Chapter 2:The Measurement and Structure of the Canadian Economy

1. Chapter 2:The Measurement and Structure of the Canadian Economy • National Income Accounts – An accounting framework to measure current economic activity. • Three approaches to measure national economic activities 1) Product Approach – The amount of goods and services excluding intermediate goods and services produced (Value Added).

2. 2) Income Approach – Income received by factors of Production 3) Expenditure Approach – Amount of spending by the ultimate purchasers/buyers Fundamental Identity of National Accounts Total Product = Total Income = Total Expenditure

3. Product Approach • Gross Domestic Product (GDP) – The market value of final goods and services newly produced in a nation within a specified period of time. • Gross National Product (GNP) = GDP + Net Factor Payment from Abroad (NFP) • NFP = Income paid to domestic factors of production by the rest of the world – Income paid to foreign factors of production in the domestic economy.

4. The Expenditure Approach • Gross Domestic Product (GDP) – Total spending on final goods and services produced within a nation during a specified period of time. • Y = GDP = Consumption (C ) + Investment (I) + Government Purchases (G) + Net Exports (NX)

5. Consumption: • Consumer Durables • Semi-Durable • Non-Durable • Services • Investment: Inventory Investment + Fixed Investment • Fixed Investment: • Residential Construction • Non-Residential Construction • Machinery and Equipment Investment

6. Government Purchases – Government expenditure excluding Transfer Payments and Interest Payments on the government Debt. • Net Exports = Exports – Imports Income Approach • GDP – Total income received by factors of production in a nation within a specified period of time.

7. Labor Income • Corporate Profits • Interest and Investment Income • Unincorporated Investment Income • Net Domestic Product at Factor Prices = 1+2+3+4 • Net Domestic Product at Market Prices = Net Domestic Product at Factor Price + Indirect Taxes - Subsidies • GDP = Net Domestic Product at Market Price + Depreciation

8. Private Disposable Income = Y + NFP + TR + INT - T • Net Government Income = T – TR – INT • GNP = Private Disposable Income + Net Govt. Income = Y + NFP

9. Saving = Current Income – Current Spending • Private Saving (SPVT) = Private Disposable Income – C = Y + NFP +TR + INT - T- C • Government Saving (SGOVT) = Net Government Income – Government Purchases = (T – TR – INT) – G = Budget Surplus/Deficit

10. Uses of Private Saving • S = I + (NX + NFP) = I +Current Account Balance (CA) • S = SPVT + SGOVT = I + CA • SPVT = I - SGOVT + CA

11. Nominal Vrs Real Variables • Real GDP = Nominal GDP / GDP Deflator • GDP Deflator measures the overall level of prices of goods and services included in GDP. • Consumer Price Index (CPI) – Measure of prices of consumer goods