Measurement

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 What is GDP?
 A measure of the value of economic
activities within a country during a period of
time.
 Value of the final goods and services
produced in a country during a year.
◦ Intermediate goods – goods that are used to
produce other goods. The value of these goods
needs to be excluded from GDP to avoid double
counting.
 It is regularly published by Statistics Canada
as a part of the National Income and
Expenditure Accounts (NIEA).

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 There are 3 approaches used to measure
GDP:
 A) the Product Approach
 B) The Expenditure Approach
 C) the Income Approach

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The product approach is also called the
value-added approach, because it looks at
each stage of prod’n and looks at the
difference between total revenue and costs
(profits).
So for example, in the prod’n of a car, we
would look at all of the inputs into prod’n
and add up the profits at each stage.
OR We add up the value of all goods
produced and subtract the value of all
intermediate goods.

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Farmer Jones Miller Smith Baker Brown

Receives for Receives for Receives for

wheat $1.00 flour $1.75 loaf of bread
$2.50
Pays to other Pays for wheat Pays for flour
firms $0.00 $1.00 $1.75
Value added Value added Value added
(factor income) (1.75 – 1.00) (2.50 – 1.75)
$1.00 = 0.75 = 0.75

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 In the product approach, we add up the value
added at each stage of production

=1.00 + 0.75 + 0.75

= $2.50

Note that this is the same price as the

selling price of the loaf of bread.

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 This approach adds up total spending on all
final goods and services.
 This is the $2.50 charged for the loaf of
bread.

Expenditure = C+ I + G + EX - IM

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 We use the final purchase price including
taxes for the calculations.
 Definitions
 Consumption: includes all spending by
households on final goods and services,
except for new houses. This is close to 60%
of GDP.
 Investment: purchases of new capital
equipment by firms and purchase of new
houses by households, plus inventory
investment.
◦ Categories: fixed investment (nonresidential and
residential investment) and inventory investment.
◦ This is approximately 20% of GDP.

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 Net exports
 Government expenditures: expenditures of
all levels of government on final goods and
services. (approx 20% of GDP)
◦ Two components: gov’t investment and
gov’t purchases
◦ This does NOT include transfer payments
such as employment insurance, Canada
Pension Plan (CPP) etc.
 Why NOT?

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 We add up all incomes earned by all factors of
production.
 = wages + net farm + unincorporated
business income (UBI) + corporate profits +
net interest income earned

 When we add these up we get

NDP at factor cost

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 It is a net figure since firms deduct
depreciation when calculating profit.
 It is at factor cost because it does not
include any taxes or subsidies.

 To get GDP at market prices we must add in

depreciation and add in indirect taxes less
subsidies.
 GDP MP = NDP FC + depreciation + indirect
taxes less subs.

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 All 3 approaches will give you the same
number for GDP at market prices …
 The Income approach = Expenditure
Approach = Value added approach

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 GNP measures the value of output produced
by Canadians wherever Canadians are (inside
Canada is GDP).
 GNP = GDP + investment income rec’d from
non-residents – investment income paid to
non-residents

 In Canada, due to a high degree of foreign

ownership, GDP is higher than GNP.

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 Leaves out

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 Our 3 approaches to GDP are calculated
during a particular time period and therefore
reflect nominal values.
 If we want to compare from year to year, we
would like a real value, which would eliminate
the effects of inflation.

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Data for Real GDP Example

Copyright © 2013 Pearson

16 Canada Inc.
◦ The table provides data for 2 years:
In Year 1, nominal GDP is (PxQ of apples)
+ (PxQ of oranges) = 130
◦ In Year 2, nominal GDP = $292

◦ So the percentage increase is 125%

◦ [(292-130)/130] x 100
or
◦ [(292/130) – 1) x 100

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 2 methods: base year price method or chain-
weighting index method
Base Year Price Method
 Treat one of the years as the base year

 If Year 1 is the base year, multiply year 2Qs

by year 1 Ps
 = $176
The index would be (176/130) x 100 =
135.4, meaning the percentage increase is
35.4%

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 We could instead use year 2 as the base year.

