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DEFINITION OF GDP
Gross domestic product is the market value of the final goods and services produced within a country
in a given time period.
1. Market value --> converted to market values so that they can be added up
2. Final G/S --> bought by the final user
o Intermediate G/S: item that is produced by one firm but bought by another (not consumed
by the end user; used as a component)
o We can only take the final G/S into count because we do not want to double count
o Stocks and bonds are not final or intermediate G/S
3. Produced within a country --> whatever is produced within the country, doesnt matter if the
company is foreign
4. In a given time period --> usually quarterly or annually
o GDP also measures total income and total expenditure
Equality between those 2 values are important because it shows the link between
productivity and living standards
When we have more income we can buy more G/S, but there must be an
increase in production of G/S for us to buy
GDP AND THE CIRCULAR FLOW OF EXPENDITURE AND INCOME
Households and firms (C)
o Households sell labour, capital and land while firms buy them
o In return, firms pay us wages, interest, rent, profit
o Firms sell and households buy G/S (called consumption expenditure)
o Investment (I): purchase of new plant, equipment and buildings, additions to inventories
Governments (G)
o Government expenditure: G/S that the gov't buys
o They also use their taxes to buy things and transfer funds to households such as security and
unemployment benefits
Rest of the world
o Exports (X) and imports (M)
o Net exports = exports - imports (X-M)
GDP = expenditures = income
o
o
Y=C+I+G+X-M
Y = C + I + G + (X - M)
2. Income approach
o Sum of the incomes that firms pay households (for the FOP they hire)
o Income is divided into 5 categories (when you add them together, they make the net
domestic income at factor cost)
1. Wages, salaries, and supplementary labour income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers income
5. Income from non-farm unincorporated businesses
o Indirect taxes - subsidies (to get market price)
o Depreciation (capital consumption) + new domestic product = gross domestic product
It tells use the value of G/S that the average person can enjoy
By using real GDP, we remove any influence that rising prices and rising cost of living on the
comparison
o Potential GDP: the max level of real GDP that can be produced when FOP are all used
2. Fluctuations of real GDP around potential GDP
o Real GDP in Canada doubled in 36 years
Business cycle: periodic but irregular up & down movement of total production and economic
activity
Two phases:
o Expansion (period when real GDP increases)
o Recession (period when real GDP decreases; growth rate is negative for at least 2 successful
quarters)
Two turning points:
o Peak (high point; right after an expansion stops)
o Trough (low point, when recession ends)
1. The real GDP of one country must be converted into the same currency units as the real GDP
of the other country
2. The value of G/S in both countries must be the same
The same products in different countries can have very different prices
FACTORS THAT INFLUENCE THE STANDARD OF LIVING BUT ARE NOT A PART OF GDP
1. Household production (producing at home is not accounted for; part of the increase in GDP is the
decrease in home production)
2. Underground economic activity (unreported production hidden from the government to avoid
taxes and regulations; not included in GDP)
3. Health and life expectancy
4. Leisure time
5. Environmental quality
6. Political freedom and social justice