Presentation on theme: "THE MEASUREMENT AND STRUCTURE OF THE CANADIAN ECONOMY"— Presentation transcript:
1 THE MEASUREMENT AND STRUCTURE OF THE CANADIAN ECONOMY CHAPTER 2THE MEASUREMENT AND STRUCTURE OF THE CANADIAN ECONOMY
2 Lecture Outline:I. Three Measurement Approaches & The Fundamental Identity II. Savings & Wealth III. Nominal vs. Real Variables IV. Interest Rates
3 I. 3 Measurement Approaches 1). Product Approach:Output produced – output used up in the intermediate stage2). Income ApproachTotal income generated by production3). Expenditure ApproachTotal spending by purchasers
4 Example: 2 Businesses Economy Stelco (produces steel): Revenues received from the sales $70k Steel sold to public 20k Steel sold to Ford 50k Wages paid to Stelco employees 30k Taxes paid to government 10k After tax profits 30k Ford (produces cars) Revenues received from the sales $80k Wages paid to Ford employees 20k Taxes paid to government 4k Steel purchased from Stelco 50k After tax profits 6k
5 Why are the 3 approaches equivalent? → Any output produced (production) is purchased by someone (expenditure) and results in someone’s income (income).
6 II. Gross Domestic Production 1). Product Approach GDP = market value of final goods and services newly produced within a nation during a fixed period of time
7 1) Product Approach i) Market Value: → allows adding different items by valuing in common units- Non-market Items- Underground Economy- Government Services
8 1) Product Approach ii) Final Goods and Services: - Don’t count Intermediate goods and services- Capital Goods: goods used to produce other goods- Inventories: unsold finished goods, goods in process & raw materials
9 1) Product Approach iii) Newly Produced: - Counts only things produced in the given period- Excludes things produced earlier
10 1) Product Approach iv) GDP vs. GNP: GDP = output produced within a countryGNP = output produced by domestic factors of productionNFP = net factor payments from abroad
11 Question:Does a country with lots of out- migration have bigger GNP or GDP?
12 II. Gross Domestic Production 2). Expenditure Approach GDP = Total spending on final goods and services produced within a nation during a specified period of time
20 3) Income Approach Net National Income a). Labour income b). Corporate profitsc). Interest and investment incomed). Unincorporated business incomeIndirect taxes - subsidiesDepreciation
21 3) Income Approach Private and Government sector income Private disposable income:The amount of income the private sector has available to spend.Net government income→ What do you get when you add these up?
22 III. Savings and Wealth 1). Important Concepts: Wealth = assets – liabilitiesSaving = current income – current spendingPrivate Savings= private disposable income – consumptionGov’t Savings= net gov’t income – gov’t purchasesNational Savings = Private + Gov’t Savings
23 2). Uses of Private Savings Uses-of-saving Identity:Private saving is used in 3 ways:Investment ( )The government budget deficit ( )The current account balance ( )
24 3). Relating Saving and Wealth Stocks vs. Flows- Flow variables:measured per unit of time- Stock variables:measured at a point in timeWealth is a stock, while saving is a flow.
25 3). Relating Saving and Wealth National wealth has two partsDomestic physical assetsNet foreign assetsHow to increase a country’s national wealth?Increase in the value of the existing assetsIncrease in national saving
26 IV. Real vs. Nominal GDP Nominal variables (in dollar terms): Problem: Do changes in nominal values reflect changes in prices or quantities?Nominal GDP (current-dollar GDP):uses current market pricesReal GDP (constant-dollar GDP):uses the prices of a base year
27 Price IndexesPrice Index: a measure of average level of prices for some specified set of goods and services, relative to some base year.GDP Deflator ( Quarterly): measures the overall level of prices for ‘economy’.Consumer Price Index (Monthly): measures the prices of consumer goods.
28 Price Indexes Concerns with using the CPI: The base year should be updated occasionally.CPI may overstate inflation:i). Quality adjustment biasii). Substitution biasInflation: growth rate of the price level
29 V. Interest RatesAn interest rate is a rate of return promised by a borrower to a lender.Nominal interest rate:nominal return to an assetReal interest rate:real return to an assetExpected real interest rate= nominal interest rate – expected inflation
30 Chapter 2 Summary What we have learned from Ch.2: - Measurement of GDP - Savings and Wealth- Nominal vs. Real GDP- Interest RatesNext: What determines the amount of output produced in an economy? (Ch.3)