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The National Income and Expenditure Accounts (IEA) give a comprehensive statistical pictureof Canadian economic developments. The Income and Expenditure Accounts are the centre ofmacroeconomic analysis and policy-making in Canada.

Detailed information for first quarter 2009

Data release June 1, 2009

y Descriptiony Data sources and methodologyy Data accuracyy Documentation

Description

The Income and Expenditure Accounts are the centre of macroeconomic analysis and policy-making in Canada. They are used in a broad assortment of applications by a wide range ofpersons and groups in society. They are a means by which Canadians can view and assess theperformance of the national economy. The accounts provide both a planning framework forgovernments and a report card on the results of the plans that governments carry out.

At the core of the Income and Expenditure Accounts (IEA) is the concept of Gross domesticproduct (GDP) and its components. It is a measure of aggregate economic activity that representsthe unduplicated value of production in two ways: (i) Incomes arising from production and (ii)final expenditures on production. The first is the sum of factor incomes generated by productiveactivity -- that is, incomes representing the returns to the labour and capital employed. The

second is the sum of all sales to final users (consumers, governments, business on capitalaccount, exports less imports). The two measures of GDP may not be equal to each other, givingrise to a statistical discrepancy.

For a more complete, though brief, description, please refer to the document entitled "Overviewof the National Income and Expenditure Accounts" available in the "Documentation" sectionlocated at the end of the detailed information for this survey.

Statistical activity

The Canadian System of National Accounts (CSNA) provides a conceptually integrated

framework of statistics and analysis for studying the state and behaviour of the Canadianeconomy. The accounts are centered on the measurement of activities associated with productionof goods and services, the sales of goods and services in final markets, the supporting financialtransactions, and the resulting wealth positions.

Collection period:2 months after the reference quarter; 5 months after the reference year.


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Subjects

y Economic accountsy Gross domestic producty Income and expenditure accounts

Data sources and methodology

y Target populationy Data sourcesy Estimationy Quality evaluationy Disclosure controly Revisions and seasonal adjustment

Target population

The Canadian economy (persons and unincorporated business, corporations, governments andnon-residents).

Data sources

Data are extracted from administrative files and derived from other Statistics Canada surveysand/or other sources.

The IEA measure of macroeconomic activity on a quarterly basis, as represented by income andexpenditure-based GDP, relies heavily on a wealth of information from various areas of StatisticsCanada. A large amount of information from various survey divisions within the bureau, alongwith other data, is compiled, integrated and analysed as part of the complex process of arriving atGDP and its component categories and underlying sector accounts.

Major suppliers of data within Statistics Canada include: Agriculture Division, Investment andCapital StockDivision, Income Statistics Division, International Trade Division, DistributiveTrades Division, Manufacturing, Construction and Energy Division, Industrial Organization andFinance Division, LabourDivision, Prices Division, Public Institutions Division, and Tax DataDivision. Numerous external and administrative sources of data are also used.

Estimation

At the heart of the System of National Accounts is the concept of 'economic production'. GrossDomestic Product is designed explicitly to measure the value of the nation's total production ofgoods and services. But, in arriving at this total, the tables also provide a statistical picture of thestructure and functioning of the economy - of the composition and use of the nation's production,and of the various types of income which are generated in the process. Going a stage further, the


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broad income and expenditure estimates are further broken down to show how the varioussectors of the economy (businesses, persons, governments and non-residents) interact in theirtransactions with one another to produce this output. In other words, beginning from the basicconcept of production, it is possible to build up a major system of statistics which traces the flowof all income and expenditure transactions underlying the production and the distribution of the

nation's total output. In the present system, both the 'national' and 'domestic' concepts are in use.The Gross National Product measures the the earnings of all Canadian factors of productionregardless of where located. The Gross Domestic Product measures only the productionoriginating within the geographic boundaries of Canada, whether the factors of production areowned by Canadians or non-residents.

The National Income and Expenditure Accounts measure the unduplicated value of production intwo separate ways. The first simply sums all of the factor incomes (wages and salaries, andprofits) generated by this productive activity - incomes representing the returns to the labour andcapital employed. The second approach sums all sales which firms have made to final users - toconsumers, to governments, to business on capital account, or in export markets. This approach

also provides an unduplicated value of total production. Imports, of course, have to be deductedfrom this summation since they are implicitly included in these final sales and should not becounted as a part of Canadian production - they represent part of the production of a foreigncountry. Sales from one firm to another (intermediate production) are not counted since to do sowould involve double counting, all intermediate production being embodied in final output soldto users. This 'sales to final users' (or 'sum of expenditures') approach yields the same value ofproduction as the 'sum of incomes' approach. After the initial estimates income and expenditure -side GDP are produced, the discrepancy is assessed.

Real GDP is only calculated in terms of expenditure as the components of the income-basedGDP cannot be split between a quantity value and a price value. Therefore, there is no indicatorenabling us to remove the effect of inflation to calculate real values for the income-based GDPcomponents. This is why only the components that are part of the GDP by expenditures arecalculated in real terms.

Quality evaluation

Data are analysed for time series consistency, links to current economic events, issues arisingfrom the source data, and with respect with coherence. As well, the discrepancy between theestimates of income and expenditure-side GDP is assessed.

It is not possible to produce an equivalent to the income or expenditure accounts except at the

aggregate level. At the level of GDP, the unduplicated value of production can also be measuredby taking the gross value of production of each firm and subtracting each firm's intermediateinputs in the form of its purchases from other firms (including imports) to yield the `net valueadded' to production by the firm. Estimates of this type are produced in the annual Input-Outputtables, as well as in the monthly industry-based estimates of GDP. Real GDP estimates can thenbe compared with the results of the monthly GDP by Industry program. Annually, the incomeand expenditure data are benchmarked to the Input-Output Accounts.


