1. THE MEASUREMENT AND STRUCTURE OF THE CANADIAN ECONOMY
CHAPTER 2
THE 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 stage
2). Income Approach
Total income generated by production
3). Expenditure Approach
Total 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 country
GNP = output produced by domestic factors of production
NFP = 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

14. 2) Expenditure Approach
i) Consumption (56.5 %):
includes 4 categories:
Consumer durables: >3 yrs (cars, TVs, not houses)
Semi-durable goods: 1-3 yrs (clothing)
Nondurable goods (food, utilities, fuel)
Services (rent, health care)

15. 2) Expenditure Approach
ii) Investment (20 %):
Fixed Investment
a). Residential construction
b). Nonresidential investment
c). Machinery and equipment investment
Inventory Investment
Government Investment

16. 2) Expenditure Approach
iii) Government purchases (19.5 %):
Government expenditure (all levels) on goods or services
Excludes transfers & debt interest payments

17. 2) Expenditure Approach
iv) Net Exports (3.9 %):
= Exports - Imports
Why are imports subtracted from GDP?

18. II. Gross Domestic Production
3). Income Approach GDP = Total incomes generated by production

20. 3) Income Approach Net National Income a). Labour income
b). Corporate profits
c). Interest and investment income
d). Unincorporated business income
Indirect taxes - subsidies
Depreciation

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 – liabilities
Saving = current income – current spending
Private Savings
= private disposable income – consumption
Gov’t Savings
= net gov’t income – gov’t purchases
National 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 time
Wealth is a stock, while saving is a flow.

25. 3). Relating Saving and Wealth
National wealth has two parts
Domestic physical assets
Net foreign assets
How to increase a country’s national wealth?
Increase in the value of the existing assets
Increase 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 prices
Real GDP (constant-dollar GDP):
uses the prices of a base year

27. Price Indexes
Price 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 bias
ii). Substitution bias
Inflation: growth rate of the price level

29. V. Interest Rates
An interest rate is a rate of return promised by a borrower to a lender.
Nominal interest rate:
nominal return to an asset
Real interest rate:
real return to an asset
Expected 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 Rates
Next: What determines the amount of output produced in an economy? (Ch.3)