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Chapter 20 :
The Measurement
of National Income
Copyright © 2014 Pearson Canada Inc.
Chapter Outline/Learning Objectives
Section
Learning Objectives
After studying this chapter, you will be able to
20.1 National Output
and Value Added
1.
see how the concept of value added solves the problem
of "double counting" when measuring national income.
20.2 National Income
Accounting:
The Basics
2.
explain the income approach and the expenditure
approach to measuring national income.
20.3 National Income
Accounting:
Some Further Issues
3.
explain the difference between real and nominal GDP
and understand the GDP deflator.
4.
discuss the many important omissions from official
measures of GDP.
5.
understand why real per capital GDP is a good measure
of average material living standards but an incomplete
measure of overall well-being.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 2
20.1 National Output and Value Added
Production occurs in stages—most firms produce outputs that
are other firms' inputs
• intermediate products
• final products
Each firm’s contribution to total output is its value added
value added = revenues — non-labour costs
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 3
Summing value added avoids the problem of double counting when
measuring total output.
Total value added in the economy is called Gross Domestic Product
(GDP).
APPLYING ECONOMIC CONCEPTS 20-1
Value Added Through Stages of Production
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 4
20.2 National Income Accounting: The Basics
Three methods for measuring national income (output):
• total value added from domestic production
• total expenditures on domestic output
• total income generated by domestic production
Because of the circular flow of income, these three measures yield
the same total—GDP.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 5
Fig. 20-1
The Circular Flow of Expenditure and Income
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Chapter 20, Slide 6
GDP from the Expenditure Side
Consider adding up the expenditures needed to purchase the final
output produced in any given year.
There are four broad expenditure categories:
• consumption
• investment
• government purchases
• net exports
Actual consumption expenditure (Ca) includes expenditure on all
final goods during the year.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 7
Actual investment expenditure (Ia) is expenditure on the production
of goods not for present consumption, including:
• inventories
• plant and equipment
• residential housing
Actual government purchases (Ga) is the purchase of currently
produced goods and services by government
• excluding transfer payments.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 8
Actual net exports (NXa) is the difference between exports and
imports: NXa = (Xa – Ima)
Exports are purchases of Canadian-produced goods and services by
foreigners. We subtract imports because they are not produced in
Canada.
Since total domestic output must equal total expenditure on domestic
output, we have:
GDP = Ca + Ia + Ga + NXa
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 9
Table 20-1
GDP from the Expenditure Side, 2011
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 10
Self-Test
Identify the items for the Canadian economy
according to the following code:
C
I
G S T X IM
or N – not applicable
a)
A student gets her haircut from self-employed
hairdresser
b)
The hairdresser buys a pair of scissors from the Ace
Beauty Supply Company
c)
Out of each day’s revenue, the hairdresser puts $5
Chapter 3-11
Self-Test continued
d)
Each time she has enough set aside, the hairdresser
buys a share of GM stock
e)
GM expands its computer facilities in its head office
f)
American tourists go skiing in the Canadian Rockies
g)
Two Canadians go to Tokyo and stay at the Hilton
Hotel
h)
Russia buys beef from Alberta ranchers
i)
The Province of Saskatchewan pays for the building
of a new highway
Chapter 3-12
GDP from the Income Side
GDP is also the sum of factor incomes and other claims on the value
of output.
Factor incomes include:
• wages
net domestic income
• rent, interest, and profits
Non-factor payments include:
• indirect taxes (net of subsidies)
• depreciation of existing physical capital
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 13
GDP from the income side is therefore equal to:
GDP = Net domestic income +
Indirect taxes (less subsidies) +
Depreciation
EXTENSIONS IN THEORY 20-1
Arbitrary Decisions in National Income Accounting
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 14
Table 20-2
GDP from the Income Side, 2011
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 15
Category
Net Exports
$$
50
Government Purchases of Goods and Services
148
Business Profits
114
Consumption
350
Indirect taxes
40
Depreciation
53
Wages and Salaries
392
Interest
37
Gross Investment
88
Government transfer payments
34
16
MyEconLab
www.myeconlab.com
Copyright © 2014 Pearson Canada Inc.
Canada and six other countries form what is called the "G7" group
of advanced industrialized nations. For a comparison of economic
growth in the G7 countries over the past decade, look for Growth
in Canada and Other G7 Countries in the Additional Topics section
of this book's MyEconLab.
Chapter 20, Slide 17
20.3 National Income Accounting: Some Further Issues
GDP and GNP
A measure of national output closely related to GDP is Gross National
Product (GNP).
The difference between GDP and GNP is the difference between
income produced and income received.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 18
GDP and GNP
GDP is superior as a measure of domestic economic activity.
GNP is superior as a measure of living standards of residents.
A more "refined" measure is disposable personal income:
It equals GNP minus:
• any part not actually paid to households
• personal income taxes
• plus transfer payments received by households
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 19
Real and Nominal GDP
GDP that is valued at constant base-period prices is
real national income.
GDP Deflator =
Nominal GDP
x 100
Real GDP
The GDP deflator is a comprehensive index of prices because
it includes the prices of all goods and services produced in
the country.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 20
Do the CPI and the GDP Deflator Move Together?
Broadly, the two price indexes move together, due to underlying
inflationary forces. But because one tracks consumer prices and
the other tracks the prices of goods produced in Canada, there
will be some differences.
APPLYING ECONOMIC CONCEPTS 20-2
Calculating Nominal and Real GDP
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Chapter 20, Slide 21
Table 20-3
Nominal and Real GDP in Canada
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Chapter 20, Slide 22
Omissions from the GDP
National income accountants cannot measure economic activity
that takes place outside of regular, legal markets:
• illegal activities
• leisure
• the underground economy
• home production
• economic "bads"
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 23
The current approach is useful because:
1. It would be difficult to correct the major omissions.
2. The level of GDP may be inaccurate but the change in GDP
is a good indication of the changes in economic activity.
3. To design policies to control inflation it is necessary to know
the flow of money payments made to produce and purchase
Canadian output.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 24
GDP and Living Standards
"Well-being" is a broader concept than material living standards:
• GDP is not a complete measure of economic well-being
• but income is a very important part of well-being and GDP
is a good measure of income.
Copyright © 2014 Pearson Canada Inc.
Chapter 20, Slide 25
Review
Wages and salaries
GST remittances
Refer to Table 20-2. What is the value
of GDP, as calculated from the
expenditure side?
Exports
Gross investment
Depreciation
A) $3784
Consumption expenditure
Government subsidies to firms
B)$3866
C) $3904
D) $3936
Business profit
Imports
3029
107
32
537
82
2808
51
423
35
Interest and investment income
276
Government purchases
524
E)$3708
© 2014 Pearson Education Canada Inc.
26
Review
If a firm's depreciation exceeds its gross investment, then its
A) net investment will be positive.
B) capital stock will be shrinking.
C) capital stock will be growing.
D) gross investment will be negative.
E) depreciation cannot exceed gross investment.
© 2014 Pearson Education Canada Inc.
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