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Certain components of income and expenditure-based GDP can be obtained in survey divisions,but typically the data are not directly comparable. For example, the variable "corporate profits" ispublished in the Quarterly Financial Statistics release, but it differs from the income-based GDPmeasure due to certain national accounts' concept adjustments.

Disclosure control

Statistics Canada is prohibited by law from releasing any data that would divulge informationobtained under the Statistics Act that relates to any identifiable person, business or organizationwithout the prior knowledge or the consent in writing of that person, business or organization.Various confidentiality rules are applied to all data that are released or published to prevent thepublication or disclosure of any information deemed confidential. If necessary, data aresuppressed to prevent direct or residual disclosure of identifiable data.

Revisions and seasonal adjustment

Revisions - Data are released within 60 days after the reference period. Estimates for eachquarter are revised when those for subsequent quarters of the same year are published. At thetime of the first quarter of each year, revisions are made back four years. They are not normallyrevised again except when historical revisions are carried out, usually once per decade. Statisticalrevisions are carried out in order to incorporate the most recent information from quarterly andannual surveys, taxation statistics, public accounts, censuses, etc., as well as from the annualbenchmarking process of the Input-Output Accounts.

Seasonal adjustment - Almost all series of the quarterly IEA are seasonally-adjusted. Seasonaladjustment is generally made at the lowest level of aggregation, and seasonally-adjusted

aggregates are obtained by summation. Statistics Canada's X-11 ARIMA is used to seasonallyadjust series.

Data accuracy

The accounts are designed as a double-entry system in which the income- and expenditure-basedGDP totals should, in principle, be identical. In fact, a difference virtually always arises betweenthem due to errors in the source data, imperfect estimation techniques, differing seasonaladjustment methods and discrepancies in the time at which the incomes and expenditures arerecorded.

The size of the discrepancy, which stems from the estimation procedure, is one gauge of thesystem's overall reliability. However, it is a partial and quite insufficient gauge. Another qualitymeasure is how well real expenditure-side GDP compares to the real GDP by Industry measure.

No direct measures of the margin of error in the estimates can be calculated. The quality of theestimates can be inferred from analysis of revisions and from a subjective assessment of the datasources and methodology used in the preparation of the estimates.


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Public revenue in Canada

All governments in Canada are in the business of taxing the people to get their revenue. Away

back in 1914 there were only two major sources of federal revenue: customs duties on goods

entering the country and excise duties on liqueur and tobacco. There were no sales taxes, no

corporation income taxes, no personal income taxes, and no succession duties.

Personal and corporation taxes were introduced during the First World War. They were modest

in proportion at the outset. The sales tax was introduced in 1920 and for some years it was the largest

revenue producer. It replaces customs duties as the major revenue factor.

The personal income tax is the chief source of revenue of the Federal government. Most people

concede that income is the best measure of an individuals ability to pay. The income tax is a

direct tax. It can not be shifted. It is progressive in character, which means that the rate is higher

on the higher incomes. Further, it is a classic tax. The rates can be quickly changed, if the

government needs more money. One defect of the income tax is of course the fact that some

people who should do so, make no returns at all or make false returns on their tax sheets. It isthus necessary for the government to keep an army of officials to check on dishonesty.

Corporation income taxes are also a lucrative source of income. And the big companies are taxed

heavily.

The national debt

In theory, government expenditures in a fiscal year should be made out of current revenues from

taxation for that year. In practice, however, governments - like individuals - frequently spend

more than they take in. This may of course be necessary because of war or national emergency.

But ever in normal times, deficit financing is not unknown among nations. Between 1930 and

1950, the United States had an unbalanced budget for every year but two.

What is a national debt? It is the money borrowed by the government of the country. From whom is it

borrowed? It is borrowed from insurance companies, from trust companies and banks from large

corporations which often invest their surplus funds in government bonds and from individuals.

If governments always had surpluses year by year in their financing, there would be no national

debts. The national debt of a country is made up of the sum total of all deficits it has experiencedin the past, less any surpluses it has enjoyed. Sometimes confusion arises over the terms gross

debt and net debt. The gross national debt is the total obligations of the government. The net debt

is obtained by subtracting the amount of the governments assets from the gross debt.


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National income and distribution

The gross national product is usually defined as the estimated dollar value of all goods and

services produced within a country in a given year. Certain deductions are made from this gross

national product such as for depreciation and indirect taxes; then the remainder is known as the

national income.

Now the process of sharing this national income, among those who helped to produce it, is called

distribution. A large share goes to the workers in the form of wages or salaries. But there are

other groups who receive their rewards for their part in the productive prices. There are the

owners of natural resources who receive their rents; there are the capitalists who get interesting

their bonds or mortgages; and there are the entrepreneurs or operators of enterprises whose

reward is in the form of profits.

Total disposable income is not exactly the same as total national income. Most of the disposable

income is used in the purchase of goods and services. But part of it represents personal savings.

People cannot dispose of the full amount that they have earned by their labour or by theirinvestments as they may wish, because of heavy direct taxes, chiefly income taxes. On the other

hand, some families are able to add to their disposable incomes by receiving pensions or family

allowances from the government. To sum up, disposable income refers to the total income that

people are actually free to spend or save as they choose.

Taxes

A tax has been defined as a compulsory charge imposed upon persons and businesses for

purposes. Many persons today pay from 25 to 50 per cent to their incomes in direct or indirect

taxes.

There are the following theories in accordance with which taxes may be levied:

a/ There is the benefit theory. According to it, the more benefit you get from the government, the

more you ought to pay. Those are in various ways dependent, such as detectives or those who go

to free clinics, should pay the greater part of the taxes. This theory is, of course, largely

impractical.

b/ There is the equal-distribution theory. Each person should pay the same tax, say a 3 per cent

rate. If a person had an income of $ 1,200 a year, he would pay $ 36; if his income were $ 12,000

a year, he would pay $ 360. The trouble here is that the person who pays the $ 36 could probably

ill afford it, whereas the person who paid the $ 360 scarcely miss it out of his large income.

