ) Saving adds to wealth