 Therefore, we would need to multiply year 1

Qs by year 2 Ps, giving us $222.50

 So index would be 292/222.50 x 100 =

131.2, or the percentage increase would be
31.2%

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 Difficult to decide, which leads to the Chain-
Weighting Index (Fisher Index)

 To calculate the chain weighted growth rate,

gc  g1  g2  1354
.  1312
.
 = 1.333

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 Calculating the Price Level
◦ The average level of prices is called the price
level.
◦ One measure of the price level is the implicit
GDP deflator, which is an average of the
prices of the goods in GDP in the current year
expressed as a percentage of the base year
prices.
◦ The GDP deflator is calculated in the table on
the next slide .

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◦ Nominal GDP and real GDP are calculated in
the way that you’ve just seen.
◦ GDP Deflator = (Nominal GDP/Real GDP) 
100.
◦ In the base year, the index is always equal to
100.

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 The CPI only includes goods and services
consumed by consumers. It is also a fixed-
weight price index, which holds quantities
constant from a base year. (typical
consumption bundle).
 2011 was the new basket

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 1) Relative

 2) changes over time.

 3) are not included in the CPI. Also

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Savings, Wealth and Capital

 Aggregate saving are of interest to

macroeconomists because it allows the
building of capital and productive capacity of
the economy.
 Simply put, what is not consumed is saved.
 Savings in an economy can theoretically come
from two sources:
◦ Private
◦ Government

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 A flow is a rate per unit of time while a stock
is the quantity at a particular point in time.
 All the components of the expenditure
approach are flows.
 National saving is a flow, but the nation’s
wealth is a stock.

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 Private disposable income, Yd
Y d = Y + NFP + TR + INT – T

NFP = NFP rec’d

TR = transfers
INT = interest on the gov’t debt
T = taxes

Private sector savings, S p

Sp = Y d - C = Y + NFP + TR + INT – T – C

Gov’t sector savings, S g

Sg = T – TR – INT - G

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 Government saving = gov’t surplus or the negative of the
gov’t deficit
D = -Sg = -T + TR + INT + G

National savings = private saving + Gov’t saving

S = S p + Sg = Y + NFP – C – G

Sub in, Y = C + I + G + NX

S = C + I + G + NX + NFP – C – G
= I + NX + NFP

OR S = I + CA where CA is the current acct surplus

(NX + NFP)
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 The economy’s private saving is used in 3
ways:
 Investment (I): firms borrow from private
savers to finance the construction and
purchase of new capital and inventory
investment
 Government budget deficit (- Sg): when the
government runs a budget deficit so that Sg
is negative, and (- Sg) is positive, it must
borrow from private savers to cover the
difference between spending and revenue.

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 Current account balance (CA): When the
current account is positive, foreigners’
receipts of payments from Canada are not
sufficient to cover the payments they make to
Canada. Foreigners must either borrow from
Canadian private savers or sell to Canadian
savers some of their assets. If the current
account is negative, Canada must borrow or
sell assets (this leads to net foreign
investment in Canada).

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 National wealth is the sum total of all
individuals, firms, and governments wealth. It
is measured as:
◦ The country’s domestic physical assets (capital
goods and lands)
◦ Add the country’s holding of foreign assets
(foreign bonds, stocks, and capital goods owned
by Canadians)
◦ Subtract the country’s liability to foreigners
(foreigner investments in Canadian assets such as
bonds, stock and capital equipment)

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 Greater wealth allows greater income
generation, therefore higher living standards.

 The savings rate plays most important role in

the wealth accumulation of a nation. The
government deficit, as it directly infringes on
the ability of an economy to accumulate
foreign and domestic assets, may pose
serious problems for long term economic
growth.

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 Unemployment rate
= Number unemployed x 100
Labour force

Participation rate
= Labour force x 100
Total working age pop

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 The unemployment rate is useful as a
measure of
 Labour mkt tightness: degree of difficulty
firms face in hiring workers
 Problems with the unemployment rate are…
Discouraged workers not counted.
Involuntary part-time not counted
underemployment not measured.

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