EATEconomic Activity Television

Catherine McGoveran

Stephanie Milligan

Carolyn Pollard

Stephanie Woods

Rebecca Young

Today’s ProgramGross Domestic Product (GDP)Components of GDPPer capita GDPLimitations of GDPOther economic measures

EATEconomic Activity Television

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Reporter

Stephanie Milligan

National Income AccountsDefinition: accounts showing levels of total income

and spending in the Canadian economy

National Income Accounts Similar to how a business tracks revenues

and expenditures Performance of the Canadian economy

can be analyzed and compared to other nation’s economies by using national income accounts

GDP

Definition: the total dollar value at current prices of all final goods and services produced in Canada in a given period

Dollar value is calculated at current prices, typically once a year

How To Calculate GDP

1. Income Approach: a method of calculating GDP by adding together all incomes in the economy

2. Expenditure Approach: a method of calculating GDP by adding together all spending in the economy

GDP Identity

GDP expressed as total income

=

GDP expressed as total spending

Both of these expressions are identical Either method can be used

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Special Report on the “Approach”

With Carolyn

Pollard

The Income Approach

The income approach is made up of 4 components for calculating GDP

1. Wages

2. Rent

3. Profit

4. Interest

The Income Approach

Stats Canada added three other classifications used for calculating GDP

5. Indirect taxes6. Depreciation7. Statistical Discrepancy Account

Balance GDP found through income approach with GDP found through expenditure approach

The Income Approach

Therefore

GDP is the sum of the seven groups

The Expenditure Approach

Categories of Products

1. Final Products: products that will not be processed further and will not be resold

2. Intermediate Products: products that will be processed further or will be resold

The Expenditure Approach

Be Careful!!

Double Counting: adding the same item to GDP at different stages in its production

↓

Causes estimates of GDP to be too

high

The Expenditure ApproachValue Added: the extra worth of a product at

each stage in its production

↓

Used to avoid double counting

Stats Canada subtracts the value of all intermediate goods/services from the value of the products at the next intermediate and final stages

The Expenditure Approach

Categories of Purchases

Excluded Purchases: categories excluded because they are not related to current production

1. Financial Exchanges

2. Second-Hand Purchases

The Expenditure Approach

The Categories of Purchases (cont’d)

Included Purchases: categories that are used in GDP calculations

1. Personal Consumption (C)

2. Gross Investment (I)

3. Government Purchases (G)

4. Net Exports (X-M)

The Expenditure Approach

FORMULA!

Expenditure Equation

GDP = C + I + G + (X – M)

Questions?

Personal Consumption

Definition: household spending on goods and services, which is the largest portion of the GDP

Nondurable Goods: goods that are

consumed just once (Food)

Durable Goods: goods that are consumed

repeatedly over time (CDs)

Gross Investment

Definition: purchases of assets that are intended to produce revenue

It can vary from about 15%-25% from year to year

Most important spending is on equipment and machines

Inventories

Definition: stocks of unsold goods and materials

businesses use inventories of input to avoid stopping production due to unexpected demand, and are viewed as income-producing assets

↑ inventories in a year = positive investment spending ↓ inventories in a year = negative investment spending Construction of all buildings is part of gross investment

Capital StockDefinition: the total value of productive assets, such as

machinery and equipment that provide a flow of revenue

Net InvestmentDefinition: gross investment minus depreciation,

representing the yearly change in the economy’s stock capital

Government PurchasesDefinition: Current government spending on

goods and services Makes up about 20% of GDP Government spending uses taxes from

households and businesses for finances

Examples Road Repairs Buying battleships for armed forces

Government Purchases

Government spending NOT included in: Government transfer payments to households Subsidies to businesses Expenditures by government-owned companies

Net Exports

Exports: Canadian purchases of goods

and services

(by foreigners)

Imports: Canadian purchases of foreign

goods and services

Net Exports

Net Exports: exports minus imports Small portion of GDPExports/Imports separately count for 25%Foreign involvement creates a net increase

Formula!

( X – M )

Expert Opinion

GDP and Living Standards

Per Capita GDP: GDP per person, calculated as GDP divided by population

GDP

____________________

Adjustments to Per Capita GDP

Inflation Adjustments When making comparisons about

economic well being – per capita GDP must be adjusted

This compensates for price changes over the years

Adjustments to Per Capita GDP

Inflation Adjustments

Real GDP: GDP expressed in constant dollars from a given year

Per Capita Real GDP: GDP per person, expressed in constant dollars from a given year

Adjustments to Per Capita GDP

Inflation Adjustments

Formula!

Per capita real GDP = Real GDP

Population

Adjustments to Per Capita GDP

Exchange-Rate Adjustments Different currencies must be adjusted

when comparing the GDP of different countries

Adjustments to Per Capita GDP

Limitations of GDP GDP has qualitative and quantitative

limitations 1. Excluded Activities

2. Product Quality

3. Composition of Output

4. Income Distribution

5. Leisure

6. The Environment

Interview

With Hazel

Henderson

Hazel Henderson

Thinking

Globally

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Other Economic Measures

National income accounts are used by Stats Canada to calculate measures that indicate economic activity

1. Gross National Product (GNP)

2. Net Domestic Product (NDI)

3. Personal Income

4. Disposable and Discretionary Income

Gross National Product

Definition: the total income acquired by Canadians both within Canada and elsewhere

GDP – concentrates on incomes in Canada

VS.

GNP – concentrates on incomes of Canadians

Gross National Product

Two adjustments made to GDP to calculate GNP1. Income earned from Canadian investments by

foreigners is deducted from GDP2. Income earned from foreign investments by

Canadians is added to GDP

Formula!

GNP = GDP – Net investment income to foreigners

Net Domestic Income

Definition: the total income earned by Canada’s households

Formula!

NDI = GDP – amounts that are not earnings from

current production

Personal Income

Definition: the income actually received by households

• Adjustments must be made to NDI to calculate personal income

1. Transfer payments

2. Other payments to persons

3. Earnings not paid out to persons

4. Net investment income to foreigners

Disposable and Discretionary Income

Disposable Income: household income minus personal taxes and other personal transfers to government

Discretionary Income: disposable income minus purchases of necessities

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