Chapter 10: Measures of Economic Activities

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Chapter 10 Measures of Economic Activities
Siu Hin C.
Eugene S.
Timothy W.
Albert L.
Brendan J.
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Time Line Today

• Introduction 5 mins
• Lesson 25 mins
• National income accounts
• Measuring GDP
• Income Approach
• Expenditure Approach
• Questions (washroom break) 10 mins
• Games 20 30 mins
• Assign Homework

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Introduction to Chapter 10

• Gross Domestic Product(GDP), and the two
  approaches to calculating it
• The components of GDP
• Per capita GDP, and how it may be used to compare
  GDPs of different countries
• Some limitations of GDP as a n economic indicator
  
• Other economic measures developed from the
  national income accounts.

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National income accounts

• National income accounts are accounts that give
  various measures of Total spending and income in
  the Canadian economy.
• This task is undertaken by Statistics Canada, a
  federal agency.
• National income accounts evaluate the performance
  of the Canadian economy, which allows for
  comparisons with other countries economies.
• This helps government policy-makers find ways to
  improve economy.

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• Income Approach
• A method of calculating GDP by adding together
  all the incomes in the economy
• i.e. Wages Salaries, Corporate Profits,
  Interest Income, Proprietors Income (rents),
  Indirect Taxes, Depreciation, Statistical
  Discrepancy
• Expenditure Approach
• A method of calculating GDP by adding together
  all the spending in the economy
• Categories of Products Final Intermediate
  double counting occurs so value added is applied
• Categories of Purchases Excluded purchases
  (financial exchanges second hand purchases),
  financial exchanges (only bank service charges/
  stock commissions), included purchases

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The Income Approach
Calculating Gross Domestic Product by adding
together all incomes in the economy.

• Income Components of GDP
• Wages, rent, profit, and interest make up
  Canadian incomes.
• Human, Capital and natural resources give
  Canadians Wages, rent, and profit.
• These four payments are
• basis of GDP calculated
• using the income approach.

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Using the income approach, GDP is the sum of all
seven categories.

• Wages and Salaries
• Largest income category
• 60 percent of GDP
• Corporate Profits
• Corporate income tax, the profits paid out to
  corporate shareholders as dividends, and the
  profits put back into the business.
• Retain Earnings

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Using the income approach, GDP is the sum of all
seven categories.

• Interest Income
• Not including interest payments made by consumers
  or government.
• Interest paid on business loans and bonds.
• Proprietors Incomes and Rents
• The earnings of sole proprietorships.
• Partnerships, including self-employed
  professionals and farmers.

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Using the income approach, GDP is the sum of all
seven categories.

• Indirect Taxes
• Provincial sales taxes (Not included).
• Charged on products rather than levied against
  households or businesses.
• Taxes (minus any subsidies business received) are
  added to income-based GDP.
• Depreciation
• Balance the two approaches to calculating GDP.

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Using the income approach, GDP is the sum of all
seven categories.

• Statistical Discrepancy
• Two approaches do differ.
• GDP figures are actually estimates.
• Divides the difference between the two
  approaches.

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The Expenditure Approach
How to calculate expenditure approach???

• The sum of purchase in product markets

Using the expenditure approach, GDP is calculated
using the previous four categories Personal
Consumption (C), Gross Investment (I), Government
Purchases (G), and Net Export (X M).
Therefore, the expenditure equation is as follow
GDP C I G (X M)
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Categories of products

• Final product
• are those that will not be processed further
• will not be resold
• Ultimate user pays for the product
• Intermediate Products
• Those that will be processed further
• Will be resold
• Example-gt Ad service bought by a soft drink
  manufacturer
• If, final and intermediate were include in the
  GDP calculation, we have a problem

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Categories of products

• Double counting
• the problem of adding to GDP the same item at
  different stages in its production.
• Value added
• the extra worth of a product at each stage in its
  production a concept used to avoid double
  counting in calculating GDP.

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Categories of Purchase

• Excluded purchase
• Financial Exchange
• Ex. Gift of money between family member is not a
  transaction included in GDP. The transaction just
  shift purchasing power from one party to another.
  Bank deposit and purchase of stock are not
  included. However, payment for any financial
  service- bank service charge or a commission to a
  stock broker.

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Categories of Purchase

• Excluded purchase
• 2. Second-Hand-Purchase
• Purchases of second hand, or used, goods are also
  excluded from GDP. Its because these products
  have already been counted at their first sale to
  consumer. So second-hand purchase in GDP would be
  double count, overestimate, the value of purchase
  sold.

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Categories of Purchase

• Included purchase
• Purchase include 4 categories
• Personal consumption ( C )
• Gross investment ( I )
• Government purchase ( G )
• Net export ( X-M )
• Expenditure equation
• GDP CIG(X-M)

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Activities P

• Each group will have 10 questions.
• The screen will appear a word/sentence
• One person in the group have to guess the answer.
  
