ECN 204 Notes
Chapter 5: Measuring the Economies Output
Gross Domestic output: Measure of aggregate output, the total dollar value of all final goods and services produced within the borders of a country, typically a year.
-GDP is a monetary measure, so that the relative values of a vast number of goods and services produced in different years can be compared
Avoiding Multiple Counting
-In order to accurately measure aggregate output all goods and services produced within a year must only be accounted for once.
-To avoid multiple counting GDP only includes the market value of final goods and ignores the value of intermediate goods
-Intermediate goods: Products purchased for further resale, or manufacturing/processing.
-Final goods: Goods/services purchased for final use.
-Alternatively, only the value added at each stage could be accounted for to avoid multiple counting.
-Value added: The value of the product sold by a firm less the value of the inputs the firm purchased from other companies.
GDP Excludes Non-Production Transactions
-Non-production transactions must be excluded from GDP because they have nothing to do with the production of final goods
-There are two types of non-production transactions: Financial transactions and 2nd hand sales
-Financial Transactions include the following:
-Public transfer payments: Social insurance payments that the government makes indirectly to households (i.e. welfare, and employment insurance). Including these payments in GDP would overstate the value, as the individuals who have received these payments contributed nothing in return.
-Private Transfer payments: The transfer of funds from one individual or another. Such as allowance, or birthday money
-Stock market transactions: The buying and selling of stocks and bonds.
-Second hand sales: -They contribute nothing to current production
Two Ways of Calculating GDP
-Expenditures approach: The sum of all money spent in buying final goods and services.
Gross Domestic output: Measure of aggregate output, the total dollar value of all final goods and services produced within the borders of a country, typically a year.
-GDP is a monetary measure, so that the relative values of a vast number of goods and services produced in different years can be compared
Avoiding Multiple Counting
-In order to accurately measure aggregate output all goods and services produced within a year must only be accounted for once.
-To avoid multiple counting GDP only includes the market value of final goods and ignores the value of intermediate goods
-Intermediate goods: Products purchased for further resale, or manufacturing/processing.
-Final goods: Goods/services purchased for final use.
-Alternatively, only the value added at each stage could be accounted for to avoid multiple counting.
-Value added: The value of the product sold by a firm less the value of the inputs the firm purchased from other companies.
GDP Excludes Non-Production Transactions
-Non-production transactions must be excluded from GDP because they have nothing to do with the production of final goods
-There are two types of non-production transactions: Financial transactions and 2nd hand sales
-Financial Transactions include the following:
-Public transfer payments: Social insurance payments that the government makes indirectly to households (i.e. welfare, and employment insurance). Including these payments in GDP would overstate the value, as the individuals who have received these payments contributed nothing in return.
-Private Transfer payments: The transfer of funds from one individual or another. Such as allowance, or birthday money
-Stock market transactions: The buying and selling of stocks and bonds.
-Second hand sales: -They contribute nothing to current production
Two Ways of Calculating GDP
-Expenditures approach: The sum of all money spent in buying final goods and services.