Unit 2 - Ch 08- Adjusted

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Copyright © 2012 by McGraw-Hill RyersonLimited. ll rights reser!ed.

Understanding Economics6th edition

by Mark Lovewell



UnderstandingEconomics

Chapter 8Measures of Economic Activity

Copyright © 2012 by McGraw-Hill Ryerson Limited !ll rights reser"ed

#th editionby Mar$ Lo"ewell



Learning %b&ecti"es !'ter this chapter yo( will be able to)

1 e*plain why economists choose toconcentrate on Gross +omestic ,rod(ct G+,.

and the two approaches to calc(lating it2 identi'y real G+, and per capita G+, and their

possible (ses and limitations when comparingli"ing standards in di/erent years or di/erentco(ntries

disting(ish other economic meas(resde"eloped 'rom the national income acco(nts




ational ncome

!cco(nts Canada3s national income acco(nts show the

le"els o' total income and spending in theCanadian economy

!mong other meas(res4 these acco(ntshighlight Gross +omestic ,rod(ct G+,.




Gross +omestic ,rod(ctG+, is the total dollar "al(e o' all 5nal goods

and ser"ices prod(ced in an economy d(ringa partic(lar period

G+, is calc(lated (sing two approaches)the income approach

the e*pendit(re approach

6he G+, identity states that G+, e*pressedas total income is identical to G+, e*pressedas total spending




Calc(lating Gross +omestic ,rod(ct7ig(re 814 ,age 21


Product Current Price(P)

Annual Product(Q)

Total Dollar Value(P x Q)

9(rgical lasers :1000 :000Mil$sha$es 2 1000 2000

G+, ; :<000



Circ(lar 7low in a 9imple =conomy7ig(re 824 ,age 21<


Economic Resources

Exenditure Aroac!

>(sinesses Ho(seholds

Household Incomes

Consumer Spending

Consumer Products

"esource Mar#ets

Product Mar#ets

$ncome Aroac!



6he ncome !pproach a. 6he income approach incl(des 'o(r classes o'

income)wages and salaries

corporate pro5ts

interest income

proprietors3 incomes and rents




6he ncome !pproach b. 6he income approach also incl(des three

other categories to balance G+, calc(latedwith the e*pendit(re approach)indirect ta*esdepreciationthe statistical discrepancy4 which is the

di/erence between the G+, estimates (sing

the two approaches4 with hal' added to thelower estimate and hal' ded(cted 'rom thehigher estimate




6he =*pendit(re

!pproach 6he e*pendit(re approach)is the s(m o' p(rchases in prod(ct mar$ets

is based on "al(e added at each prod(ctionstage to a"oid do(ble co(nting

e*cl(des 5nancial e*changes and second-handp(rchases




?al(e !dded in Ma$ing,aper7ig(re 84 ,age 218


Production%tage

Total ValuePaid&"eceived

Value Added 'usiness T!atAdds Value

1 @ood is c(t and

transported topaper mill

2 ,aper isprocessed andsold to retailer

,aper is sold byretailer to

cons(mer

:10

0

2A<

00

:AA<

:100

1A< 2A< B100.

12< 00 B2A<.

:00

logging

company

papercompany

retailer



Components o' the =*pendit(re

!pproach a. 6here are 'o(r components o' the e*pendit(re

approach,ersonal cons(mption C. consists o' ho(sehold

p(rchases o' ser"ices and nond(rable andd(rable goods

Gross in"estment . represents b(siness andgo"ernment p(rchases o' real capital incl(ding

added in"entories. and is 5nanced thro(ghretained earnings and personal sa"ing




Components o' the ncome

!pproach b.Go"ernment p(rchases G. e*cl(de trans'er

payments and are 5nanced thro(gh ta*es andborrowing

et e*ports -M. eD(als e*ports 'oreignp(rchases o' Canadian prod(cts. min(s importsCanadian p(rchases o' 'oreign prod(cts.




Canada3s Gross +omestic ,rod(ct2010.7ig(re 84 ,age 21A


$ncome Aroac!( illions)

Exenditure Aroac!( illions)

@ages and salaries 8<21

Corporate pro5ts 1E0#nterest ncome #E,roprietors3 incomes and rents 10##ndirect ta*es 1A1+epreciation 22E1

9tatistical discrepancy 0<

Gross +omestic ,rod(ct 1#21<

,ersonal cons(mption C. E1

Gross in"estment . <8AGo"ernment p(rchases G. <2Aet e*ports B M. 2EE9tatistical +iscrepancy -0A

Gross +omestic ,rod(ct 1#21<



Gross and et

n"estmentet in"estment)is the ann(al change in an economy3s capital

stoc$

eD(als gross in"estment min(s depreciation

is positi"e in a growing economy with anincreasing capital stoc$

is negati"e in a declining economy with adecreasing capital stoc$




et n"estment and Capital 9toc$7ig(re 8<4 ,age 21E


Caital %toc#

at %tart of *ear Dereciation

+ross

$nvestment

Caital %toc#

at End of *ear

:200 billion :2#0 billion:100 billion:0 billion



7inancial Mar$et 7lows 6he so(rces o' '(nds 'or in"estment come

'rom)b(sinesses3 retained earnings

personal sa"ing 9.

