Chapter 9 Measures of Economic Activity

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Chapter 9Measures of Economic Activity

• Inez Chu, Michelle Huynh, Sydney, Winfield Chung,
  Leo Tsang

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9.1 Gross Domestic Product

• Sydney
• Inez
• Michelle

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National Income Accounts

• Canadas 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)

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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

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Calculating Gross Domestic ProductFigure 9.1,
Page 215
Surgical lasers 1000 3 3000 Milkshakes 2 1000 20
00 GDP 5000
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Circular Flow in a Simple EconomyFigure 9.2,
Page 216
Income Approach
Economic Resources (natural, capital, and human
resources
Household Incomes (rent, interest, wages and
profit)
Businesses
Households
Consumer Spending
Consumer Products
Expenditure Approach
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The Income Approach (a)

• Four classes of incomes include
• Wages and Salaries
• Corporate Profits
• Interest Income
• Proprietors Incomes and Rents

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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

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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

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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

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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
  servicebank service charges, or commission to a
  stockbroker is included)
• 2) Second-Hand Purchases

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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 )

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Included Purchases (b)

• 3) Government Purchases (G)
• current government spending on goods and services
  (20 of GDP)

Income
Income
Saving (S)
Investment Funds
Retained Earnings
Investment (I)
Consumption (C)
Spending
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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)

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Government and the Circular Flow
Income
Income
Government Borrowing
Household Taxes (- Transfer Payments)
Business Taxes (-Subsidies)
Government Purchases (G)
Consumption (C)
Spending
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The Rest of the World and the Circular Flow
Income
Income
Foreign Lending (-Foreign Borrowing)
Imports (M)
Export (X)
Consumption (C)
Spending
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Questions

• Practice Questions Page 210

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9.2GDP and Living Standards

• Winfield

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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

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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

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Limitations of GDP (b)

• indicate how much leisure is enjoyed by a
  countrys citizens
• distinguish between activities that are and are
  not harmful to the environment

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9.3 Other Economic Measures

• Leo Tsang

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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.

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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

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Winner!

• GDP A. B. GNP

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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 gt Nations citizens
  financial asset GDP gt GNP
• When nations citizens foreign financial
  investment are greater than the amount owned by
  nations assets owned by Foreigners makes GNP
  greater than GDP
• Foreign Financial asset lt Nations citizens
  financial asset GDP lt GNP

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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

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Questions

• Class work 9.3 1.a)
• Homework 9.3 1.b)c)d),2a)b)

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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.

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2007/2008 UNDP HDI Report
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Bibliography

• Lovewell, Mark. Understanding Economics A
  Contemporary Perspective. Third ed. 214-21.
• Lovewell, Mark. 2002. McGraw-hill Ryerson. 7
  Dec. 2008 lthttp//highered.mcgraw-hill.com/sites/d
  l/free/0070891478/33799/lovewell2_ppt09.pdfgt.
• "Human Developement Index." Wikipedia. 7 Dec.
  2008 lthttp//en.wikipedia.org/wiki/human_developme
  nt_indexgt.