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Unformatted text preview: CHAPTER 2: THE MEASUREMENT AND STRUCTURE OF THE CANADIAN ECONOMY INTRODUCTION Chapter 2 is all about numbers-those that describe the economy. First, Section 2.1 discusses the general idea of the national income accounts and talks about the relationships between key macroeconomic variables. Section 2.2 then goes into a detailed discussion ofGDP (the main measure of output) and its components. Then, Section 2.3 talks about measures of saving and wealth, both for the private sector and for the government. Section 2.4 covers real GDP, price indexes, and inflation. Interest rates are discussed in Section 2.5. You might think that all this accounting business is pretty dull, routine stuff, but it's been the focus of a lot of attention recently. As you'll learn in the chapter, counting all the economy's output, and especially calculating the inflation rate, is very tricky business. Many economists are convinced that we've been mismeasuring many of the macroeconomic variables, especially inflation. And that, in turn, has policymakers concerned. As you go through this chapter, you may find some of the details of national income accounting somewhat tedious. But it helps to know how economic goods and services are counted in order to understand the concepts used later in the textbook. So immerse yourself in some of the details; it will pay offlater. CHAPTER OUTLINE I. National Income Accounting: The Measurement of Production, Income, and Expenditure (Sec. 2.1) A. Three alternative approaches give the same measurements 1. Product approach: the amount of output produced 2. Income approach: the incomes generated by production 3. Expenditure approach: the amount of spending by purchasers B. Juice business example shows that all three approaches are equal 1. Important concept in product approach: value added = value of output - value of intermediate inputs C. Why the three approaches are equivalent: 1. They must be, by definition 2. Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach) 3. The fundamental identity of national income accounting: total production = total income = total expenditure (2.1) II. Gross Domestic Product (Sec. 2.2) A. The product approach to measuring GDP 1. GDP is the market value of final goods and services newly produced within a nation during a fixed period of time 2. Market value: allows adding together unlike items by valuing them at their market prices a. Problem: misses nonmarketed items such as homemaking and child-care services performed within the family without pay, the value of environmental quality, and natural resource depletion b. There is some adjustment to reflect the underground economy c. Government services that are not sold in markets (public education, defence, the building and maintenance of roads and bridges) are valued at the cost of production....
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This note was uploaded on 10/20/2010 for the course MATH 100 taught by Professor A during the Spring '10 term at Wilfred Laurier University .
- Spring '10