A good or service produced by a firm, bought by another firm, & used as a component of a final good or service

GDP measures the Value of Production

at a given time period

1. Consumption
2. Investment
3. Government
4. Net Exports

• The purchase of new capital goods (tools, instruments, machines, buildings, & other constructions) & additions to inventories
• Does not include financial capitals such as the purchase of stocks and bonds

The value of exports of goods and services

minus

The value of imports of goods and services

• Items that households, firms & governments in Canada buy from the rest of the world
• Are produced in other countries so expenditure on imports is not an expenditure on Canadian-produced goods and services

• Is the sum of the 4 expenditures

Total Expenditure

=

C = Consumption

+

I = Investment

+

G = Government

+

NX = Net Exports

Undistributed Profit

• Is a part of total income that is a combination of interest and profit that firms do not pay to the household that owns them
• From an economic viewpoint, this is income earned by households & then loaned back to the firms

Net Taxes

= 

Taxed Paid

_

Benefits Received from Gov't

1. Expenditure Approach
2. Income Approach

• Uses data on expenditures such as consumption, investment, government & net exports
• This approach is like attaching a meter to the circular flow diagram on all the flows running through the Goods markets to firm & measuring the magnitude of those flows

What is the formula to calculate GDP using the Expenditure Approach?

GDP

=

Consumption

+

Investment

+

Government

+

Net Exports

• Uses data from CCRA and other sources on the incomes that firms pay households for the services of factors of production they hire
• This approach is like attaching a meter to the circular flow diagram on all the flows in the factors market from firms to households & measuring the magnitudes of those flows

GDP

=

Net Domestic Product

+

Indirect Taxes

 _

Subsidies

+

Depreciation

1. Wages, Salaries, Supplementary Labour
2. Interest & Investment Income
3. Profits of Corporations & Govt. Enterprises
4. Income from Farms & Unincorporated Businesses

• Are payments for labour services
• Includes all wages & salaries plus fringe benefits paid by employers such as extended health insurance & pension fund contribution

Is the total interest earned by households from assets (such as bonds) & loans they have made

minus

The interest payments they make on their debts (such as credit card debts)

• Is an estimate of what homeowners would pay to rent the housing they own & use themselves
• This measures the total value of housing services whether they are owned or rented

• Are counted as income because they are like an addition to the income of shareholders
• Are equivalent to profits paid out as dividends & then lent back to the corporations who earned them

Profits of Corporations & Government Enterprises

• Are a combination of interest on capital & profit for entrepreneurship
• Profits of Corporation includes the profits paid out as dividends and undistributed profits

Net Domestic Product @ Factor Cost

=

Sum

((Wages, Salaries & Supplementary Labour)

+

(Interest & Investment Income)

+

(Profits of Corporation & Gov't Enterprises)

+

(Income from Farms & Unincorporated Businesses)

1. Convert Price from Factor Cost to Market Price
2. Convert Net Product to Gross Product

What is the formula to convert GDP from Factor Cost to Market Price?

GDP @ Mkt Price

=

Net Domestic Product @ Factor Cost

+

Indirect Taxes

 _

Subsidies

GDP at Gross

=

Net Domestic Product @ Factor Cost

+

Indirect Taxes

_

Subsidies

+

Depreciation

1. The value of a firm's production

minus

The value of the intermediate goods it buys from other firms

2. Equals the sum incomes including the profits that the firm paid for the factors of production it used

GNP

=

GDP

minus 

Net Investment Income paid to non-residents

Investment Income earned in Canada for non-residents

minus

Investment income by Canadians in other Countries

• The income available for spending on consumption & saving

Net Taxes

Net Taxes

=

Transfers from Gov't

 _

Taxes

What are the 4 parts of GDP?

1. Value Produced
2. What Produced
3. Where Produced
4. When Produced

1. Total Production
2. Total Income
3. Total Expenditure

From the viewpoint of firms, the value of production is the cost of production.

