5 - macro econ

• Value added


  Sales revenue - Cost of intermediate goods
• Value added

  Payments owed to the firm's factors of production
• The sum of all values added in an economy is a measure of the economy's total output
• Measuring national income

  1. Concept of value added

  2. Sum the total flow of expenditure on final domestic output

  3. Sum the total flow of income generated by the flow of domestic production
• Gross domestic product (GDP)

  The total value of goods and services produced in the economy during a given period
• Components of GDP from the expenditure side

  • Consumption expenditure
  • Investment expenditure
  • Government purchases
  • Net exports
• Consumption expenditure

  Household expenditure on all goods and services
• Investment expenditure

  Expenditure on the production of goods not for present consumption
• Capital stock

  The economy's total quantity of capital goods
• Fixed investment

  Creating new capital goods
• Net investment

  Gross investment - Depreciation
• Government purchases

  Expenditure on currently produced goods and services, exclusive of government transfer payments
• Net exports

  Exports - Imports
• GDP = Consumption + Investment + Government purchases + Net exports
• Components of GDP from the income side

  • Factor incomes (wages, salaries, interest, business profits)
  • Non-factor payments (indirect taxes, subsidies, depreciation)
  • Statistical discrepancy
• Nominal GDP

  Total GDP valued at current prices
• Real GDP


  GDP valued at base-period prices
• GDP deflator

  Index number derived by dividing nominal GDP by real GDP
• The GDP deflator measures the average change in price of all the items in GDP
• The GDP deflator does not necessarily change in line with changes in the CPI
• GDP is good but- But much economic activity takes place outside the markets that the national income accountants survey. activities such as

  • Illegal activities
  • The underground economy
  • Home production, volunteering, and leisure
  • Free products in the digital world
  • Economic "bads"
• GDP is an excellent measure of the flow of economic activity in organized markets in a given year
• Changes in real per capita income are a good measure of average material living standards
• Material living standards are only part of what most people consider their overall well-being
• Production occurs in stages.
• Some firms produce outputs that are used as inputs by other firms, and these firms, in turn, produce outputs that are used as inputs by yet other firms.
• The error that would arise in estimating the nation’s output by adding all sales of all firms is called double counting.
• Intermediate goods are ingredient to what pie is to final goods
• complete

  A) $1000

  B) 300

  C) factors of production

  D) Purchases

  E) $4300

  
• GDP = C + G + I + (X – M)
• Investment expenditure also includes inventories
• Investment expenditure also includes capital goods and residential housing.
• The total amount of investment in any given year is the sum of the changes in inventories, the additions to the stock of plant and equipment, and the new construction of residential housing units.
• Some portion of current output replaces worn out physical capital — depreciation
• So from the income side, GDP is the sum of factor incomes + indirect taxes (net of subsidies)+ depreciation.
• When we calculate GDP from the income side, we include a “fudge factor”, called statistical discrepancy
• Statistical discrepancy makes sure that the independent measures of income and expenditure come to the same total.
• Although national income and national expenditure are conceptually identical, in practice both are measured with slight error.
• Movements in the CPI measure the change in the average price of consumer goods
• Movements in the GDP deflator reflect the change in the average price of goods produced in Canada