ECON 1002D

Ch 5: Measuring a Nation’s Income

Class 2: Jan 16, 2023

Gross Domestic Product (GDP)

– components
– correcting for inflation
– link to well-being
The National Accounts
• techniques to measure _______________________________________

Gross Domestic Product (GDP) is . . .

. . . the _____________________ of all ___________ goods & services
produced ______________ a country in a given _________________________.

Goods are valued at their _________________________, so:

– GDP measures all goods using the _________________ (i.e., ________),
rather than ‘adding apples to oranges.’
– Things that don’t involve a ___________________ are excluded,
e.g.,
– ______________ you do yourself vs. __________ a house cleaner;
– eating an apple from a tree in your backyard vs. _____________ in
a grocery store.
Final Goods: intended for __________________

Intermediate Goods are used as ____________ in the production of _________.

GDP only includes __________ goods, since they already _________________

of the ______________________ goods used in their production.
Exercise:
A Farmer grows a bushel of wheat and sells it to a Miller for $1.
A Miller turns the wheat into flour and sells it to a Baker for $3.
A Baker uses the flour to make a loaf of bread and sells it to a Consumer for
$6.
What is Value Added by each actor? What is GDP?
Farmer: VA =
Miller: VA =
Baker: VA =

GDP = sum of all VA =

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 • Or, _______________ to just look at the _______________________
price since it ___________________ costs of all _____________.

GDP includes ________________________

e.g., cars, Blu-ray discs, clothing, phones

and ___________________________
e.g., car repairs, movie screenings, dry cleaning, cell phone service

GDP includes __________________________ goods,

not goods produced in the _____________.

GDP measures the value of production that occurs _____________________

________________, whether done by its own ____________ or by __________
located there.

Timeframe
usually a year or a quarter (3 months).

Components of GDP

• GDP (denoted Y) consists of four components, based on purchaser:

– Consumption (C)
– Investment (I)
– Government Purchases (G)
– Net Exports (NX)

Y = ______________________________

Consumption (C)
• spending by _____________________ on goods & services (G&S)

• Note on housing expenditure:

– for ___________ → consumption includes __________ payments.
– for _____________ → consumption includes the ______________
_________________ of the house, but not the ________________
or ___________________________.
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Investment (I)
• spending on G&S that will be used to produce __________ in the _____
• includes
– _____________________________________________________
– _____________________________________________________
– _____________________________________________________

Government Purchases (G)

• spending on G&S by local, provincial, and federal governments
• excludes __________________________, such as _________ payments
or ________________________________ benefits since these payments
represent transfers of income, not purchases of G&S and do not represent
production

Net Exports (NX)

• NX = ____________________
• Exports: __________ spending on _______________ produced the G&S
• Imports: the ____________ of C, I, and G spent on G&S produced _____

Canadian GDP and Its Components

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E X E R C I S E S:
GDP and its components

Determine how GDP and its components change in each of the following cases:

A. Debbie spends $200 on dinner at a restaurant in Ottawa;

B. Sarah spends $1800 on a new laptop, built in China, to use in her

publishing business;

C. Jane spends $1200 on a computer to use in her editing business. She

buys last year’s model at a discounted price from a local manufacturer;

D. General Motors manufactures $500 million worth of cars, but consumers

only buy $470 million worth of them.

Real versus Nominal GDP

• Inflation ____________ economic variables like GDP, so we measure two
versions:
– Nominal GDP values output valued at _________________ prices,
_____________________ for inflation;
– Real GDP values output at constant prices for a ____________,
_______________ for inflation.

EXAMPLE:

• Compute Nominal GDP in each year:

2019:
2020:
2021:
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 • Compute Real GDP in each year, using 2019 as the base year:
2019:
2020:
2021:

Nominal Real
Year GDP GDP

2019

2020

2021

In each year,
• Nominal GDP is measured using the (then) _______________ prices;
• Real GDP is measured using ___________ prices from the _________
year ( _______in this example).

• The change in Nominal GDP reflects both _________ and ____________.

• The change in Real GDP is the amount that GDP would change if prices
were constant (i.e., if inflation were zero).
➔ Hence, Real GDP ___________ for ______________.

GDP Deflator
• a measure of the overall _________ level

GDP Deflator =

• One way to measure the economy’s inflation rate is to compute the

_____________ ___crease in the GDP Deflator from one year to the
next.

PREVIOUS EXAMPLE:
Nominal Real GDP
Year GDP GDP Deflator

2019

2020

2021
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Compute the GDP Deflator in each year.

2019:

2020:

2021:

EXERCISES:
GDP and its components

A. Compute Nominal GDP in 2019.

B. Compute Real GDP in 2020.

C. Compute the GDP Deflator in 2021.

GDP and Economic Well-Being

• Real GDP per Person is the ___________________________________

of the average person’s __________________________ in a country.
• However, it does not measure ____________________ of well-being, nor
does any single indicator.

GDP Does Not Value:

i. the quality of the ________________
ii. leisure ___________
iii. _____________________ activity, such as the child care a parent
provides to his or her child at home
iv. ______________
v. many other important determinants of the quality of life
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So why focus so strongly on GDP?
• Having a large GDP enables a country to __________ better schools, a
cleaner environment, health care, etc.
• Many indicators of the quality of life are _____________________ with
GDP. For example:
1. _______________
2. _______________

SUMMARY

• Gross Domestic Product (GDP) measures a country’s total income and

expenditure.

• The components of GDP by category of spending (buyers) are:

1. Consumption
2. Investment
3. Government Purchases
4. Net Exports.

• Real vs. Nominal GDP

– Nominal − uses current prices
– Real − uses constant prices of a base year, thereby correcting for
inflation

• GDP is the main indicator of a country’s economic well-being, even though

it neglects:
i. the environment
ii. leisure
iii. non-market activity
iv. equity
v. numerous other dimensions of the quality of life.

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