Chapter 9Measures 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 ProductFigure 9.1, Page 215

Product Current Price(P)

Annual Product(Q)

Total Dollar Value(P x Q)

Surgical lasers $1000 3 $3000Milkshakes 2 1000 2000

GDP = $5000

Circular Flow in a Simple EconomyFigure 9.2, Page 216

Economic Resources(natural, capital, and

human resources

Expenditure Approach

Businesses Households

Household Incomes(rent, interest, wages

and profit)

Consumer Spending

Consumer Products

Resource Markets

Product Markets

Income Approach

The Income Approach (a)

Four classes of incomes include:Wages and SalariesCorporate ProfitsInterest IncomeProprietors’ Incomes and Rents

The Income Approach (b)

To balance the GDP that is calculated using the income approach three other classifications are included:

Indirect TaxesDepreciationStatistical 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)

ResourceMarkets

FinancialMarkets

Households

ProductMarkets

Businesses

Investment (I)

Income Income

Saving (S)

Consumption (C)Spending

Retained Earnings

Investment Funds

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

Income Income

Consumption (C)Spending

Government Borrowing

Household Taxes(- Transfer Payments)

Government Purchases (G)

ResourceMarkets

FinancialMarkets

HouseholdsGovernmentBusinesses

ProductMarkets

Business Taxes(-Subsidies)

The Rest of the World and the Circular Flow

Income Income

Consumption (C)Spending

Foreign Lending(-Foreign Borrowing)

Export (X)

ResourceMarkets

FinancialMarkets

HouseholdsRest of theWorld

Businesses

ProductMarkets

Imports (M)

Questions

Practice Questions Page 210

9.2GDP 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 timePer 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.mcgraw-hill.com/sites/dl/free/0070891478/33799/lovewell2_ppt09.pdf>.

"Human Developement Index." Wikipedia. 7 Dec. 2008 <http://en.wikipedia.org/wiki/human_development_index>.