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: 1) Consumer Durables 2) Semi-Durable 3) Non-Durable 4) Services Investment: Inventory Investment + Fixed Investment Fixed Investment: 1) Residential Construction 2) Non-Residential Construction 3) 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 1) Labor Income 2) Corporate Profits 3) Interest and Investment Income 4) Unincorporated Investment Income Net Domestic Product at Factor Prices = 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 (S PVT ) = Private Disposable Income – C = Y + NFP +TR + INT - T- C Government Saving (S GOVT ) = 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 = S PVT + S GOVT = I + CA S PVT = I - S GOVT + 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