Chapter 2 - Chapter 2 The Measurement and Structure of the...

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Chapter 2: The Measurement and Structure of the Canadian Economy National Income Accounting: Measurement of Production, Income, and Expenditure This is an accounting framework used in measuring current economic activity The national income accounts are based on the idea that the amount of economic activity that occurs during a period of time can be measured in terms of: (1) amount of output produced, excluding output used up in intermediate stages of production (product approach) (2) the incomes received by the producers of output (income approach) (3) amount of spending by the ultimate purchasers of output (expenditure approach) Each of the above approached gives a different perspective on the economy but all give identical measurements of the amount of current economic activity Product approach measures economic activity by adding the market value of goods and services produced, excluding any goods and services used up in the intermediate stages of production this approach makes use of the value added concept (value of its output minus the value of its input) The income approach measures economic activity by adding all income received, including wages, taxes (government income), and after tax profits The expenditure approach measures activity by adding the amount spent by all ultimate users of output Ultimate users are the consumers (intermediate purchases are not included here) Why the three approaches are equivalent By definition, the market value of goods and services produced is equal to the amount buyers must spend to purchase them Since they are always equal, the product approach and the expenditure approach must be equal What the seller receives must be equal to what the buyers spend Therefore, the income and expenditure approach must be equal Fundamental identity of income accounting: Total production = total income = total expenditure Gross Domestic Product The broadest measure of aggregate economic activity is the GDP GDP can be measured using any of the 3 approaches mentioned previously Product Approach to Measuring GDP
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This approach defines a nation’s GDP as the market value of final goods and services newly produced within a nation during a fixed period of time Market Value: MV: the prices at which goods and services are sold Using MV allows us to add different goods together because they will each have their own monetary value Therefore, it takes into account differences in relative economic importance of different goods and services A problem with using marker values to measure GDP is that some G/S are not sold in the formal market and therefore makes it difficult to get reliable measures.
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