Download Chapter 9 Measures of Economic Activity

Chapter 9
Measures of Economic Activity
Inez Chu, Michelle Huynh, Sydney,
Winfield Chung, Leo Tsang
9.1
Gross Domestic Product
Sydney
Inez
Michelle
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)
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
Calculating Gross Domestic Product
Figure 9.1, Page 215
Product
Surgical lasers
Milkshakes
Current Price
(P)
Annual Product
(Q)
$1000
2
3
1000
Total Dollar Value
(P x Q)
$3000
2000
GDP = $5000
Circular Flow in a Simple Economy
Figure 9.2, Page 216
Income Approach
Economic Resources
(natural, capital, and
human resources
Resource Markets
Businesses
Household Incomes
(rent, interest, wages
and profit)
Consumer Spending
Product Markets
Consumer Products
Expenditure Approach
Households
The Income Approach (a)
Four classes of incomes include:
Wages and Salaries
Corporate Profits
Interest Income
Proprietors’ Incomes and Rents
The Income Approach (b)
To balance the GDP that is calculated using
the income approach three other
classifications are included:
Indirect Taxes
Depreciation
Statistical Discrepancy
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
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
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
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 )
Included Purchases (b)
3) Government Purchases (G)
 current government spending on goods and
services (20% of GDP)
Income
Investment Funds
Businesses
Resource
Markets
Financial
Markets
Income
Saving (S)
Households
Retained Earnings
Investment (I)
Spending
Product
Markets
Consumption (C)
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)
Government and the Circular Flow
Resource
Markets
Income
Income
Financial
Markets
Government Borrowing
Businesses
Business Taxes
Government
(-Subsidies)
Household Taxes
Households
(- Transfer Payments)
Government Purchases (G)
Spending
Product
Markets
Consumption (C)
The Rest of the World and the Circular Flow
Resource
Markets
Income
Income
Financial
Markets
Foreign Lending
(-Foreign Borrowing)
Rest of the
World
Businesses
Export (X)
Spending
Households
Imports (M)
Product
Markets
Consumption (C)
Questions
Practice Questions Page 210
9.2
GDP and Living Standards
Winfield
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 time
Per capita GDPs for various countries are
measured in a single currency
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
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
9.3
Other Economic Measures
Leo Tsang
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.
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
Winner!
GDP – A. + B. = GNP
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 ]
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
Questions
Class work: 9.3 #1.a)
Homework: 9.3 #1.b)c)d),#2a)b)
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.
2007/2008 UNDP HDI Report
Bibliography
Lovewell, Mark. Understanding Economics A
Contemporary Perspective. Third ed. 214-21.
Lovewell, Mark. 2002. McGraw-hill Ryerson. 7
Dec. 2008 <http://highered.mcgrawhill.com/sites/dl/free/0070891478/33799/lovewell
2_ppt09.pdf>.
"Human Developement Index." Wikipedia. 7
Dec. 2008
<http://en.wikipedia.org/wiki/human_developmen
t_index>.