Ch 5:GDP & Standard of Living Flashcards

Terms Definitions
Gross Domestic Product (GDP)
The market value of all the final goods and services produced within a country at a given time period
Final Good or Service
A good or service that is produced for its final user & not as a component of another good or service
Intermediate Good or Service
A good or service produced by a firm, bought by another firm, & used as a component of a final good or service
Only goods and services that are produced 1._____ count as part of that country's GDP
1. within a country
What does GDP measure?
GDP measures the Value of Production
at a given time period
What are the 4 types of expenditures in the circular flow?
Consumption
Investment
Government
Net Exports
Consumption Expenditure
The expenditure by households on consumption goods and services
Investment Expenditure
The purchase of new capital goods (tools, instruments, machines, buildings, & other constructions) & additions to inventories
Does not include financial capitals such as the purchase of stocks and bonds
 
Government Expenditure on Goods and Services
The expenditure by all levels of governments on goods and services
Net Exports of Goods and Services
The value of exports of goods and services
minus
The value of imports of goods and services
Exports of goods and services
Items that firms in Canada sell to the rest of the world
Imports of Goods and Services
Items that households, firms & governments in Canada buy from the rest of the world
Are produced in other countries so expenditure on imports is not an expenditure on Canadian-produced goods and services
 
 
Total Expenditure
Is the sum of the 4 expendituresTotal Expenditure
=
C = Consumption
+
I = Investment
+
G = Government
+
NX = Net Exports
Undistributed Profit
Is a part of total income that is a combination of interest and profit that firms do not pay to the household that owns them
From an economic viewpoint, this is income earned by households & then loaned back to the firms
Net Taxes
Net Taxes

Taxed Paid
_
 
Benefits Received from Gov't
When did Canada's GDP exceeded the $1 trillion  mark?
In 2000
What are the 2 approach to measuring GDP?
Expenditure Approach
Income Approach
Expenditure Approach
Uses data on expenditures such as consumption, investment, government & net exports
This approach is like attaching a meter to the circular flow diagram on all the flows running through the Goods markets to firm & measuring the magnitude of those flows
What is the formula to calculate GDP using the Expenditure Approach?
GDP
=
Consumption
+
Investment
+
Government
+
Net Exports
Income Approach
Uses data from CCRA and other sources on the incomes that firms pay households for the services of factors of production they hire
This approach is like attaching a meter to the circular flow diagram on all the flows in the factors market from firms to households & measuring the magnitudes of those flows
What is the formula to calculate GDP using the Income Approach?
GDP
=
Net Domestic Product
+
Indirect Taxes
 _
 
Subsidies
+
Depreciation
What are the 4 categories of income in measuring GDP?
Wages, Salaries, Supplementary Labour
Interest & Investment Income
Profits of Corporations & Govt. Enterprises
Income from Farms & Unincorporated Businesses
Wages, Salaries & Supplementary Labour Income
Are payments for labour services
Includes all wages & salaries plus fringe benefits paid by employers such as extended health insurance & pension fund contribution
Interest Income
Is the total interest earned by households from assets (such as bonds) & loans they have made
minus
The interest payments they make on their debts (such as credit card debts)
 
Investment Income
Includes Rent received by households for the use of their property & other assets as well as imputed rent for owner-occupied housing
Imputed Rent
Is an estimate of what homeowners would pay to rent the housing they own & use themselves
This measures the total value of housing services whether they are owned or rented
Undistributed Profit
Are counted as income because they are like an addition to the income of shareholders
Are equivalent to profits paid out as dividends & then lent back to the corporations who earned them
Profits of Corporations & Government Enterprises
Are a combination of interest on capital & profit for entrepreneurship
Profits of Corporation includes the profits paid out as dividends and undistributed profits
Income from Farms, Unincorporated Businesses
Is a mixture of wages, interest, rent & profit
What is the formula to calculate Net Domestic Product at Factor Cost
Net Domestic Product @ Factor Cost
=
Sum
((Wages, Salaries & Supplementary Labour)
+
(Interest & Investment Income)
+
(Profits of Corporation & Gov't Enterprises)
+
(Income from Farms & Unincorporated Businesses)
What are the two adjustments required to calculate GDP using the income approach?
Convert Price from Factor Cost to Market Price
Convert Net Product to Gross Product
What is the formula to convert GDP from Factor Cost to Market Price?
GDP @ Mkt Price
=
Net Domestic Product @ Factor Cost
+
Indirect Taxes
 _
 
Subsidies
Depreciation
The decrease in the value of capital that results from its use & from obsolescence. Also called Capital Consumption
What is the formula to calculate GDP using the Income Approach
GDP at Gross
=
Net Domestic Product @ Factor Cost
+
Indirect Taxes
_
 
Subsidies
+
Depreciation
Value Added
1. The value of a firm's production
minus
The value of the intermediate goods it buys from other firms
 
2. Equals the sum incomes including the profits that the firm paid for the factors of production it used
 
Final Expenditure
Is the sum of value added to GDP
What is the formula to calculate Gross National Product (GNP)?
GNP
=
GDP
 
minus 
 
Net Investment Income paid to non-residents
Net Investment Income paid to non-residents
Investment Income earned in Canada for non-residents
 
minus
 
Investment income by Canadians in other Countries
Personal Disposable Income
The income available for spending on consumption & saving
Net Taxes
Net Taxes
=
Transfers from Gov't
 _
 
Taxes
What are the 4 parts of GDP?
Value Produced
What Produced
Where Produced
When Produced
How does GDP measure Total Production?
GDP values items at their market value - at the prices at w/c each item is traded in markets
What goods and services does GDP calculate?
GDP values all the final goods and services
What are the 3 things that GDP measures?
Total Production
Total Income
Total Expenditure
Explain why the value of production equals income equals expenditure?
From the viewpoint of firms, the value of production is the cost of production.
From the viewpoint of purchasers of goods and services, the value of production is the cost of buying it w/c equals expenditure so:
 
