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20.2 National Income Accounting: The Basics - Coggle Diagram
20.2 National Income Accounting: The Basics
GDP from the Expenditure Side
Y = C + I + G + NX;
adding up the expenditures needed to purchase final output produced in a year
Consumption Expenditure
includes expenditure on all goods and services sold to their final users (households or businesses) during the year
→ i.e haircuts, dental fair, phone bills, and
non-durable goods
like clothing, vegetables, etc. as well as
durable goods
Investment Expenditure
expenditure on goods
not
for present consumption
, includes inventories of goods made but not yet sold and inputs purchased but not yet used in production;
includes plant and equipment, residential housing, inventories and gross and net investment
Changes in Inventories
inventories → stock of raw materials, goods in process, and finished goods held by firms to mitigate the effect of short-term fluctuations in production or sales
accumulation of inventories = positive investment
b/c it represents goods produced but not used for current consumption; such goods included in national income accounts looking at wages and costs to produce them as well as profit they will potentially make
decumulation of inventories = negative investment
b/c it represents reduction of stock of finished goods amiable to be sold; shows lack of economic growth
New Plant and Equipment
capital goods = manufactured aids to production i.e machines, vehicles, computers, etc.
capital stock → aggregate (total) quantity of capital goods; usually called plant & equipment
(any manufactured aid to production used by firms)
fixed investment → the creation of new plant and equipment;
also called business fixed investment
New Residential Housing
B/C building of a
new
house isn't used for present consumption but for future, it is considered investment expenditure; HOWEVER, purchasing an existing house isn't part of national income b/c ownership of existing asset is just transferred, and transactions aren't part of national income
Gross and Net Investment
WHAT IS IT? → total investment that occurs in the economy
divided into two parts:
depreciation → amount by which capital stock is depleted through production process
and
net investment → gross investment - depreciation
when
net investment is positive = economy's capital stock growing
; when
net investment is negative = economy's capital stock shrinking
all of it included in national income
, whether net or depreciation
Total investment = sum during year of Δ in inventories, additions to stock of plant and equipment and new construction of residential housing
Government Purchases
WHAT IS IT? → gov. expenditure on currently produced goods and services, exclusive of gov. transfer payments
Cost Versus Market Value
gov. output valued at cost rather than market value b/c it's difficult valuing market value of aspects of economy
one consequence includes Δ in gov.'s or private sector's productivity, depending on whether productivity is on private or public side...
Gov. Purchases Vs. Gov. Expenditures
only gov. purchases of currently produced goods and services are included as part of GDP SO lots of gov. spending does
not* count as part of GDP
transfer payment → payment (expenditure) to an individual or institution not in return of service i.e welfare, retirement, etc.
; no market transaction ≠ involvement with GDP
Net Exports
Imports
domestic expenditure on forting-produced G and S (money out, goods in)
when importing something domestically, parts of expenditure goes back to foreign country but some expenditure does go towards Canadian output; need to subtract expenditure on imports (so as to not put false values)
Exports
foreign expenditure on domestically produced G and S (money in, goods out)**
all goods and services produced in Canada and sold to foreigners must be counted as part of Canadian production and income; adding value of exports to
Canadian output
NX = (X-M)
; when value of Canadian exports exceeds imports, NX+; when value of Canadian imports exceeds value of exports, NX-
three ways to calculate GDP; value added, expenditure and income side
; seen as GDP on expenditure side, GPD on income side, etc.; having both income and expenditure side allows for check on statistical procedures and on errors in measurement...
GDP from Income Side
WHAT IS IT? → adding up factor incomes and other claims on the value of output until all of that value is accounted for
Factor Incomes
Wages and Salaries
are the payment for the services of labor and they include all pre-tax labor earnings, i.e take-home pay, income taxes withheld, etc.
represent the part of the value of production that is paid to labor
labor; e.g. pensions, benefits;
Interest
includes interest that is earned on bank deposits, interest that is earned on loans to firms,
and miscellaneous other investment income
capital; e.g.bank accts, loans
Business Profits
profits = dividends + retained earnings: dividends → distributed profits; retained earnings → undistributed profits (money that is left over)
; technology and entrepeuneurhsip
profits + interests = payment for use of capital
; interests = borrowed capital and profits for capital contributed by owners of firmsl
Net Domestic Income
net domestic income at factor cost = sum of wages and salaries, interest and profits
; excludes value that is used as replacement investment
Non-Factor Payments (IBT - Sub) + Depreciation
Indirect Taxes and Subsidies
taxes on production and sale of G and S
; Canada = GST, provicincal sale taxes and excise taxes on specific products
subsidies are seen as negative taxes and therefore need to
substract
their value b/c they allow factor incomes to
exceed
the market value of output
Depreciation
it is part of gross profits but not net profits
seeing depreciation compensates for capital used up in process of production; is added to net domestic income
wHEN TO USE WHICH METHOD?
Expenditure approach best when computing GDP to provide necessary information, for example looking at capital stock, relative to consumption and investment
Income approach looks at composition of factors, therefore if distribution of income needs to be looked at, it will be this approach that will be used