Chapter 20

Chapter 20 - Chapter 20: The Measurement of National Income...

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Chapter 20: The Measurement of National Income 20.1 National Output and Value Added Production occurs in stages: some firms produce outputs that are used as inputs by other firms, an these other firms, in turn, produce outputs that are used as inputs by yet other firms. You want to avoid double counting. Intermediate goods: all outputs that are used as inputs by other producers in a further stage of production Final goods: goods that are not used as inputs by other firms but are produced to be sold for consumption, investment, government, or exports during the period under consideration Value added: the value of a firm’s output minus the value of the inputs that it purchases from other firms Value added is the correct measure of each firm’s contribution to total output – the amount of market value that is produced by that firm The sum of all values added in an economy is a measure of the economy’s total output. 20.2 National Income Accounting: The Basics The value of domestic output is equal to the value of the expenditure on that output and is also equal to the total income claims generated by producing that output. Figure 20-1 The Circular Flow of Expenditure and Income Three ways of measuring national income: Add up the value of all goods and services produced in the economy (value-added concept) GDP by valued added Add up the total flow of expenditure on domestic output GDP on the expenditure side Add up the total flow of income generated by the flow of domestic production GDP on the income side Gross domestic product (GDP): the total value of goods and services produced in the economy during a given period
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GDP from the Expenditure Side GDP for a given year is calculated from the expenditure side by adding up the expenditures needed to purchase the final output produced in that year. Total expenditure on final output is the sum of four broad categories of expenditure: (1) Consumption expenditure : household expenditure on all goods and services. Represented by the symbol C as one of the four components of aggregate expenditure. (2) Investment expenditure:
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This note was uploaded on 04/17/2008 for the course ECON 295 taught by Professor Ragan during the Winter '08 term at McGill.

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Chapter 20 - Chapter 20: The Measurement of National Income...

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