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{current} - GDP{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