Economics for Business - Measuring Production and Income

Recessions and National Accounting Systems

• Before the Great Depression, economists believed in never-ending growth.

• The UN System of National Accounts was created to measure economic indicators and prevent/mitigate recessions.

• GDP (Gross Domestic Product) is a key indicator in this system.

Measures of GDP

• Value Added Approach: Measures economic activity by the production of domestic agents (value produced minus intermediate consumption).

• Income Approach: Measures economic activity from income data declared by residents.

• Expenditure Approach: Measures economic activity by expenditures on:

  • Consumption of final goods.

  • Investments in capital goods and inventories.

• These three approaches are consolidated in the System of National Accounts to produce the GDP indicator.

GDP, the Value-Added Approach

• GDP is the value of output less intermediate consumption.

• Direct measure: sum of value added by all agents in an economy.

• Formula: $GDP = \sum Value Added$

Income and Expenditure Approach

• Expenditure Approach: Sum of market value of:

  • Expenditure on final consumption of goods & services.

  • Capital accumulation and changes in inventories.

• Income Approach: GDP measured by the value of gross income (sum of wages, dividends, and rents).

Consolidation and the Circular Flow

• Equation: $\sum \equiv Y \equiv C + I + G + (X-M)$

  • Where:

  • $Y$: total income

  • $C$: final consumption

  • $I$: investment

  • $G$: public spending

  • $X-M$: exports - imports (net imports)

Canadian GDP

• Includes:

  • Gross Fixed Capital Formation

  • Investment in Inventories

Other Indicators of Production and Income

• GDP per capita: $GDP/population$ (useful for international comparisons).

• Gross National Product (GNP): Based on what a country's citizens and firms produce, wherever they are located.

• Net National Product (NNP): $GNP - capital depreciation$

• Net Domestic Product (NDP): $GDP - capital depreciation$

Limitations of GDP

• Doesn't account for:

  • Household production

  • Underground economic activity

  • Health and life expectancy

  • Leisure time

  • Environmental quality

  • Political freedom and social justice

Nominal vs Real GDP

• Real GDP adjusts for price increases.

• GDP deflator: indicator of prices in domestic products compared to a base year.

• Equation: $Real GDP = \frac{Nominal GDP}{GDP Deflator} \times 100$

GDP Growth and the Business Cycle

• Growth rate: $\frac{GDP<em>{current} - GDP</em>{previous}}{GDP_{previous}} \times 100$

• Business cycle stages:

  • Expansion: sustained acceleration in real output growth.

  • Stagnation: sustained deceleration in real output growth.

  • Recession: decline in real output for six months or more.

  • Depression: decline in real output over the long run.

Drivers of Economic Growth

• Classical theory: Labor productivity.

• Socialist theory: Capital accumulation.

• Neoclassical synthesis theory: Technology (innovation, R&D).

• Institutional theory:

  • Government efficiency

  • Political and administrative systems

  • Cultural factors

  • Geography and demography