Macro 102 Chpater 20

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20. The Measurement of National Income
[20.1 National Output and Value Added]
Production occurs in stages
Some firms produce outputs that are used as inputs by other firms, and these other firms, in turn, produce outputs that are used as inputs by yet other firms Double counting (multiple counting) is the error that would arise in estimating the nation’s output by adding all sales of all firms Could be solved by distinguishing between two types of output Intermediate Goods: all outputs that are used as inputs by other producers in a further stage of production Final Goods: goods that are not used as inputs by other firms but are produced to be sold for consumption, investment, government, or exports during the period under consideration Extremely difficult to distinguish final goods from intermediate goods Economists use the concept of value added

Value Added: the value of a firm’s output minus the value of the inputs that it purchases from other firms (Value Added = Revenue – Cost of intermediate goods (purchased from other firms)) Payments made to factors of production (such as wages and profits) are NOT purchases from other firms, and therefore are not subtracted But the firm’s revenue must equal the cost of intermediate goods plus these payments to factors of production (Value Added = Payments to factors of production)

Value added is the correct measure of each firm’s contribution to total output – the amount of market value that is produced by that firm Value added is the net value of a firm’s output
The sum of all values added in an economy is a measure of the economy’s total output [20.2 National Income Accounting: The Basics]
Measures of national income and product derive from an accounting system called the National Income and Expenditure Accounting (NIEA) The value of domestic output is equal to the value of the expenditure on that output and is also equal to the total income claims generated by producing that output 3 ways of measuring national income are:

Add up the value of all goods and services produced in the economy (which gives GDP by value added) Requires the concept of value added
Add up the total flow of expenditure on final domestic output (which gives GDP on the expenditure side) Add up the total flow of income generated by the flow of domestic production (which gives GDP on the income side) All three give the same total called gross domestic product (GDP) Gross Domestic Product (GDP): the total value of goods and services produced in the economy during a given period GDP from the Expenditure Side

Given by adding up the expenditures needed to purchase the final output produced in one year Sum of four broad categories of expenditure: consumption, investment, government purchases, and net exports Define all expenditure on final outputs so it falls into one of the four categories 1. Consumption Expenditure

Consumption Expenditure (C): household expenditure on all goods and services Includes expenditure on all goods including services, non-durable goods, and durable goods Actual measured consumption expenditure is Ca

2. Investment Expenditure
Investment Expenditure (I): expenditure on goods not for present consumption Includes expenditure on investment goods
Changes in Inventories
Inventories: stocks of raw materials, goods in process, and finished goods held by firms to mitigate the effect of short-term fluctuations in production or sales Decumulation (drawing down of inventories) counts as disinvestment (negative investment) because it is a reduction in the stock available to be sold New Plant and Equipment

Capital Stock: the aggregate quantity of capital goods
Fixed Investment: the creation of new plant and equipment (also called business fixed equipment) New Residential Housing
Only when a NEW house is built ( a durable asset over a long period of time), it appears as...
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