CH 20 - Measurement of National Income

# CH 20 - Measurement of National Income - CHAPTER 20 THE...

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CHAPTER 20 THE MEASUREMENT OF NATIONAL INCOME Each firm’s contribution to total output is equal to its value added, which si the value of the firm’s output – the values of all intermediate goods & services (output of other firms) that it uses The sum of all the values added produced in an economy is the economy’s total output = Gross Domestic Product (GDP) Production occurs in stages: Some firms produce outputs that are used as inputs by other firms, and these other firms, in turn purchase outputs that are used as inputs by yet 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 = a measure of the economy’s total output 20.2 NATIONAL INCOME ACCOUNTING : BASICS The value of domestic output = value of the expenditure on that output = Total income claims generated by producing that output From the circular flow of income, there are 3 ways to compute national income, but all 3 methods define the same total: o Add up each firm’s value added o Add up total expenditure on domestic output o Add up the total income generated by domestic production GDP FROM THE EXPENDITURE SIDE: Expenditure side of National Accounts: (Expenditure) Total GDP = C a + I a + G a + (X a + IM a ) o C a = consu mption expenditures of households o I a = investment in plant & equipment, residential construction & inventory accumulation o G a = government purchase of goods + services o (X a - IM a ) = net exports of goods + services GDP FROM THE INCOME SIDE:

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## This note was uploaded on 04/18/2008 for the course ECON 295 taught by Professor Ragan during the Spring '08 term at McGill.

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CH 20 - Measurement of National Income - CHAPTER 20 THE...

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