Proportional taxes do not distribute the burden of taxation equitably.


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c/ There is the ability theory. Adam Smith expressed this theory nearly two centuries ago: The

subject of every state ought to contribute toward the support of the government as nearly as

possible in proportion to their respective abilities, that is, in proportion to the revenue which they

respectively enjoy under the protection of the state.

In general, there are two kinds of taxes, direct and indirect. The property taxes are direct, as alsoincome taxes and inheritance taxes. A direct tax is one that cannot be shifted from the person

upon whom it is levied to somebody else. An indirect tax is one which may be, and usually is,

shifted from the persons upon whom it is levied. The sales tax is an indirect tax. It is levied, not

directly on the individual, but on goods which the individual purchases. And some people are not

aware that they are paying it. The excise tax on wines, spirits, and cigarettes is a hidden or

indirect tax. Governments enjoy large revenues from the liquor business. Indeed those

individuals who purchase liquor are paying more to the government in taxes than to the

distilleries who manufacture it.

Governments often prefer to raise money by indirect taxes because they are less noticeable and seemless burdensome. Indirect taxes are sometimes levied on luxury goods on the theory that those

who can afford these luxuries should pay for the privilege of enjoying them.

The income tax, it has been said previously, is a direct tax. It is progressive in character, which

means that the rate is higher on the higher incomes. Further, it is an elastic tax. The rates can be

quickly changed if the government needs more money. One defect of the income tax is, of

course, the fact that some people make no returns at all or make false returns on their tax sheet. It

is this necessary for the government to keep a small army of officials to check on dishonesty.

Corporation income taxes are also a lucrative source of income and the big companies arelikewise taxed to such an extent that as a rule the shareholders get less of the profits made by

them than do the public treasures.

The enigma of production in the modern world

There was a time when each family produced for itself most of the things it needed for its

everyday life. It grew its own food and made its own clothing and furniture. If there was not

enough to eat, it was because the land was poor or the crops were destroyed by a storm or theworkers had taken life a bit too easy.

But in most parts of the modern world, people have little or no idea of how to make the dozens

of different things they use in the course of a single day. Nor, if they could not buy them at a

store, would they know how to set about getting them. From where come the cups and saucers

and knives and forks and spoons that we use for breakfast? Do we still get sugar from Cuba or


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have we some other source of supply? Do our stores get their oranges from Greece or Spain,

Egypt or Algeria or some from each of these regions? Do we continue to get our coffee from

Brazil? And, if so, why does its price fluctuate so much?

In the world of today, the relationship between work and wants is much less direct than it used to

be. We spend our time making goods for sale, but we seldom use these goods for ourselves. Wespecialise in this modern economy and this specialisation has enabled us to enjoy things of which

our grandfathers never dreamed. Old people saw the first automobiles, aeroplanes, telephones at the

beginning of our century. In their childhood there were no electric refrigerators, no radios, no

television sets, but there were moving pictures (without sound).

But the production picture is still far being perfect in its entirety. There are many thousands

haunted by the fear of the future and the unemployment it may bring. There are still more

thousands living in unsanitary, overcrowded houses and suffering from an enormous amount of

misery and disease.

Need we experience all this poverty? Are we producing as efficiently as possible? Are we

producing the things that people really ought to have? Is specialisation always a good method of

production? Should we allow foreign countries produce some things for us or should we purchase

only those things manufactured in our own country? Should some industries have a monopoly in

their productive fields? Should a government plan production for us or can it be safely left to

private enterprise? These are some of questions for which economists should be seeking to find

the answers.


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Economy of Canada

Nominal GDP (2003): $869.2 billion.

Real GDP growth rate (2003): 5.3%.

Nominal per capita GDP (2003): $27,682.

Natural resources: Petroleum and natural gas, hydroelectric power, metals and minerals, fish,forests, wildlife, abundant fresh water.

Agriculture: Products--wheat, livestock and meat, feed grains, oil seeds, dairy products,tobacco, fruits, vegetables.

Industry: Types--motor vehicles and parts, machinery and equipment, aircraft and components,other diversified manufacturing, fish and forest products, processed and unprocessed minerals.

Trade: Merchandise exports (2003)--$313.8 billion: motor vehicles and spare parts, lumber,wood pulp and newsprint, crude and fabricated metals, natural gas, crude petroleum, wheat. In2003, 83% of Canadian exports went to the United States. Merchandise imports (2003)--$289.7billion: motor vehicles and parts, industrial machinery, crude petroleum, chemicals, agriculturalmachinery. In 2003, 70% of Canadian imports came from the United States.


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Economy of Canada

From Wikipedia, the free encyclopedia

Jump to: navigation, search

Economy of

Currency Canadian dollar (CAD)

Fiscal year 1 April 31 March

Trade

organizationsNAFTA, OECD, WTO and others

Statistics

GDP $1.274 trillion (2007 est.)

GDP growth 0.5% (2008)[1]

GDP per capita Nominal:$50,100 PPP:$40,090 (2008 est.)

GDP by sectoragriculture (2.1%), industry (28.8%), services (69.1%)

(2007 est.)

Inflation (CPI) 1.2% (2008 est.)

Population

below poverty

line

10.8% (relative) (2005) / 4.9% (absolute) (2004)

Gini index 31.5% (2004)

Labour force 17.9 million (2007 est.)

Labour force

by occupation

agriculture (2%), manufacturing (13%), construction

(6%), services (76%), other (3%) (2006)

Unemployment 7.2% (Feb. 2009.)


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Main industries

transportation equipment, chemicals, processed and

unprocessed minerals, food products, wood and

paper products, fish products, petroleum and natural

gas

External

Exports $440.1 billion (2007 est.)

