Chapter 2:The Measurement and
Structure of the Canadian Economy

National Income Accounts – An accounting framework to measure current economic activity.

Three approaches to measure national economic activities
1) Product Approach – The amount of goods and services excluding intermediate goods and services produced (Value Added).
1

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
2


Product Approach
Gross Domestic Product (GDP) – The market value of final goods and services newly produced in a nation within a specified period of time.

Gross National Product (GNP) = GDP + Net
Factor Payment from Abroad (NFP)

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.
3

The Expenditure Approach

Gross Domestic Product (GDP) – Total spending on final goods and services produced within a nation during a specified period of time.

Y = GDP = Consumption (C ) + Investment
(I) + Government Purchases (G) + Net
Exports (NX)
4


1)
2)
3)

3)
4)
1)
2)

Consumption:
Consumer Durables
Semi-Durable
Non-Durable
Services
Investment: Inventory Investment + Fixed Investment
Fixed Investment:
Residential Construction
Non-Residential Construction
Machinery and Equipment Investment
5



Government Purchases – Government expenditure excluding Transfer Payments and Interest Payments on the government
Debt.
Net Exports = Exports – Imports
Income Approach

GDP – Total income received by factors of production in a nation within a specified period of time.
6

1)
2)
3)
4)
Labor Income
Corporate Profits
Interest and Investment Income
Unincorporated Investment Income


Net Domestic Product at Factor Prices = 1+2+3+4
Net Domestic Product at Market Prices = Net
Domestic Product at Factor Price + Indirect Taxes -
Subsidies

GDP = Net Domestic Product at Market Price +
Depreciation
7


Private Disposable Income = Y +
NFP + TR + INT - T

Net Government Income = T – TR
– INT

GNP = Private Disposable Income
+ Net Govt. Income = Y + NFP
8


Saving = Current Income – Current
Spending

Private Saving (S
+ INT - T- C
PVT
) = Private
Disposable Income – C = Y + NFP +TR

Government Saving (S
GOVT
) = Net
Government Income – Government
Purchases = (T – TR – INT) – G =
Budget Surplus/Deficit
9


Uses of Private Saving

S = I + (NX + NFP) = I +Current
Account Balance (CA)

S = S
PVT
+ S
GOVT
= I + CA

S
PVT
= I - S
GOVT
+ CA
10


Nominal Vrs Real Variables

Real GDP = Nominal GDP / GDP
Deflator

GDP Deflator measures the overall level of prices of goods and services included in GDP.

Consumer Price Index (CPI) – Measure of prices of consumer goods
11