Value of Production
=
Income
=
Expenditure
What are the expenditures not included in GDP?
Expenditures not included in GDP are:
Spending on intermediate goods
Used Goods - Because they were already counted as part of GDP during which time they were new goods
Financial Assets - When households buy stocks or bonds, they are making loans, not buying goods and services. The expenditure on newly produced capital good is part of GDP
Real GDP
The value of final good and services produced in a given year when valued at constant prices
Nominal GDP
The value of the final goods and services produced in a given year valued at the prices that prevailed in that same year
What is the Traditional method of calculating Real GDP?
Choose a base year
Sum the expenditures of each
Value the quantities produced in each year at the prices of the base year
What is the New method of calculating Real GDP?
Choose a base year
Sum the expenditures of each
Value the quantities produced in each year at the prices of the base year as well as the other year being compared

 Note that it builds from the traditional method. But it takes it two steps further
4. Calculate the percentage of value of production in each year
5. Calculate the average of the two.
GDP Deflator
Is an average of current prices expressed as a percentage of base-year prices.
Is a measure of the price level
 
What is the formula to calculate GDP Deflator?
GDP Deflator
=
(Nominal GDP
÷
Real GDP)
x
100
Does the expansion of real GDP provide a full & accurate measure of the change in our standard of living?
It does not, for 2 reasons
Standard of living depends on all goods and services, not only on those included in GDP
Standard of living depends on factors other than goods and services produced
What are the goods and services that are excluded from GDP?
Household Production
Underground Production
Leisure time
Environment Quality
What are other influences on the Standard of Living?
Health & Life Expectancy
Political Freedom & Social Justice
Human Development Index
Combines real GDP, life expectancy, health and education levels
Define GDP and explain why the value of production, income and expenditure are the same for an economy
P.74
Describe how economic statisticians measure GDP in Canada?
P.74
Distinquish between nominal GDP and real GDP and define GDP deflator
P.74
Explain and describe the limitations of real GDP as a measure of the standard of living
P.74
Explain the statement:The value of production = income = expenditure
Because firms pay out everything they receive as incomes to the factors of production. From the viewpoint of firms, the value of production is the cost of production which equals income. From the viewpoint of purchasers of goods and ervices, the value of production is the cost of buying it, which equals expenditure
What are goods and services not included in the calculation of GDP?
Intermediate Goods and Services
Used Goods
Financial Assets
Household Production
Underground Production
Leisure time
Environment Quality
Gross National Product
GDP minus investment income paid to non-residents
Is the production that generates incomes for Canadians
What is the formula to calculate Personal Disposable Income?
 
Personal Disposable Income
=
Personal Income - (Net Taxes=Sum((Transfers from Gov't - Taxes)))
What is the formula to calculate Personal Disposable Income from GNP?
Personal Disposable Income (PDI)

1. Net National Product 
=
GNP - depreciation
 
2. National Income @ Factor Cost
=
NNP - indirect taxes - subsidies
 
3. Personal Income

Natnl Incm @ Fctr Cost - Undstrbtd Profit
 
4. Personal Disposable Income
=
Personal Income - Net Taxes
 
 
 
 
Net National Product
Is GNP minus depreciation or capital consumption
National Income
Measured in terms of factor cost
Equals Net national Product minus indirect taxes minus subsidies
 
Personal Income
Equals national income minus undistributed profits
In 2002, GDP was 1.155 B, In 2003, GDP was 1.207 B. Because GDP in 2003, was greater than in 2002, what are the 2 main reasons for the increase in GDP?
We produced more goods and services
We paid higher prices for our goods and services
Why is it a big deal to determine the cause of increase in GDP?
Because producing more goods and services contributes to an improvement in our standard of living but Paying higher prices means contributes to an increase in cost of living but not in standard of living
What are the steps in calculating Nominal GDP?
Sum the expenditures for each products
Sum the expenditures calculated in step 1 to calculate for the sum of expenditures for the year
True or False
 
Real GDP equals Nominal GDP in the base year
T
What are the steps in calculating Real GDP using the Traditional method?
1. Calculate Nominal GDP
2. Choose a base year
3. Value the quantities produced in each year the prices of the base year
What are the steps in calculating Real GDP using the New Method?
Calculate Nominal GDP
Choose Base year
Value the quantities produced in each year at the prices of the base year

Value the quantities produced in the base year at the prices of the prevailing year

 Determine the increase or decrease of value of production by comparing the base year to the prevailing year numbers calculated in steps 3 & 4. Note that this number uses the base year prices therefore ( Base year #'s - Prevailing year Numbers)
Divide the number calculated from Step 5 to the nominal GDP calculated in the base year 
Repeat Steps 5,6 & 7 to calculate for the prevailing year numbers. Note that these numbers uses the prevailing year's prices.
Calculate the average of the percentage increase (i.e. (x+y)÷2)
Calculate the ratio of the percentage calculated from step 8 is to the nominal base year (i.e. 200 * 5% = 10)
We then add this number to the nominal GDP of the base year to calculate the real GDP for the prevailing year (i.e. if base year = 250 then    250+10=260)
Chain-Linking
By applying the calculated percentage change to the real GDP of the proceeeding year, real GDP in each year is linked back to the dollars of the base year.
By comparing the Nominal GDP vs Real GDP, if Nominal GDP rises and Real GDP remains unchanged what most likely happened?
That the reason for the rise in GDP is the increase in price and not an increase in production
True or False
The larger the nominal GDP for a given real GDP, the higher are the prices and the larger is the GDP deflator
T
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Term:
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