Export goods

motor vehicles and parts, industrial machinery,

aircraft, telecommunications equipment, electronics,

chemicals, plastics, fertilizers, wood pulp, timber,

crude petroleum, natural gas, electricity, aluminium

Main export

partnersU.S. 78.9%, UK 2.8%, China 2.1% (2007)

Imports $394.4 billion (2007 est.)

Import goods

machinery and equipment, motor vehicles and parts,

electronics, crude oil, chemicals, electricity, durable

consumer goods

Main import

partnersU.S. 54.1%, China 9.4%, Mexico 4.2% (2007)

Gross External

Debt$758.6 billion (2007 est.)

Public finances

Public Debt $467.3 billion CAD (Federal, 2007)

Revenues $565.8 billion

Expenses $551.2 billion (2007 est.)

Economic aid $3.9 billion (donor) (2007)


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Main data source: CIA World Fact Book

All values, unless otherwise stated, are in US dollars

This box: viewtalk

Canada has the ninth largest economy in the world[2] (measured in US dollars at marketexchange rates),[3] is one of the world's wealthiest nations, and a member of the Organization forEconomic Co-operation and Development (OECD) and Group of Eight (G8). As with otherdeveloped nations, the Canadian economy is dominated by the service industry, which employsabout three quarters of Canadians.[4] Canada is unusual among developed countries in theimportance of theprimary sector, with the logging and oil industries being two of Canada's mostimportant. Canada also has a sizable manufacturing sector, centred in Central Canada, with theautomobile industry especially important.

Canada has one of the highest levels ofeconomic freedom in the world.

[5]

Today Canada closelyresembles the U.S. in its market-oriented economic system, and pattern of production.[6] As ofOctober 2007, Canada's national unemployment rate of 5.9% is its lowest in 33 years. Provincialunemployment rates vary from a low of 3.6% in Alberta to a high of 14.6% in Newfoundlandand Labrador.[7] According to the Forbes Global 2000 list of the world's largest companies in2008, Canada had 69 companies in the list, ranking 5th next to France.[8] As of 2008, Canadastotal government debt burden is the lowest in the G8.

International trade makes up a large part of the Canadian economy, particularly of its naturalresources. The United States is by far its largest trading partner, accounting for about 76% ofexports and 65% of imports as of 2007.[9] Canada's combined exports and imports ranked 8th

among all nations in 2006.

[10]

Economic sectors

Canada has considerable natural resources spread across its varied regions. In British Columbia,the forestry industry is of great importance, while the oil industry is important in Alberta andNewfoundland and Labrador.Northern Ontario is home to a wide array of mines, while the

fishing industry has long been central to the character of the Atlantic provinces, though it hasrecently been in steep decline. Canada has mineral resources of coal, copper, iron ore, and gold.

These industries are increasingly becoming less important to the overall economy. Only some4% of Canadians are employed in these fields, and they account for less than 6% of GDP.[citationneeded] They are still paramount in many parts of the country. Many, if not most, towns in northernCanada, where agriculture is difficult, exist because of a nearby mine or source of timber.Canada is a world leader in the production of many natural resources such as gold, nickel,


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uranium, diamonds and lead. Several of Canada's largest companies are based in natural resourceindustries, such as EnCana, Cameco, Goldcorp, and Barrick Gold. The vast majority of theseproducts are exported, mainly to the United States. There are also many secondary and serviceindustries that are directly linked to primary ones. For instance one of Canada's largestmanufacturing industries is thepulp and papersector, which is directly linked to the logging

industry.

The relatively large reliance on natural resources has several effects on the Canadian economyand Canadian society. While manufacturing and service industries are easy to standardize,natural resources vary greatly by region. This ensures that differing economic structuresdeveloped in each region of Canada, contributing to Canada's strong regionalism. At the sametime the vast majority of these resources are exported, integrating Canada closely into theinternational economy. Howlett and Ramesh argue that the inherent instability of such industriesalso contributes to greater government intervention in the economy, to reduce the social impactof market changes. [11]

Such industries also raise important questions of sustainability.D

espite many decades as aleading producer, there is little risk of depletion. Large discoveries continue to be made, such asthe massive nickel find at Voisey's Bay. Moreover the far north remains largely undeveloped asproducers await higher prices or new technologies as many operations in this region are not yetcost effective. In recent decades Canadians have become less willing to accept the environmentaldestruction associated with exploiting natural resources. High wages and Aboriginal land claimshave also curbed expansion. Instead many Canadian companies have focused their explorationand expansion activities overseas where prices are lower and governments more accommodating.Canadian companies are increasingly playing important roles in Latin America, Southeast Asia,and Africa.

It is the renewable resources that have raised some of the greatest concerns. After decades ofescalating overexploitation the cod fishery all but collapsed in the 1990s, and the Pacific salmonindustry also suffered greatly. The logging industry, after many years of activism, have in recentyears moved to a more sustainable model.

[edit] Energy

See also: Petroleum production in Canada

Nodding donkey pumping an oil well near Sarnia, Ontario


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Canada is one of the few developed nations that is a net exporter of energy. Most important arethe large oil and gas resources centred in Alberta and the Northern Territories, but also present inneighbouring British Columbia and Saskatchewan. The vast Athabasca Tar Sands give Canadathe world's second largest reserves of oil after Saudi Arabia according to USGS. In BritishColumbia and Quebec, as well as Ontario, Saskatchewan, Manitoba and the Labrador region,

hydroelectric power is an inexpensive and relatively environmentally friendly source of abundantenergy. In part because of this, Canada is also one of the world's highest per capita consumers ofenergy.[12][13] Cheap energy has enabled the creation of several important industries, such as thelarge aluminum industry in Quebec, Alberta and British Columbia.