6hese are inFows into 5nancial mar$ets4 whilein"estment is an o(tFow




7inancial Mar$ets and the Circ(lar Fow7ig(re 8#4 ,age 220


Reso"rce

Mar#ets

$inancial

Mar#ets

Ho"seholds

%rod"ct

Mar#ets

&"sinesses

'n!estment (')

'ncome 'ncome

*a!ing (*)

Cons"mption (C)*pending

Retained +arnings

'n!estment $"nds



Go"ernment 7lows7inancial inFows to go"ernment incl(de)ho(sehold ta*es min(s trans'er payments

b(siness ta*es min(s s(bsidies

go"ernment borrowing

Go"ernment p(rchases are a 5nancial o(tFow'rom go"ernment




Go"ernment and the Circ(lar 7low7ig(re 8A4 ,age 221


'ncome 'ncome


Go!ernment &orrowing

Ho"sehold ,aes

(- ,ranser %ayments)

Go!ernment %"rchases (G)

Reso"rce

Mar#ets

$inancial

Mar#ets

Ho"seholdsGo!ernment&"sinesses

%rod"ct

Mar#ets

&"siness ,aes

(-*"bsidies)



Connections with the Rest o' the

@orldet e*ports represent a net inFow into

Canadian prod(ct mar$ets

Lending by 'oreigners represents an inFowinto Canadian 5nancial mar$ets>orrowing by 'oreigners represents an

o(tFow 'rom Canadian 5nancial mar$ets




6he Rest o' the @orld and the Circ(lar7low7ig(re 884 ,age 222


'ncome 'ncome


$oreign Lending

(-$oreign &orrowing)

+port (/)

Reso"rce

Mar#ets

$inancial

Mar#ets

Ho"seholdsRest o the

orld&"sinesses

%rod"ct

Mar#ets

'mports (M)



G+, and Li"ing

9tandards ,er capita G+, is G+, per person and eD(als

G+, di"ided by pop(lation

,er capita real G+, is)per capita G+, e*pressed in constant dollars

'rom a gi"en year

(sed to compare li"ing standards in a gi"en

co(ntry o"er time ,er capita G+,s 'or "ario(s co(ntries are

meas(red in a single c(rrency




Limitations o' G+, a.G+, has limitations as an indicator o' li"ing

standards beca(se it does not)incl(de nonmar$et acti"ities and those that

ta$e place in the (ndergro(nd economy

'(lly capt(re impro"ements in prod(ct D(ality

indicate the composition o' o(tp(t

indicate the distrib(tion o' income




Limitations o' G+, b.indicate how m(ch leis(re is en&oyed by a

co(ntry3s citiens

disting(ish between acti"ities that are and are

not harm'(l to the en"ironment




%ther =conomic

Meas(res a.Gross ational ,rod(ct G,.)is the total income acD(ired by Canadians both

within Canada and elsewhere

eD(als G+, min(s net in"estment income tothe rest o' the world




+eri"ing Gross ational ,rod(ct 2010.7ig(re 8E4 ,age 22A


( illions)

Gross +omestic ,rod(ct G+,. 1#21<

+ed(ct) et in"estment income to the rest o' the world -. 2A<Gross ational ,rod(ct G,. 1<E0



%ther =conomic

Meas(res b. +isposable ncome +.)is personal income min(s personal ta*es and

other personal trans'ers to go"ernment






!dding the H(man +imension a.Mahb(b (l HaD was instr(mental in de"ising the

H(man +e"elopment nde* H+. p(blishedann(ally 'or "ario(s co(ntries by the nited

ations +e"elopment ,rogramme 6his inde* is based on per capita G+, ad&(sted 'or

p(rchasing power parity4 the a"erage o' years o'schooling o' the co(ntry3s ad(lt citiens4 the

e*pected years o' schooling 'or children o' school-going age4 and li'e e*pectancy at birth




6he +ebate %"er the H+

a. 6here are three main iss(es with the H+ that

its critics highlight) 6he H+ ran$ings 'or rich co(ntries are

n(merically "ery close4 ma$ing it diIc(lt to (sethese ran$ings in any meaning'(l way




6he +ebate %"er the H+

b.ncreases in per capita G+, 'or rich co(ntries

are disco(nted at higher and higher rates4 amethod criticied by some obser"ers

Li'e e*pectancy statistics change "ery grad(allyand are diIc(lt to estimate

HaD was aware o' these s(ggestions4 andrealied that the H+ wo(ld be modi5ed o"er

time




Re5ning the H+=ach year4 the +, has been incl(ding

ad&(sted H+s that highlight incomedisparities within co(ntries and disparities

between men and women 9(ch e*tensionsare certain to contin(e




UnderstandingEconomics

Chapter 8T!e End

Copyright © 2012 by McGraw-Hill Ryerson Limited !ll rights reser"ed

#th

editionby Mar$ Lo"ewell

Documents

Unit 2 - Ch 08- Adjusted