Chapter 5 - Economics 104 2 Measuring Economic Activity...

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Economics 104 1 2. Measuring Economic Activity Readings — chapter 5. Summary Measuring output (production, expenditure, and income approaches) Nominal versus real GDP Measuring employment and unemployment Gross Domestic Product The principal measure of economic activity is Gross Domestic Product the market value of fnal goods and services produced within a country in a given period . What does this mean and how do we measure it?
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Economics 104 2 Market value To aggregate across all the di erent types of goods and services in the economy, market prices are used. For example: Production Market Price Value Oil 100 barrels $70 per barrel $7 000 Wheat 100 tonnes $150 per tonne $15 000 Total Market Value of Production $22 000
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Economics 104 3 Ar icherexamp le : Production Market Price Value Oil 100 barrels $70 per barrel $7 000 Wheat 100 tonnes $150 per tonne $15 000 Healthcare (government provided) ? $ ? $10 000 Home schooling (non-market) ? $ ? ? Total Market Value of Production $32 000 Government provided services (those without fees) are valued based upon the costs to provide them. Many non-market activities are simply not measured.
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Economics 104 4 Final Goods and Services Final goods and services — those that are consumed. Intermediate goods and services — those that are used in the production process. GDP measures the market value of ±nal goods and services. This avoids double counting of intermediate goods . Equivalently, we can measure GDP by adding up value added in production. Value added = market value of good or service - cost of intermediate goods and services purchased from other ±rms Important quali±cation: factories, machines, equipment, called capital goods ,areusedforproduc- tion but counted as fnal goods . Within a country in a given period Gross Domestic Product measures what ever is produced within a country — no matter who owns the good. Resale of goods produced in previous years do not contribute to GDP.
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Value added in bread production Firm Revenue Cost of Intermediate Goods Value Added Grain Supplier $0.50 $0.00 $0.50 Flour Miller $1.20 $0.50 $0.70 Bakery $2.00 $1.20 $0.80 Total $2.00 Value added at each state is revenue less cost of intermediate goods. The value of the final good (loaf of bread) captures all of the intermediate goods.
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Value added in bread production Firm Revenue Cost of Intermediate Goods Value Added Grain Supplier $0.50 $0.00 $0.50 Flour Miller $1.20 $0.50 $0.70 Bakery $2.00 $1.20 $0.80 Total $2.00 Value added at each state is revenue less cost of intermediate goods. The value of the final good (loaf of bread) captures all of the intermediate goods.
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Economics 104 5 Measuring GDP — Production Approach As on previous slides: measure GDP by adding up value added in production. Measuring GDP — Expenditure Approach Goods that are produced must be purchased — measuring expenditures in the economy must tell us how much is produced.
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Chapter 5 - Economics 104 2 Measuring Economic Activity...

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