Historically, an important issue in Canadian politics is that while Western Canada is one of theworld's richest sources of energy, the industrial heartland of Southern Ontario has fewer nativesources of power. It is, however, cheaper for Alberta to ship its oil to the western United Statesthan to eastern Canada. The eastern Canadian ports thus import significant quantities of oil fromoverseas, and Ontario makes significant use ofnuclear power.

In times of high oil prices this means that the majority of Canada's population suffers, while theWest benefits. TheNational Energy Policy of the early 1980s attempted to force Alberta to selllow priced oil to eastern Canada. This policy proved deeply divisive, and quickly lost itsimportance as oil prices collapsed in the mid-1980s. One of the most controversial sections of theCanada-United States Free Trade Agreement of 1988 was a promise that Canada would nevercharge the United States more for energy than fellow Canadians.

[edit] Agriculture

Main article: Agriculture in Canada

A grain elevator in Alberta

Canada is also one of the world's largest suppliers of agricultural products, particularly of wheatand other grains.[14] Canada is a major exporter of agricultural products, to the United States but


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also to Europe and East Asia. As with all other developed nations the proportion of thepopulation and GDP devoted to agriculture fell dramatically over the 20th century.

As with other developed nations, the Canadian agriculture industry receives significantgovernment subsidies and supports. However, Canada has been a strong supporter of reducing

market influencing subsidies through the World Trade Organization. In 2000, Canada spentapproximately CDN$4.6 billion on supports for the industry. Of this, $2.32 billion was classifiedunder the WTO designation of "green box" support, meaning it did not directly influence themarket, such as money for research or disaster relief. All but $848.2 million were subsidiesworth less than 5% of the value of the crops they were provided for, which is the WTOthreshold. Consequently, Canada used only $848.2 million of its $4.3 billion subsidy allowancegranted by the WTO.[15]

[edit] Manufacturing

The general pattern of development for wealthy nations was a transition from a primary industry

based economy to a manufacturing based one, and then to a service based economy. Canada didnot follow this pattern; manufacturing has always been secondary, though certainly notunimportant. Partly because of this, Canada did not suffer as greatly from the pains ofdeindustrialization in the 1970s and 1980s.

Central Canada is home tobranch plants to all the major American and Japanese automobilemakers and many parts factories owned by Canadian firms such as Magna International andLinamar Corporation. Central Canada today produces more vehicles each year than theneighboring U.S. state ofMichigan, the heart of the American automobile industry.Manufacturers have been attracted to Canada due to the highly educated population with lowerlabour costs than the United States. Canada's publicly funded health care system is also an

important attraction, as it exempts companies from the high health insurance costs they must payin the United States.

Much of the Canadian manufacturing industry consists of branch plants of United States firms,though there are some important domestic manufacturers, such as Bombardier Inc.. This hasraised several concerns for Canadians. Branch plants provide mainlyblue collarjobs, withresearch and executive positions confined to the United States.[citation needed]

Deindustrialization in Canada has become a serious problem, especially in Ontario (which isvery dependent on the automotive industry), with foreign businesses closing plants across theboard. The economic crisis is only worsening the situation, with even more plants closing

(Oshawa and Windsor, Ontario being especially hard hit).


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[edit] Service sector

The Toronto-Dominion Centre in Toronto

The service sector in Canada is vast and multifaceted, employing some three quarters ofCanadians and accounting for over two thirds of GDP.

[16]The largest employer is the retail

sector, employing almost 12% of Canadians.[17] The retail industry is mainly concentrated in arelatively small number of chain stores clustered together in shopping malls. In recent years therise ofbig-box stores, such as Wal-Mart (of the United States) and Future Shop (a subsidiary ofthe US based Best Buy), have led to fewer workers in this sector and a migration of retail jobs tothe suburbs.

The second largest portion of the service sector is the business services, employing only aslightly smaller percentage of the population. This includes the financial services, real estate, andcommunications industries. This portion of the economy has been rapidly growing in recentyears. It is largely concentrated in the major urban centres, especially Toronto and Calgary (seeBanking in Canada).

The education and health sectors are two of Canada's largest, but both are largely under thepurview of the government. The health care industry has been rapidly growing, and is the thirdlargest in Canada. Its rapid growth has led to problems for governments who must find money tofund it.

Canada has an important high tech industry, and also an entertainment industry creating contentboth for local and international consumption. Tourism is of ever increasing importance, with thevast majority of international visitors coming from the United States. Though the recent strengthof the Canadian Dollar has hurt this sector, other nations such as China have increased tourism toCanada.

[edit] Political issues


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[edit] Regional imbalances

The Canadian economy differs greatly from region to region. Traditionally Central Canada hasbeen the economic engine of Canada, home to more than half of its population and much of itsindustry. Recent years have seen rapid growth in Western Canada as trade with Asia has

enriched British Columbia and oil wealth provided a major boost to Alberta and Saskatchewan.

The four Atlantic provinces, though once the centre of economic activity, underwent a majordecline in the late 19th century and have traditionally been significantly poorer than the rest ofCanada, especially after the recent collapse of the fishing industry. Recent years have seen somesignificant moves towards diversification, especially as offshore oil and gas wealth have begunto flow into the region. Quebec has also traditionally been poorer than the Canadian averagealthough by a lesser margin than the Atlantic provinces. In more recent yearsNewfoundland andLabradorhave started to see a change in their economy, being called the "Celtic tiger ofCanada," (in a comparison to the economic transformation in Ireland); it has also been called a"mini Alberta" because of new oil and gas exploration, although many young Newfoundlanders

emigrate to Alberta for higher-paying jobs.

[edit] Relations with the U.S.

Main article: Canada United States relations

Canada and the United States share a deep and common trading relationship. Canada's jobmarket continues to perform well along with the US, reaching a 30 year low in theunemployment rate in December 2006, following 14 consecutive years of employmentgrowth.

