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Chapter 2:The Measurement and Structure of the Canadian Economy National Income Accounts – An accounting framework to measure current economic activity. Three approaches to measure national economic activities 1) Product Approach – The amount of goods and services excluding intermediate goods and services produced (Value Added). 1 2) Income Approach – Income received by factors of Production 3) Expenditure Approach – Amount of spending by the ultimate purchasers/buyers Fundamental Identity of National Accounts Total Product = Total Income = Total Expenditure 2 Product Approach Gross Domestic Product (GDP) – The market value of final goods and services newly produced in a nation within a specified period of time. Gross National Product (GNP) = GDP + Net Factor Payment from Abroad (NFP) NFP = Income paid to domestic factors of production by the rest of the world – Income paid to foreign factors of production in the domestic economy. 3 The Expenditure Approach Gross Domestic Product (GDP) – Total spending on final goods and services produced within a nation during a specified period of time. Y = GDP = Consumption (C ) + Investment (I) + Government Purchases (G) + Net Exports (NX) 4 Consumption: 4) Consumer Durables Semi-Durable Non-Durable Services Investment: Inventory Investment + Fixed Investment Fixed Investment: 1) 2) 3) 1) 2) 3) Residential Construction Non-Residential Construction Machinery and Equipment Investment 5 Government Purchases – Government expenditure excluding Transfer Payments and Interest Payments on the government Debt. Net Exports = Exports – Imports Income Approach GDP – Total income received by factors of production in a nation within a specified period of time. 6 4) Labor Income Corporate Profits Interest and Investment Income Unincorporated Investment Income Net Domestic Product at Factor Prices = 1+2+3+4 1) 2) 3) Net Domestic Product at Market Prices = Net Domestic Product at Factor Price + Indirect Taxes Subsidies GDP = Net Domestic Product at Market Price + Depreciation 7 Private Disposable Income = Y + NFP + TR + INT - T Net Government Income = T – TR – INT GNP = Private Disposable Income + Net Govt. Income = Y + NFP 8 Saving = Current Income – Current Spending Private Saving (SPVT) = Private Disposable Income – C = Y + NFP +TR + INT - T- C Government Saving (SGOVT) = Net Government Income – Government Purchases = (T – TR – INT) – G = Budget Surplus/Deficit 9 Uses of Private Saving S = I + (NX + NFP) = I +Current Account Balance (CA) S = SPVT + SGOVT = I + CA SPVT = I - SGOVT + CA 10 Nominal Vrs Real Variables Real GDP = Nominal GDP / GDP Deflator GDP Deflator measures the overall level of prices of goods and services included in GDP. Consumer Price Index (CPI) – Measure of prices of consumer goods 11