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Ch. 8 Measures of Economic Activity

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14 views

Ch. 8 Measures of Economic Activity

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elmorris91
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© © All Rights Reserved
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Chapter 8

Measures of Economic
Activity

Prepared by Murray Davidson, Centennial College.


© 2020 by McGraw-Hill Education Ltd. 1
Learning Objectives
After this chapter you will be able to:
 Explain why economists choose to
concentrate on Gross Domestic
Product (GDP)
 Explain the two approaches to calculating GDP
 Identify real, nominal GDP and per capita GDP
 Identify possible uses and limitations of GDP
 Distinguish GDP from other economic
measures

© 2020 by McGraw-Hill Education Ltd. 2


National Income Accounts
 Canada’s national income accounts show the levels
of total income and spending in the Canadian
economy.

 Gross Domestic Product (GDP) is one among the


measures in these accounts highlight.

 GDP is the total dollar value of all final goods and


services produced in an economy during a particular
period.

© 2020 by McGraw-Hill Education Ltd. 3


GDP in Historical Perspective

© 2020 by McGraw-Hill Education Ltd. 4


World GDP
 Total World GDP: $US 78 trillion
 Total World population: 7.8 billion

 World GDP per person: $US 10,000

 Canada GDP: $US 1.6 trillion (2% of world)


 US GDP: $US 20 trillion (25% of world)
 China GDP: $US 12 trillion (15% of world)
 India GDP: $US 2.5 trillion (3% of world)
© 2020 by McGraw-Hill Education Ltd. 5
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 is identical to GDP expressed as total
spending.
© 2020 by McGraw-Hill Education Ltd. 6
Calculating Gross Domestic Product
FIGURE 8.1

© 2020 by McGraw-Hill Education Ltd. 7


Circular Flow in a Simple Economy
FIGURE 8.2

© 2020 by McGraw-Hill Education Ltd. 8


The Income Approach (a)
The income approach includes four classes of
income:

 wages and salaries


 corporate profits

 interest income

 proprietors’ incomes and rents

© 2020 by McGraw-Hill Education Ltd. 9


The Income Approach (b)
The income approach also includes three other
categories to balance GDP calculated with the
expenditure approach:

 indirect taxes
 depreciation

 the statistical discrepancy (the difference

between the GDP estimates using the two


approaches)

© 2020 by McGraw-Hill Education Ltd. 10


Canada’s Gross Domestic Product (2018)
FIGURE 8.3

© 2020 by McGraw-Hill Education Ltd. 11


The Expenditure Approach
The expenditure approach:

 is the sum of purchases in product markets


 is based on value added at each production stage

to avoid double counting


 excludes financial exchanges and second-hand

purchases

© 2020 by McGraw-Hill Education Ltd. 12


Value Added in Making Paper
FIGURE 8.4

© 2020 by McGraw-Hill Education Ltd. 13


Expenditure Approach
Components (a)
There are four components of the expenditure
approach.

 Personal consumption (C) consists of household


purchases of services and nondurable and
durable goods.
 Gross investment (I) represents business and

government purchases of real capital (including


added inventories) and is financed through
retained earnings and personal saving.

© 2020 by McGraw-Hill Education Ltd. 14


Expenditure Approach
Components (b)
 Government purchases (G) exclude transfer
payments and are financed through taxes and
borrowing.

 Net exports (X-M) equals exports (foreign


purchases of Canadian products) minus imports
(Canadian purchases of foreign products).

© 2020 by McGraw-Hill Education Ltd. 15


Gross and Net Investment
Net investment:

 is the annual change in an economy’s capital


stock
 equals gross investment minus depreciation

 is positive in a growing economy with an

increasing capital stock


 is negative in a declining economy with a

decreasing capital stock

© 2020 by McGraw-Hill Education Ltd. 16


Net Investment and Capital Stock
FIGURE 8.5

© 2020 by McGraw-Hill Education Ltd. 17


Financial Market Flows
 The sources of funds for investment come from:
 businesses’ retained earnings

 personal saving (S)

 These are inflows into financial markets, while


investment is an outflow.

© 2020 by McGraw-Hill Education Ltd. 18


Financial Markets and the Circular Flow
FIGURE 8.6

© 2020 by McGraw-Hill Education Ltd. 19


Government Flows
 Financial inflows to government include:
 household taxes minus transfer payments

 business taxes minus subsidies

 government borrowing

 Government purchases are a financial outflow from


government.

© 2020 by McGraw-Hill Education Ltd. 20


Government and the Circular Flow
FIGURE 8.7

© 2020 by McGraw-Hill Education Ltd. 21


Connections with the Rest of the
World
 Net exports represent a net inflow into Canadian
product markets.

 Lending by foreigners represents an inflow into


Canadian financial markets.

 Borrowing by foreigners represents an outflow from


Canadian financial markets.

© 2020 by McGraw-Hill Education Ltd. 22


The Rest of the World and the
Circular Flow FIGURE 8.8

© 2020 by McGraw-Hill Education Ltd. 23


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, net of inflation in that year.


 used to compare living standards in a given

country over time


 Per capita GDPs for various countries are

measured in a single currency.

© 2020 by McGraw-Hill Education Ltd. 24


Limitations of GDP (a)
GDP has limitations as an indicator of living standards
because it does not:

 include nonmarket 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

 indicate how much leisure is enjoyed by a country’s

citizens
 distinguish between activities that are and are not

harmful to the environment


© 2020 by McGraw-Hill Education Ltd. 25
Other Economic Measures
Gross National Income (GNI):

 is the total income acquired by Canadians both


within Canada and elsewhere

 equals GDP minus net income to the rest of the


world

© 2020 by McGraw-Hill Education Ltd. 26


Deriving Gross National Income
(2018) Figure 8.9

© 2020 by McGraw-Hill Education Ltd. 27


Disposable Income
Disposable Income (DI):

 is personal income minus personal taxes and


other personal transfers to government

© 2020 by McGraw-Hill Education Ltd. 28


Deriving Other Income Measures
(2018) Figure 8.10

© 2020 by McGraw-Hill Education Ltd. 29


Adding the Human Dimension
 GDP does not capture some important elements of
the standard of living such as:
 Health
 Education

 Environmental polution

 Leisure time

 Products that are not exchanged in markets

 Inequality levels in a society

 UN has developed the Human Development Index


(HDI) to try to include some of these issues.
© 2020 by McGraw-Hill Education Ltd. 30
Conclusion
Described GDP and the two approaches to calculate
it.

Identified real GDP and per capita GDP and the


alternative ways to use GDP to compare living
standards in different countries.

© 2020 by McGraw-Hill Education Ltd. 31

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