Download Ch. 9: Handout Answers

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Chapter 9. Measures of Economic Activity
By: Mike, Gloria, Sophia, Belinda
Section 9.1 ：Gross Domestic Product
National income accounts
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Statistics Canada prepares the country’s National Income Accounts which give various
measures of total income and spending in the Canadian economy.
They allow us to evaluate the performance of the Canadian economy and to compare it
with other nation’s economies.
Measuring Gross Domestic Product
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The most common measure in Canada is Gross Domestic Product (___GDP______) , it
is the total dollar value of all final goods and services produced 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
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There are _2__ approaches for calculating GDP in Canada, one is for measuring income,
the other is for measuring spending.
The income approach to GDP involves adding together all the income in the economy,
including wages, salaries, corporate profits etc.
The expenditure approach to GDP involves adding together all the spending in the
economy.
The GDP identity
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GDP calculated as total income is identical to gross domestic product calculated as total
spending.
The relationship between the two approaches is called GDP 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
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Income approach
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There are four payments that form the basis of GDP calculated using the income
approach
1. Wages and Salaries
- is the largest income category
- includes Direct payments to workers as well as employee benefits
2. Corporate Profits
- all corporate profits are a payment to Share owning households
- Retained earnings  profits kept by businesses for new investment
3. Interest Income
- interest paid on Business loans, bonds and royalty payments
4. 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:
5. Indirect Taxes are taxes that cannot be seen and is charged on products
6. Depreciation
- Durable assets such as buildings and equipments become old and needs to
replaced. This is considered as a cost to the business.
7. Statistical Discrepancy
- is the discrepancy in the GDP figures for the two approaches
The Expenditure Approach
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Finding GDP using the expenditure approach is the sum of purchases in product markets.
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There are two things to remember: categories of products, and categories of expenditure.
Categories of Products
Final product are those that will not be processed further and will not be resold.
Intermediate product are those that will be processed further or will be resold.
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*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 added to 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
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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 financial service are included.
Second-Hand Purchases
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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)
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- 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)
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is the current government spending on goods and services.
transfer payment and government subsidies are 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)
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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
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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.
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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
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GNP is the total income acquired by Canadians both within Canada and elsewhere.
GDP focuses on incomes made in Canada, GNP focuses on the earning of Canadians.
To calculate GNP, two adjustments must be made:
1. Income earned from Canadian financial investment by the rest of the world is
deducted from GDP to find GNP (i.e. interest payments on a Canadian government
bold held in Japan)
2. 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
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Disposable income or DI is an income measure, which is income after payment of
income taxes, which can be either consumed or saved.
Article
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 GDP adjusted for purchasing power parity, the rate of
adult literacy, the percentage of youth enrolled in school and life expectancy at birth.
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The Debate Over HDI
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There are four issues with the HDI that its critics highlight
1. The HDI rankings for rich countries are numerically very close, making it
difficult to use these rankings in any meaningful way.
2. Literacy figures for many countries are open to dispute.
3. Increases in per capita GDP for rich countries are discounted at higher and
higher rates, a method criticized by some observers.
4. Life expectancy statistics 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.