[18]Disputes over trade tariffs, multi-lateral military action and controversial Canadian

legislation such as same-sex marriage, disability rights, racism, immigration law, and legalmedical marijuana have raised tensions and cooled relations between these two countries.

Despite these differences, the United States is by far Canada's largest trading partner, with morethan $1.7 billion CAD in trade per day in 2005. 81% of Canada's exports go to the United States,and 67% of Canada's imports are from the United States.[19] Trade with Canada makes up 23% ofAmerica's exports and 17% of its imports.[20] By comparison, in 2005 this was more than U.S.trade with all countries in the European Union combined,[21] and well over twice U.S. trade withall the countries ofLatin America combined.[22] Just the two-way trade that crosses theAmbassador Bridge between Michigan and Ontario equals all U.S. exports to Japan. Canada'simportance to the United States is not just a border-state phenomenon: Canada is the leadingexport market for 35 of 50 U.S. states, and is the United States' largest foreign supplier ofenergy.

Bilateral trade increased by 52% between 1989, when the U.S.-Canada Free Trade Agreement(FTA) went into effect, and 1994, when theNorth American Free Trade Agreement (NAFTA)superseded it.[citation needed] Trade has since increased by 40%. NAFTA continues the FTA's movestoward reducing trade barriers and establishing agreed upon trade rules. It also resolves somelong-standing bilateral irritants and liberalizes rules in several areas, including agriculture,services, energy, financial services, investment, and government procurement. NAFTA forms the


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largest trading area in the world, embracing the 406 million people of the three North Americancountries.

The largest component of U.S.-Canada trade is in the commodity sector.

The U.S. is Canada's largest agricultural export market, taking well over half of all Canadianfood exports.[23] Similarly, Canada is the largest market for U.S. agricultural goods with nearly20% of American food exports going to its Northern neighbor[citation needed]. Nearly two-thirds ofCanada's forest products, including pulp and paper, are exported to the United States; 72% ofCanada's total newsprint production also is exported to the U.S.

At $73.6 billion in 2004, U.S.-Canada trade in energy is the largest U.S. energy tradingrelationship, with the overwhelming majority ($66.7 billion) being exports from Canada. Theprimary components of U.S. energy trade with Canada arepetroleum, natural gas, and electricity.Canada is the United States' largest oil supplier and the fifth-largest energy producing country inthe world. Canada provides about 16% of U.S. oil imports and 14% of total U.S. consumption of

natural gas. The United States and Canada's national electricity grids are linked and bothcountries share hydro power facilities on the Western borders.

While most of U.S.-Canada trade flows smoothly, there are occasionally bilateral trade disputes,particularly in the agricultural and cultural fields.[citation needed] Usually these issues are resolvedthrough bilateral consultative forums or referral to World Trade Organization (WTO) or NAFTAdispute resolution.[citation needed] In May 1999, the U.S. and Canadian Governments negotiated anagreement on magazines that provides increased access for the U.S. publishing industry to theCanadian market. The United States and Canada also have resolved several major issuesinvolving fisheries. By common agreement, the two countries submitted a Gulf of Maineboundary dispute to the International Court of Justice in 1981; both accepted the Court's 12

October 1984 ruling which demarcated the territorial sea boundary. A current issue between theUnited States and Canada is the ongoing softwood lumber dispute, as the U.S. alleges thatCanada unfairly subsidizes its forestry industry.

[citations needed]

In 1990, the United States and Canada signed a bilateral Fisheries Enforcement Agreement,which has served to deter illegal fishing activity and reduce the risk of injury during fisheriesenforcement incidents. The U.S. and Canada signed a Pacific Salmon Agreement in June 1999that settled differences over implementation of the 1985 Pacific Salmon Treaty for the nextdecade.

[citations needed]

Canada and the United States signed an aviation agreement during Bill Clinton's visit to Canadain February 1995, and air traffic between the two countries has increased dramatically as a result.The two countries also share in operation of the St. Lawrence Seaway, connecting the GreatLakes to the Atlantic Ocean.[citations needed]

The U.S. is Canada's largest foreign investor; at the end of 1999, the stock of U.S. directinvestment was estimated at $116.7 billion, or about 72% of total foreign direct investment inCanada. U.S. investment is primarily in Canada's mining and smelting industries, petroleum,chemicals, the manufacture of machinery and transportation equipment, and finance.[citations needed]


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Canada is the third-largest foreign investor in the United States. At the end of 1999, the stock ofCanadian direct investment in the United States was estimated at $90.4 billion. Canadianinvestment in the United States is concentrated in manufacturing, wholesale trade, real estate,petroleum, finance, and insurance and other services.[citations needed]

[edit] Median household income comparison

CountryMedian household income national

currency unitsYear

PPP rate

(OECD)

Median household

income (PPP)

Switzerland[24]

(gross) 101,904 CHF, $81,2742006 1.762142 $55,901

California, US[25] 55,450 USD2007 1.00 $55,450

United States 50,233 USD2007 1.00 $50,233

Canada[26] 53,634 CAD2005 1.21 $44,000

New Zealand[27] 62,556 NZD2007 1.54 $41,000

Switzerland[24]

(after taxes and health insurance)

71,652 CHF, $57,1462006 1.8229 $39,306

United Kingdom[28]

24,700 GBP2004 0.632 $39,000

Australia[29] 53,404 AUD2006 1.41 $38,000

Israel[30]

107,820 ILS2006 2.90 $37,000

Ireland 35,410 EUR2005 1.02 $35,000

Scotland,

United

Kingdom[31]

21,892 GBP2005 0.649 $34,000

West Virginia,

US[32] US state $33,000

Hong Kong[33]

186,000 HKD2005 5.96 $31,000

Singapore[34]

45,960 SGD2005 1.55 $30,000


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National Income, strictly, is a money measure of the incomes received or accruing to residents of a

country as owners of the agents of production, during a specified period of time. National income

includes wages, rents, interest and profits, not only in the form of cash payments, but as income from

contributions made by employers to pension funds, income of the self-employed, and undistributedbusiness profits.

