Chapter 9 Measures of Economic Activity

1. Chapter 9Measures of Economic Activity Inez Chu, Michelle Huynh, Sydney, Winfield Chung, Leo Tsang

2. 9.1 Gross Domestic Product Sydney Inez Michelle

3. 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)

4. 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

5. Product Current Price (P) Annual Product (Q) Total Dollar Value (P x Q) Calculating Gross Domestic ProductFigure 9.1, Page 215 Surgical lasers $1000 3 $3000 Milkshakes 2 1000 2000 GDP = $5000

6. Resource Markets Product Markets 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

7. The Income Approach (a) Four classes of incomes include: • Wages and Salaries • Corporate Profits • Interest Income • Proprietors’ Incomes and Rents

8. 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

9. 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

10. 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

11. 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

12. 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 )

13. Resource Markets Financial Markets Businesses Households Product Markets Included Purchases (b) 3) Government Purchases (G) • current government spending on goods and services (20% of GDP) Income Income Investment Funds Saving (S) Retained Earnings Investment (I) Consumption (C) Spending

14. 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)

15. Government and the Circular Flow Resource Markets Financial Markets Households Businesses Government Product Markets Income Income Government Borrowing Business Taxes (-Subsidies) Household Taxes (- Transfer Payments) Government Purchases (G) Consumption (C) Spending

16. The Rest of the World and the Circular Flow Resource Markets Financial Markets Rest of the World Households Businesses Product Markets Income Income Foreign Lending (-Foreign Borrowing) Imports (M) Export (X) Consumption (C) Spending

17. Questions • Practice Questions Page 210

18. 9.2GDP and Living Standards Winfield

19. 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

20. 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

21. 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

22. 9.3 Other Economic Measures Leo Tsang

23. 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.

24. 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 JapanDeduct 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

25. Winner! GDP – A. + B. = GNP

26. 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 ]

27. 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

29. Questions Class work: 9.3 #1.a) Homework: 9.3 #1.b)c)d),#2a)b)

30. 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.

31. 2007/2008 UNDP HDI Report

32. 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>.