Chapter II Measurements and Structure

# Chapter II Measurements and Structure - Chapter II 2.1...

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Chapter II Measurements and Structure of the National Economy 2.1 National Income Accounting: the Measurement of Production, Income and Expenditure The National Income Accounts are 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 The amount of output produced; excluding output used up in intermediate stages of production (the product approach); 2 The income received by the producer of output (the income approach); 3 Amount spending by the ultimate purchaser of output (the expenditure approach) The important thing to remember is that all three approaches give identical measurements of the amount of current economic activity. 1 Using the Product Approach: It measures economic activity by adding the market value of goods produced, excluding any goods used up in intermediate stages of production (Value Added concept). Value Added of any producer is the value of its output minus the value of the input if purchased from other producers. The advantage of value added is that it automatically includes final goods and excludes intermediate goods from the measure of total output. In this example Company 1 added \$35 Company 2 added \$(40 – 25) = \$15 Economic Activity (The Value added) = \$50 Company 1 Wages 15 Taxes 5 Revenue 35 Final 10 Intermediate 25 Company 2 Wages 10 Taxes 2 Purchase 25 Revenue 40 1

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2 Using the Income Approach: The income approach measures economic activity by adding all income received by producers of output, including wages received by workers and profit received by owners of firms. Way of looking at this approach is as follow: Profits from all companies plus the profits of all individuals Using the books method: π 1 + π 2 + w 1 + w 2 Where, ` π 1 = the profits from Company 1 = Revenue – wages = 35 – 15 = 20 π 2 = the profits from Company 2 = Revenue – wages – Intermediate goods = 40 – 10 – 25 = 5 w 1 = the wages from Company 1 employees = 15 w 2 = the wages from Company 2 employees = 10 π 1 + π 2 + w 1 + w 2 = 20 + 5 + 15 + 10 = 50 Simplified example Revenue – Wage Company 1 = \$(35 – 15) = \$20 Company 2 = \$(40 – 10) = \$30 Economic Activity = \$(20 + 30) 3 Using the Expenditure Approach: The Expenditure Approach measures the activity by adding the amount spent by all ultimate users of output. This means final product. In this example Revenue – Intermediate goods sold Company 1 = (35 -25) = \$10 Company 2 = \$40 Economic Activity = \$(10 + 40) Company 1 Wages 15 Taxes 5 Revenue 35 Final 10 Intermediate 25 Company 2 Wages 10 Taxes 2 Purchase 25 Revenue 40 2
Why the Three Approaches Are Equivalent? By definition:

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Chapter II Measurements and Structure - Chapter II 2.1...

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