In market economies such as Canada's, the measures of national income include (with someexceptions) only those economic activities in which goods or services are sold in markets; thefew exceptions ("imputed values") are illustrated by the inclusion in the estimates of a rentalincome for owner-occupied homes, and by the inclusion in the income of farmers of an estimateof the value of the produce from their own farms consumed by the farm families themselves. Atthe same time, official and nearly all private estimates do not include anything for the value of allof the services performed in the household by the unpaid homemaker (seeHOUSEWORK). Thislarge omission is serious if national income is being used to measure the well-being of a

country's people.

As it stands, this measure of national income is exactly equivalent to what the net production ofgoods and services would sell for on the market if there were nothing else added to the prices ofgoods and services; it is therefore a measure of the net value of products measured at factor cost.However, the prices at which goods are exchanged in markets do include indirect taxes such assales taxes and customs duties. In the national accounts, these taxes and the allowances fordepreciation and obsolescence may be added to the net national income at factor cost to obtainthe measure "gross national product at market prices."

In Canada, official national income estimates are prepared by Statistics Canada. By collecting a

wide range of economic and other statistical data, Statistics Canada incidentally obtainsinformation useful in estimating national income and related items in the system of nationalaccounts; when necessary, it conducts surveys specifically designed to elicit data for nationalincome estimates. In addition, it can obtain information provided to other public bodies, eg,tabulations prepared from both personal and corporate income-tax returns.

The components of national income given in the official accounts partly depend on the availabledata. Wages and salaries paid to hired workers (the largest component) are shown because theycan be obtained from data sources such as the census of manufactures, reports filed by financialinstitutions, and income-tax returns. Similarly, estimates of property income, the recompense forthe productive services of capital goods, natural resources and entrepreneurship, are obtained

from much the same sources and are shown in interest and rental income and corporation profits.Net interest and dividends paid to residents of other countries are not included. Incomes ofunincorporated self-employed persons must be otherwise estimated. Incomes of farmers areestimated by subtracting from the receipts from sales of farm products the expenses incurred inproduction; the resulting farm income is a mixture of labour income (for the work of the farmerand his unpaid family) and of property income. Incomes of other unincorporated businesses, eg,those engaged in the professions, and in merchandising or service industries, are calculated in thesame way, or, in some instances, from income-tax tabulations.


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The indirect taxes and capital consumption allowances (depreciation) added to national incometo yield GROSS DOMESTIC PRODUCT (GDP) are derived respectively from governmentrecords and from business and other records; some imputation of depreciation is necessary incertain cases, eg, those involving government-owned buildings and owner-occupied housing.

The national accounts include 4 main categories of expenditure: consumer purchases; purchasesof new capital goods by businesses, governments and persons; government purchases; and netexports of goods and services. The measure of these expenditures reflects the prices actually paidfor goods and services. The expenditure on capital goods also includes both the component ofcapital expenditure that just makes up for capital consumption and the net addition to the capitalstock. The sum of these expenditures is gross national expenditure.

Gross domestic product (as opposed to GNP) is a money measure of the value of all goods andservices produced in Canada regardless of the fact that some of the income generated in theirproduction may belong to residents of other countries. GNP is a measure of the goods andservices that are available to residents of Canada. The former exceeds the latter to the extent that

interest and dividends paid abroad exceed those received from abroad.

The UN has encouraged its members to prepare uniform national income calculations, butcomparisons of the resulting per capita national incomes must be interpreted with care for 3reasons. First, the exchange rates used to put such measures into a common currency, so that thecomparisons can be made, reflect the comparative prices in each currency only of goods that aretraded internationally (comparative prices of untraded goods may not be at all well reflected inexchange rates); second, the size of nonmarket production and hence the portion of productionthat is not measured in national income estimates vary greatly among countries (typically, less-developed countries have relatively large nonmarket sectors of production); third, patterns ofconsumption vary greatly among countries and comparisons of money incomes may not reflect

the effect of these variations on a population's well-being.

Comparisons are also made intertemporally for a single country. National income and relatedestimates are usually calculated first in the prices of the period (most commonly a year) to whichthey apply. For year-to-year comparisons, the aggregates, usually the national expenditureestimates, are deflated by price indices to remove the effects of price change from the changes inthe aggregate production; they are then said to be measured in constant prices, ie, the prices of aparticular year.

Author M.C. URQUHART


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Measures of national income and output

From Wikipedia, the free encyclopedia

(Redirected from National income)

Jump to: navigation, search

"GNP" redirects here. For other uses, see GNP (disambiguation).

It has been suggested that this article be split into multiple articles accessible from a

disambiguation page. (Discuss)

A variety ofmeasures of national income and output are used in economics to estimate totaleconomic activity in a country or region, including gross domestic product (GDP), gross nationalproduct (GNP), and net national income (NNI).

There are three main ways of calculating these numbers; the output approach, the incomeapproach and the expenditure approach. In theory, the three must yield the same, because totalexpenditures on goods and services (GNE) must equal the total income paid to the producers(GNI), and that must also equal the total value of the output of goods and services (GNP).

However, in practice minor differences are obtained from the various methods for severalreasons, including changes in inventory levels and errors in the statistics. This is because goodsin inventory have been produced (therefore included in GNP), but not yet sold (therefore not yetincluded in GNE). Similar timing issues can also cause a slight discrepancy between the value ofgoods produced (GNP) and the payments to the factors that produced the goods, particularly ifinputs are purchased on credit, and also because wages are collected often after a period ofproduction.

