Aggregate output and Income

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Section 1

Question Answer
aggregate outputthe value of all the goods and services produced in a specified period of time.
aggregate incomevalue of all the payments earned by the suppliers of factors used in the production of goods and services.
four broad forms of paymentscompensation of employees, rent, interest, and profits.
Aggregate expenditure,the total amount spent on the goods and services produced in the (domestic) economy during the period, must also be equal to aggregate output and aggregate income. However, some of this expenditure may come from foreigners in the form of net exports.1 Thus, aggregate output, aggregate income, and aggregate expenditure all refer to different ways of decomposing the same quantity.
Gross domestic productthe market value of all final goods and services produced within the economy in a given period of time (output definition) or, equivalently, the aggregate income earned by all households, all companies, and the government within the economy in a given period of time (income definition).
income approach,GDP is calculated as the total amount earned by households and companies in the economy
expenditure approach,GDP is calculated as the total amount spent on the goods and services produced within the economy during a given period
GDP measuring criteriagoods and services included in the calculation of GDP must be produced during the measurement period.;goods and services included in the calculation of GDP are those whose value can be determined by being sold in the market.;Only the market value of final goods and services is included in GDP
Intermediate goodsgoods that are resold or used to produce another good.3 The value of intermediate goods is excluded from GDP because additional value is added during the production process
Goods and Services Included at Imputed ValuesFor simplicity and global comparability, the number of goods and services with imputed values that are included in the measurement of GDP are limited. In general, non-market activity is excluded from GDP.
two examples of services that are not sold in the marketplace are still included in the measurement of GDP.Owner-occupied housing and government services,
non-market activityactivities performed for one’s own benefit, such as cooking, cleaning, and home repair, are excluded. Activities in the so-called underground economy are also excluded. The underground economy reflects economic activity that people hide from the government either because it is illegal or because they are attempting to evade taxation.

Section 2

Question Answer
real GDP,indicates what would have been the total expenditures on the output of goods and services if prices were unchanged.
Per capita real GDPreal GDP divided by the size of the population) has often been used as a measure of the average standard of living in a country.
nominal GDP.Economists define the value of goods and services measured at current prices
Nominal and real GDP can be expressed asNominal GDPt = Pt × Qt
implicit price deflator for GDP, or simply the GDP deflator,(Value of current year output at current year prices/ Value of current year output at base year prices) × 100
Components of GDPGDP = C + I + G + (X – M)  
Household and Business Sectorsservices of labor, land, and capital flowing through the factor market to business firms and the flow of income back from firms to households. Households spend part of their income on consumption (C) and save (S) part of their income for future consumption. Current consumption expenditure flows through the goods market to the business sector. Household saving flows into the financial markets where it provides funding for businesses that need to borrow or raise equity capital. Firms borrow or raise equity primarily to finance investment (I) in inventory, property, plant, and equipment. Investment (I) is shown flowing from firms through the goods market and back to firms because the business sector both demands and produces the goods needed to build productive capacity (capital goods).
The Government SectorTransfer payments are not included in government expenditures on goods and services (G) because they represent a monetary transfer by the government of tax revenue back to individuals with no corresponding receipt of goods or services. The household spending facilitated by the transfer payments is, of course, included in consumption (C) and, hence, GDP. It is worth noting that transfers do not always take the form of direct payments to beneficiaries. Instead, the government may pay for or even directly provide goods or services to individuals.
fiscal deficitgovernment expenditure (G) exceeds net taxes (T), then the government has a fiscal deficit and must borrow in the financial markets.
External SectorTrade and capital flows involving the rest of the world are shown in the bottom right quadrant of Exhibit 6. Net exports (X – M) reflects the difference between the value of goods and services sold to foreigners—exports (X)—and the portion of domestic consumption (C), investment (I), and government expenditure (G) that represents purchases of goods and services from the rest of the world—imports (M).
balance of trade deficitdomestic economy is spending more on foreign goods and services than foreign economies are spending on domestic goods and services. It also means that the country is spending more than it produces because domestic saving is not sufficient to finance domestic investment plus the government’s fiscal balance. A trade deficit must be funded by borrowing from the rest of the world through the financial markets

Section 3

Question Answer
statistical discrepancy.1) Final output expenditure= sum of sales +final users and 2) the sum of the factor incomes. In theory, the two approaches should provide the same estimate of GDP. As shown in the exhibit, however, in practice they differ because of the use of different data sources.
Canadian GDPGDP = Consumer spending on G&S + Business gross FI + Delta(inventory) + govt spending on G&S+ Government gross GI + Exports − Imports + SD
GDP is estimated in the income approachGDP = NI+CCA+SD
national income (NI) is the income received by all factors of production used in the generation of final output:NI = Compensation of employees + Corporate and government enterprise profits before taxes + Interest income + UNI + Rent + Indirect business taxes less subsidies
Corporate profits before taxes include three items:1) dividends paid to households, 2) undistributed corporate profits (retained earnings) that remain in the business sector, and 3) corporate taxes paid to government.
Interest incomeinterest paid by businesses to households, government, and foreigners to compensate them for the loan of a financial asset.
Unincorporated net income (UNI),including rent, is the earnings that flow to unincorporated proprietors and farm operators for running their own business.
capital consumption allowance (CCA)measure of the wear and tear (depreciation) of the capital stock that occurs in the production of G&S. This measure acknowledges the fact that some income/output must be allocated to replacement of the existing capital stock as it wears out. Loosely speaking, one may think of Profit + CCA as the total amount earned by capital, with the CCA being the amount that must be earned and reinvested just to maintain the existing productivity of the capital.
Personal incomebroad measure of household income and measures the ability of consumers to make purchases
formula for PIPersonal income = NI − Indirect business taxes − Corporate income taxes − Undistributed corporate profits + Transfer payments