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Understanding Economics6th edition
by Mark Lovewell
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UnderstandingEconomics
Chapter 8Measures of Economic Activity
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#th editionby Mar$ Lo"ewell
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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
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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+,.
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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
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Calc(lating Gross +omestic ,rod(ct7ig(re 814 ,age 21
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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
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Circ(lar 7low in a 9imple =conomy7ig(re 824 ,age 21<
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Economic Resources
Exenditure Aroac!
>(sinesses Ho(seholds
Household Incomes
Consumer Spending
Consumer Products
"esource Mar#ets
Product Mar#ets
$ncome Aroac!
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6he ncome !pproach a. 6he income approach incl(des 'o(r classes o'
income)wages and salaries
corporate pro5ts
interest income
proprietors3 incomes and rents
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6he ncome !pproach b. 6he income approach also incl(des three
other categories to balance G+, calc(latedwith the e*pendit(re approach)indirect ta*esdepreciationthe statistical discrepancy4 which is the
di/erence between the G+, estimates (sing
the two approaches4 with hal' added to thelower estimate and hal' ded(cted 'rom thehigher estimate
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6he =*pendit(re
!pproach 6he e*pendit(re approach)is the s(m o' p(rchases in prod(ct mar$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
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?al(e !dded in Ma$ing,aper7ig(re 84 ,age 218
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Production%tage
Total ValuePaid&"eceived
Value Added 'usiness T!atAdds Value
1 @ood is c(t and
transported topaper mill
2 ,aper isprocessed andsold to retailer
,aper is sold byretailer to
cons(mer
:10
0
2A<
00
:AA<
:100
1A< 2A< B100.
12< 00 B2A<.
:00
logging
company
papercompany
retailer
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Components o' the =*pendit(re
!pproach a. 6here are 'o(r components o' the e*pendit(re
approach,ersonal cons(mption C. consists o' ho(sehold
p(rchases o' ser"ices and nond(rable andd(rable goods
Gross in"estment . represents b(siness andgo"ernment p(rchases o' real capital incl(ding
added in"entories. and is 5nanced thro(ghretained earnings and personal sa"ing
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Components o' the ncome
!pproach b.Go"ernment p(rchases G. e*cl(de trans'er
payments and are 5nanced thro(gh ta*es andborrowing
et e*ports -M. eD(als e*ports 'oreignp(rchases o' Canadian prod(cts. min(s importsCanadian p(rchases o' 'oreign prod(cts.
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Canada3s Gross +omestic ,rod(ct2010.7ig(re 84 ,age 21A
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$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<
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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$
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et n"estment and Capital 9toc$7ig(re 8<4 ,age 21E
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Caital %toc#
at %tart of *ear Dereciation
+ross
$nvestment
Caital %toc#
at End of *ear
:200 billion :2#0 billion:100 billion:0 billion
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7inancial Mar$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$ets4 whilein"estment is an o(tFow
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7inancial Mar$ets and the Circ(lar Fow7ig(re 8#4 ,age 220
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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
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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
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Go"ernment and the Circ(lar 7low7ig(re 8A4 ,age 221
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'ncome 'ncome
Cons"mption (C)*pending
Go!ernment &orrowing
Ho"sehold ,aes
(- ,ranser %ayments)
Go!ernment %"rchases (G)
Reso"rce
Mar#ets
$inancial
Mar#ets
Ho"seholdsGo!ernment&"sinesses
%rod"ct
Mar#ets
&"siness ,aes
(-*"bsidies)
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Connections with the Rest o' the
@orldet e*ports represent a net inFow into
Canadian prod(ct mar$ets
Lending by 'oreigners represents an inFowinto Canadian 5nancial mar$ets>orrowing by 'oreigners represents an
o(tFow 'rom Canadian 5nancial mar$ets
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6he Rest o' the @orld and the Circ(lar7low7ig(re 884 ,age 222
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'ncome 'ncome
Cons"mption (C)*pending
$oreign Lending
(-$oreign &orrowing)
+port (/)
Reso"rce
Mar#ets
$inancial
Mar#ets
Ho"seholdsRest o the
orld&"sinesses
%rod"ct
Mar#ets
'mports (M)
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G+, and Li"ing
9tandards ,er capita G+, is G+, per person and eD(als
G+, di"ided by pop(lation
,er capita real G+, is)per capita G+, e*pressed in constant dollars
'rom a gi"en year
(sed to compare li"ing standards in a gi"en
co(ntry o"er time ,er capita G+,s 'or "ario(s co(ntries are
meas(red in a single c(rrency
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Limitations o' G+, a.G+, has limitations as an indicator o' li"ing
standards beca(se it does not)incl(de nonmar$et acti"ities and those that
ta$e place in the (ndergro(nd economy
'(lly capt(re impro"ements in prod(ct D(ality
indicate the composition o' o(tp(t
indicate the distrib(tion o' income
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Limitations o' G+, b.indicate how m(ch leis(re is en&oyed by a
co(ntry3s citiens
disting(ish between acti"ities that are and are
not harm'(l to the en"ironment
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%ther =conomic
Meas(res a.Gross ational ,rod(ct G,.)is the total income acD(ired by Canadians both
within Canada and elsewhere
eD(als G+, min(s net in"estment income tothe rest o' the world
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+eri"ing Gross ational ,rod(ct 2010.7ig(re 8E4 ,age 22A
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( illions)
Gross +omestic ,rod(ct G+,. 1#21<
+ed(ct) et in"estment income to the rest o' the world -. 2A<Gross ational ,rod(ct G,. 1<E0
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%ther =conomic
Meas(res b. +isposable ncome +.)is personal income min(s personal ta*es and
other personal trans'ers to go"ernment
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!dding the H(man +imension a.Mahb(b (l HaD was instr(mental in de"ising the
H(man +e"elopment nde* H+. p(blishedann(ally 'or "ario(s co(ntries by the nited
ations +e"elopment ,rogramme 6his inde* is based on per capita G+, ad&(sted 'or
p(rchasing power parity4 the a"erage o' years o'schooling o' the co(ntry3s ad(lt citiens4 the
e*pected years o' schooling 'or children o' school-going age4 and li'e e*pectancy at birth
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6he +ebate %"er the H+
a. 6here are three main iss(es with the H+ that
its critics highlight) 6he H+ ran$ings 'or rich co(ntries are
n(merically "ery close4 ma$ing it diIc(lt to (sethese ran$ings in any meaning'(l way
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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
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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
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