chapter 5 textbook
5.1 National Output and Value Added
Production occurs in stages: Some firms produce outputs that are used as inputs by other firms, and these other firms, in turn, produce outputs that are used as inputs by yet other firms.
error that would arise in estimating the nation’s output by adding all sales of all firms:
double counting (Multiple counting)
two types of output:
Intermediate goods are outputs of some firms that are used as inputs by other firms
Final goods are products that are not used as inputs by other firms
Value added:
the amount of value that firms and workers add to their products over and above the costs of purchased intermediate goods. An individual firm’s value added is
Payments made to factors of production, such as the wages paid to workers or the profits paid to owners, are not purchases from other firms and hence are not subtracted from the firm’s revenue when computing value added
Value added is the correct measure of each firm’s contribution to total output—the amount of market value that is produced by that firm and its workers.
The sum of all values added in an economy is a measure of the economy’s total output.
We find the value of the final goods either by counting only the sales of the last firm or by taking the sum of the values added by each firm.
5.2 National Income Accounting: The Basics
An income claim refers to the economic value generated by the production of goods and services, which ultimately belongs to someone in the form of income.
The circular flow of income suggests three different ways of measuring national income
add up the value of all domestic output—the goods and services produced in the economy. (This requires the concept of value added, which we discussed above.)
add up the total flow of expenditure on domestic output. Summing all spending on final goods and services. Follows the equation of GDP:
Add up the total flow of income generated by domestic production.
2 Sides of GDP
Expenditure side: adding up total expenditure for each of the main components of output.
GDP for a given year is calculated from the expenditure side by adding up the expenditures needed to purchase the output produced in that year. Total expenditure on output is the sum of four broad categories of expenditure:
Consumption: includes expenditure on all goods and services sold to their final users (ex. dental care, legal advice, clothing, cut flowers, ect)
Investment: expenditure on goods not for present consumption, including inventories of goods made but not yet sold and of inputs purchased but not yet used in production (ex. factories, computers, machines, residential housing.)
The accumulation of inventories during any given year counts as positive investment for that year because it represents goods produced but not used for current consumption
Decumulation: The drawing down of inventories
Government purchase: All government purchases of goods and services are included as part of national expenditure. Actual government purchases of goods and services are denoted:
Government output is typically valued at cost rather than at market value
Only government purchases of currently produced goods and services are included as part of GDP
Transfer payments: which are government expenditures that are not made in return for currently produced goods and services
Net exports
Imports: domestic expenditure on foreign-produced goods and services. actual total imports denoted as
Exports: foreign expenditure on domestically produced goods and services. Denoted as:
Net exports: group actual imports and actual exports together denoted as :
Income side: adding up all the income generated by the act of production
the two values calculated from the income and the expenditure sides are identical conceptually and differ in practice only because of errors of measurement
The calculation of GDP from the income side involves adding up factor incomes and other claims on the value of output until all of that value is accounted for.
Factor incomes: three main components of factor incomes:
Wages and salaries: In total, wages and salaries represent the part of the value of production that is paid to labour. (ex. pre-tax labour earnings—that is, the payment to workers before deductions for income taxes, employment-insurance contributions, pension-fund contributions, and other employee benefits.)
Interest: Interest includes interest that is earned on bank deposits, interest that is earned on loans, and miscellaneous other investment income.
Non-factor payments
Every time a consumer spends $10 on some item, some part of this $10 expenditure does not get paid as income to factors of production. This shortfall is due to the presence of indirect taxes and depreciation.
In Canada, the most important indirect taxes are provincial sales taxes, excise taxes on specific products, and the federal Goods and Services Tax (GST).
when GDP is measured from the income side, we add depreciation.
From the income side, GDP is the sum of factor incomes plus indirect taxes (net of subsidies) plus depreciation'
Gross domestic product measured from the expenditure side is equal to the sum of these four major expenditure categories.
Measured from the expenditure side, GDP is equal to the total expenditure on domestically produced output. GDP is equal to:
Capital stock (plant and equipment): The economy’s total quantity of capital goods accumulated through past production
(Business) fixed investment: Adding to the existing stock of capital goods is an act of investment
Only when a new house is built does it appear as residential investment in the national accounts.
Actual total investment expenditure is denoted by the symbol:
Total national income
