Production approach contd to avoid this double

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Unformatted text preview: it as an intermediate good © Gustavo Indart Slide 6 The Production Approach (cont’d) To avoid this double counting we must consider only the value added in each industry or at each stage in the process of manufacturing a good The value added by a firm is the difference between the revenue the firm earns by selling its product and the amount it pays for the product of other firms it uses as intermediate goods © Gustavo Indart Slide 7 Example Suppose that the production and sale of bread in a given period of time is $1000, and that the flour used in the production of this bread costs $400 Also suppose that $200 worth of wheat is needed to produce this $400 worth of flour What is the contribution of these activities to GDP? The contribution to GDP is only $1,000 since bread is the only final good (flour and wheat are both intermediate goods) © Gustavo Indart Slide 8 Example (cont’d) Product Value of Output Value Added Bread $1000 $600 Flour $400 $200 Wheat $200 $200 Total $1600 $1000 © Gustavo Indart Slide 9 The Expenditure Approach Total spending on goods and services produced in Canada during any period can be broken down as follows: GDP = Consumption + Investment + Government expenditure (purchases) + Net exports (or exports minus imports) or, in symbols, Y = C + I + G + NX Here we are measuring GDP taking into account who buys the output © Gustavo Indart Slide 10 Consumption Expenditure Consumption spending is the largest component of GDP It includes: Services (haircuts, medical care, education) Durable goods (cars, stereos, washing machines) Non durable (food, clothing, gasoline) goods Note that durable goods should rather be included in investment since they are not completely consumed during the period when they are purchased © Gustavo Indart Slide 11 Investment Expenditure For GDP purposes, investment spending is the type of expenditure that results in an addition to the physical stock of capital Therefore, investment does not include buying a bond or stock in a company T transfer'of'ownership Investment includes expenditure on: only'if'NEW Machinery and equipment Non residential construction building'factories Residential construction increased'in'inventories Changes in inventories if'nega9ve,'counted'as'consump9on'expenditure' © Gustavo Indart Slide 12 Investment Expenditure (cont’d) Investment is a flow of new capital during the year that is added to the stock of capital The capital stock is the total amount of physical capital...
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