Lecture

Wednesday, December 09, 2015

7:34 PM

National Income Accounting

Gross Domestic Product (GDP)
GDP = value of all final good produced in Canada during a period of time
1. Currently produced - not sales of used items
2. Market prices - at market prices, including indirect taxes
3. Exchanged in market - doesn't include illegal transactions
a. Imputed rent to owner's occupied houses
Measuring GDP
1. Production: value added in production
2. Expenditure: total expenditure on final goods and services
3. Income: total income earned by production
1. Production
Value of final goods and services produced in country (avoids double counting)
Value added = revenue selling product - amount paid for product
2. Expenditure
GDP = Consumption + Investment + Government + Net Exports
GDP = C + I + G + NX
Investment expenditure includes private investment but not gov. investment
Flow of net capital -> Gross Investment not net investment
Government expenditure includes investment, but not transfers and interest
3. Income
Value added in production = income
GDP includes indirect taxes - subsidies
Net Domestic Income
NDI = GDP - net indirect taxes - depreciation = part of GDP that goes to payment of owners
= salaries + profits + interest + rents + net income of unincorporated business
Also called Net Domestic Product at factor cost
Net Domestic Product at market prices = GDP - depreciation
Personal Income
Personal Income (PI) = NDI - profits + dividends + transfer payments + interest on govt. debt
Personal Disposable Income (PDI) = consumption expenditure + saving
GDP vs GNP
GDP = production within Canada of Canadian & non-resident production
GNP = production within & outside Canada of only Canadian production.
National Income of country
Real vs. Nominal GDP
Nominal GDP = value of output in current dollars (current period prices)
Changes because output and market price change
Real GDP = value of output in constant dollars (base period prices)
Only changes because output changes
Chapter 2 Page 1

Only changes because output changes

Chain Method of GDP
Averages price of current and previous year
GDP Deflator = GDP current prices / GDP base year prices x 100
CPI = consumer goods current prices / consumer goods base prices x 100
CPIX = CPI - volatile prices (i.e. oil, energy, etc.)
GDP vs. CPI
GDP is only domestic production, CPI is all purchases (domestic + foreign)
ASSUMPTIONS
1. Gross investment = net investment (no depreciation)
2. GDP = NDI (no indirect taxes/subsidies)
3. Y = GDP = NDI
IMPORTANT (1)
1. Taxes = Transfer payments = 0, Imports = Exports = 0, Profits = Dividends
2. Y = S + I
3. GDP = NDI = PI = PDI = Y = YD
4. Y = C + S
5. C + I = C + S
6. S = I
IMPORTANT (2)
1. GDP = NDI = GNP + Profits = Dividends
2. Y = C + I + G + NX
3. YD = Y - TA + TR = C + S
4. C = Y - TA + TR - S
5. Y = (Y -TA + TR - S) + I + G + NX
6. S = I + (G + TR - TA) + NX
G + TR - TA = government budget deficit
NX = net exports (trade surplus)
National Saving = Private Saving + Public Saving
NS = S + PS (or Government Budget Surplus - BS)

Chapter 2 Page 2