From the viewpoint of purchasers of goods and services, the value of production is the cost of buying it w/c equals expenditure so:

Value of Production

=

Income

=

Expenditure

Expenditures not included in GDP are:

1. Spending on intermediate goods
2. Used Goods - Because they were already counted as part of GDP during which time they were new goods
3. Financial Assets - When households buy stocks or bonds, they are making loans, not buying goods and services. The expenditure on newly produced capital good is part of GDP

Nominal GDP

1. Choose a base year
2. Sum the expenditures of each
3. Value the quantities produced in each year at the prices of the base year

1. Choose a base year
2. Sum the expenditures of each
3. Value the quantities produced in each year at the prices of the base year as well as the other year being compared

 Note that it builds from the traditional method. But it takes it two steps further

4. Calculate the percentage of value of production in each year

5. Calculate the average of the two.

• Is an average of current prices expressed as a percentage of base-year prices.
• Is a measure of the price level

GDP Deflator

=

(Nominal GDP

÷

Real GDP)

x

100

It does not, for 2 reasons

1. Standard of living depends on all goods and services, not only on those included in GDP
2. Standard of living depends on factors other than goods and services produced

1. Household Production
2. Underground Production
3. Leisure time
4. Environment Quality

What are other influences on the Standard of Living?

1. Health & Life Expectancy
2. Political Freedom & Social Justice

Combines real GDP, life expectancy, health and education levels

P.74

Describe how economic statisticians measure GDP in Canada?

P.74

P.74

P.74

1. Intermediate Goods and Services
2. Used Goods
3. Financial Assets
4. Household Production
5. Underground Production
6. Leisure time
7. Environment Quality

• GDP minus investment income paid to non-residents
• Is the production that generates incomes for Canadians

What is the formula to calculate Personal Disposable Income?

Personal Disposable Income

=

Personal Income - (Net Taxes=Sum((Transfers from Gov't - Taxes)))

Personal Disposable Income (PDI)

= 

1. Net National Product 

=

GNP - depreciation

2. National Income @ Factor Cost

=

NNP - indirect taxes - subsidies

3. Personal Income

= 

Natnl Incm @ Fctr Cost - Undstrbtd Profit

4. Personal Disposable Income

=

Personal Income - Net Taxes

Net National Product

Is GNP minus depreciation or capital consumption

• Measured in terms of factor cost
• Equals Net national Product minus indirect taxes minus subsidies

• Equals national income minus undistributed profits

In 2002, GDP was 1.155 B, In 2003, GDP was 1.207 B. Because GDP in 2003, was greater than in 2002, what are the 2 main reasons for the increase in GDP?

1. We produced more goods and services
2. We paid higher prices for our goods and services

• Because producing more goods and services contributes to an improvement in our standard of living but Paying higher prices means contributes to an increase in cost of living but not in standard of living

1. Sum the expenditures for each products
2. Sum the expenditures calculated in step 1 to calculate for the sum of expenditures for the year

True or False

Real GDP equals Nominal GDP in the base year

T

What are the steps in calculating Real GDP using the Traditional method?

1. Calculate Nominal GDP

2. Choose a base year

3. Value the quantities produced in each year the prices of the base year

1. Calculate Nominal GDP
2. Choose Base year
3. Value the quantities produced in each year at the prices of the base year
4. Value the quantities produced in the base year at the prices of the prevailing year
5.  Determine the increase or decrease of value of production by comparing the base year to the prevailing year numbers calculated in steps 3 & 4. Note that this number uses the base year prices therefore ( Base year #'s - Prevailing year Numbers)
6. Divide the number calculated from Step 5 to the nominal GDP calculated in the base year 
7. Repeat Steps 5,6 & 7 to calculate for the prevailing year numbers. Note that these numbers uses the prevailing year's prices.
8. Calculate the average of the percentage increase (i.e. (x+y)÷2)
9. Calculate the ratio of the percentage calculated from step 8 is to the nominal base year (i.e. 200 * 5% = 10)
10. We then add this number to the nominal GDP of the base year to calculate the real GDP for the prevailing year (i.e. if base year = 250 then    250+10=260)

By applying the calculated percentage change to the real GDP of the proceeeding year, real GDP in each year is linked back to the dollars of the base year.

By comparing the Nominal GDP vs Real GDP, if Nominal GDP rises and Real GDP remains unchanged what most likely happened?

That the reason for the rise in GDP is the increase in price and not an increase in production

True or False

The larger the nominal GDP for a given real GDP, the higher are the prices and the larger is the GDP deflator