• Other members from the same group have to help
  him/her to guess the answer, without saying they
  word on the screen.
• Group members will rotate to answer it.
• Person who is answering cannot look at the
  screen.

A
B
C
D
E
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Economy
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Personal Consumption

• Household spending on goods and service
• Non-durable goods, such as food, are consumed
  just once
• Durable goods, such as chair, CD, are consumed
  repeat over time

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Gross investment

• Purchase of asset that are intended to produce
  revenue.
• Ex. A newspaper publishers purchase of a
  printing press.

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Government purchases (G)

• Government purchases included current spending by
  all levels of government on goods and services
  and makes-up about 20 of the GDP.
• Circular flow of money it subtracts from the GDP
  Some government spending is not included in this
  category.

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Net Export (X M)

• This category includes purchases of Canadian
  goods and services by foreigners or exports (X).
  
• This category also accounts for imports (M) or
  Canadian purchases of foreign goods or services.
  Since the payments of these goods and services
  leaves the Canadian.
• The values of imports and exports separately
  make-up 25 of the GDP each

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GDP and Living Standard

• Per capital GDP or GDP per person is frequently
  used to measure the dollar value of each
  individual in that country. Its a way to
  compare the cost of living between years and to
  compare economic performance between countries.
• The calculation formula
• Per capital GDP GDP
• Population

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Adjustment to Per Capital GDP

• Inflation Adjustments Are done by comparing
  economic well being in the same country for
  different years
• To make adjustments for inflation you must use
  real GDP, which is expressed in constant dollars
  from a given year (currently, 1986 is the base
  year)
• Exchange-Rate Adjustments Is a way for various
  countries to compare their per capital GDP
• In order to do this you must convert every
  countrys GDP to one currency, usually the
  standard currency being U.S. dollars.

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Limitations of GDP

• Excluded Activities
• Non-market activities such as housework, unpaid
  child care, and the work of do-it-yourselfers
• Underground economy includes all the productive
  transactions that are unreported and, therefore,
  also left out of the GDP
• Product Quality
• Measures purchases of production not available a
  few decades ago, but can not fully capture these
  quality improvements because price stays
  relatively similar while continuing to improve

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Limitations of GDP

• Composition of Output
• Tells us nothing about what the government has
  produced and purchased
• Income Distribution
• GDP does not reflect how outputs are being
  distributed among the citizens of many countries.

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Limitations of GDP

• Leisure
• It is not bought and sold in the market, so it
  cant be accounted for by GDP
• Environment
• GDP does not differentiate between economic
  activities that are harmful to the environment
  and those that are not, and it may not
  effectively represent slipover costs and benefits

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Gross National Product (GNP)

• The total income acquired by Canadians in Canada
  and elsewhere
• To calculate Canadian investments by foreigners
  must be deducted from GDP and income earned from
  foreign investments made by Canadians must be
  added to GDP.
• Canadian GNP is less than Canadian GDP.
• GDP GNP Net investment income to
  foreigners.

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Net domestic income (NDI)
What is earned by households supplying
resources in Canada?
(Indirect taxes, depreciation and statistical
discrepancy)
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Personal income (PI)

• Income actually received by households
• Transfer Payments Addition of government
  transfer payments net domestic income are
  excluded from NDI but are part of PI
• Other payment to persons interest payments paid
  from government to bond holders but are not part
  of resource earnings included in PDI
• Earnings not paid out to persons taxes on
  corporate profits must be subtracted from NDI to
  find PI
• Net investment income to foreigners Net
  investment income must be subtracted

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Disposable and discretionary income

• Disposable (DI) Household income minus personal
  taxes and other personal transfers to government
• Discretionary Disposable Income minus purchases
  of necessities can be either saved or spent on
  non-essential items

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Hazel Henderson Ecologonomist

• Major Works Published
• 1967 - Should Business Tackle Societys Problems?
• 1978 - Creating Alternative Futures The End of
  Economics
• 1981 The Politics of the Solar Age
  Alternatives to Economics

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Beliefs

• Economics is not a science service given by
  economists is mostly to single clients in the
  short term, making them more akin to lawyers
• Modern economics rewards resource depletion and
  values cheap land and labour, low taxes, and weak
  environmental laws should not be so
• Polluters must be punished through taxation We
  need to... tax the hell out of waste and
  destruction

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Beliefs

• Do what one can in ones corner of the world
  Think globally, act locally
• Immediate action must be taken to deal with
  imminent social and environmental costs of
  industrial development
• Artificial needs must be phased out
• Cake analogy of unnecessary icing products
  taking precedence over vital natural concerns
• Wealth creative people, healthy ecosystems,
  healthy people, education, nutrition

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Beliefs

• Amassing natural wealth and pursuing Hendersons
  naturalist policy leads to a sustainable future
• Codifying value systems to incorporate into
  economics will help this along (Cultural DNA
  code)
• Henderson Ignored in the 70s 20 years later she
  sees some improvement (article published Nov. 3,
  1990)