Chapter 2:The Measurement and

Structure of the Canadian Economy

n National Income Accounts – An accounting

framework to measure current economic
activity.
n Three approaches to measure national

economic activities
1) Product Approach – The amount of goods
and services excluding intermediate goods
and services produced (Value Added).

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2) Income Approach – Income received by
factors of Production

3) Expenditure Approach – Amount of spending

by the ultimate purchasers/buyers

Fundamental Identity of National Accounts

Total Product = Total Income = Total

Expenditure

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 Product Approach
n Gross Domestic Product (GDP) – The market
value of final goods and services newly
produced in a nation within a specified period
of time.

n Gross National Product (GNP) = GDP + Net

Factor Payment from Abroad (NFP)

n NFP = Income paid to domestic factors of

production by the rest of the world – Income
paid to foreign factors of production in the
domestic economy.
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 The Expenditure Approach

n Gross Domestic Product (GDP) – Total

spending on final goods and services
produced within a nation during a specified
period of time.

n Y = GDP = Consumption (C ) + Investment

(I) + Government Purchases (G) + Net
Exports (NX)

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n Consumption:

1) Consumer Durables
2) Semi-Durable
3) Non-Durable
4) Services

n Investment: Inventory Investment + Fixed Investment

n Fixed Investment:

1) Residential Construction
2) Non-Residential Construction
3) Machinery and Equipment Investment

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n Government Purchases – Government
expenditure excluding Transfer Payments
and Interest Payments on the government
Debt.
n Net Exports = Exports – Imports

Income Approach

n GDP – Total income received by factors of

production in a nation within a specified
period of time.

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1) Labor Income
2) Corporate Profits
3) Interest and Investment Income
4) Unincorporated Investment Income

n Net Domestic Product at Factor Prices = 1+2+3+4

n Net Domestic Product at Market Prices = Net

Domestic Product at Factor Price + Indirect Taxes -
Subsidies

n GDP = Net Domestic Product at Market Price +

Depreciation

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n Private Disposable Income = Y +
NFP + TR + INT - T

n Net Government Income = T – TR

– INT

n GNP = Private Disposable Income

+ Net Govt. Income = Y + NFP

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n Saving = Current Income – Current
Spending

n Private Saving (SPVT) = Private

Disposable Income – C = Y + NFP +TR
+ INT - T- C

n Government Saving (SGOVT) = Net

Government Income – Government
Purchases = (T – TR – INT) – G =
Budget Surplus/Deficit

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n Uses of Private Saving

n S = I + (NX + NFP) = I +Current

Account Balance (CA)

n S = SPVT + SGOVT = I + CA

n SPVT = I - SGOVT + CA

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n Nominal Vrs Real Variables

n Real GDP = Nominal GDP / GDP

Deflator

n GDP Deflator measures the overall level

of prices of goods and services included
in GDP.

n Consumer Price Index (CPI) – Measure

of prices of consumer goods 11