Contents

[hide]

y 1 GDP vs. GNPy 2 Concepts related to GDPy 3 The output approachy 4 The income approachy 5 The expenditure approachy 6 National income and welfarey 7 See alsoy 8 Referencesy 9 External links


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[edit] GDP vs. GNP

Gross domestic product (GDP) is defined as the "value of all final goods and services producedin a country in one year".[1] On the other hand, Gross National Product (GNP) is defined as the"value of all goods and services produced in a country in one year, plus income earned by its

citizens abroad, minus income earned by foreigners in the country".[2] The key differencebetween the two is that GDP is the total output of a region, e.g. France, and GNP is the totaloutput of all nationals of a region, e.g. French.

To give an example of the difference between GDP and GNP, and also income, using UnitedStates:[3]

National income and output (Billions of dollars)

Period Ending 2003

Gross national product 11,059.3

Net U.S. income receipts from rest of the world 55.2

U.S. income receipts 329.1

U.S. income payments 273.9

Gross domestic product 11,004.1

Private consumption of fixed capital 1,135.9

Government consumption of fixed capital 218.1

Statistical discrepancy 25.6

National Income 9,679.7

GNP is less used than in the past, as many countries have many citizens working abroad.Because of this, GDP is becoming a more popular measure nowadays.[4]

[edit] Concepts related to GDP

A number of ratios are derived from GDP. These include:

y NDP: Net domestic product is defined as "gross domestic product (GDP) minus depreciation ofcapital",

[5]similar to NNP.


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y GDP per capita: Gross domestic product per capita is the mean value of the output producedper person, which is also the mean income.

These terms often use "expenditure", or "income" instead of "product". These are still the same,as for all goods that are produced, an amount of money equal to the value of the goods produced

is spent on purchasing the goods, and the money spent purchasing the goods is paid to theworkers as income. Therefore, production, expenditures, and income are all equal.

Also, "domestic" is often substituted with "national", as explained in GDP vs. GNP.

[edit] The output approach

The output approach focuses on finding the total output of a nation by directly finding the totalvalue of all goods and services a nation produces.

Because of the complication of the multiple stages in the production of a good or service, only

the final value of a good or service is included in total output. This avoids an issue often called'double counting', wherein the total value of a good is included several times in national output,by counting it repeatedly in several stages of production. In the example of meat production, thevalue of the good from the farm may be $10, then $30 from the butchers, and then $60 from thesupermarket. The value that should be included in final national output should be $60, not thesum of all those numbers, $100. The values added at each stage of production over the previousstage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating thevalue of final output.

The method of calculating national income by output, value added method:

GDP(gross domestic product) at market price = value of output in an economyin a particular year - intermediate consumption

NNP at factor cost = GDP at market price - depreciation + NFIA (net factor

income from abroad) - net indirect taxes[6]

[edit] The income approach

The income approach focuses on finding the total output of a nation by finding the total incomeof a nation. This is acceptable, because all money spent on the production of a good - the totalvalue of the good - is paid to workers as income.

The main types of income that are included in this measurement are rent (the money paid toowners of land), salaries and wages (the money paid to workers who are involved in theproduction process, and those who provide the natural resources), interest (the money paid forthe use of man-made resources, such as machines used in production), and profit (the moneygained by the entrepreneur - the businessman who combines these resources to produce a goodor service).


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The equation for measurement of National Income by Income Method:

NDP at factor cost = compensation of employee + operating surplus + mixed

income of self employee

National income = NDP at factor cost + NFIA (net factor income from

abroad)

[edit] The expenditure approach

The expenditure approach is the most popular national output accounting method. It focuses onfinding the total output of a nation by finding the total amount of money spent. This too isacceptable, because like income, the total value of all goods is equal to the total amount ofmoney spent on goods. The basic formula for domestic output combines all the different areas inwhich money is spent within the region, and then combining them to find the total output.

GDP = C + I + G + (X -M)

Where:C = Household consumption expenditures / Personal consumption expendituresI = Gross private domestic investmentG = Government consumption and gross investment expendituresX = Gross exports of goods and servicesM = Gross imports of goods and services

Note: (X - M) is often written as NX, which stands for "Net Exports"

[edit] National income and welfare

GDP per capita (per person) is often used as a measure of a person's welfare. Countries withhigher GDP may be more likely to also score highly on other measures of welfare, such as lifeexpectancy. However, there are serious limitations to the usefulness of GDP as a measure ofwelfare:

y Measures of GDP typically exclude unpaid economic activity, most importantly domestic worksuch as childcare. This leads to distortions; for example, a paid nanny's income contributes to

GDP, but an unpaid parent's time spent caring for children will not, even though they are both

carrying out the same economic activity.

y GDP takes no account of the inputs used to produce the output. For example, if everyoneworked for twice the number of hours, then GDP might roughly double, but this does notnecessarily mean that workers are better off as they would have less leisure time. Similarly, the

impact of economic activity on the environment is not measured in calculating GDP.

y Comparison of GDP from one country to another may be distorted by movements in exchangerates. Measuring national income at purchasing power parity may overcome this problem at the

risk of overvaluing basic goods and services, for example subsistence farming.

y GDP does not measure factors that affect quality of life, such as the quality of the environment(as distinct from the input value) and security from crime. This leads to distortions - for example,


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spending on cleaning up an oil spill is included in GDP, but the negative impact of the spill on

well-being (e.g. loss of clean beaches) is not measured.

y GDP is the mean (average) wealth rather than median (middle-point) wealth. Countries with askewed income distribution may have a relatively high per-capita GDP while the majority of its

citizens have a relatively low level of income, due to concentration of wealth in the hands of a

small fraction of the population. See Gini coefficient.

Because of this, other measures of welfare such as the Human Development Index (HDI), Indexof Sustainable Economic Welfare (ISEW), Genuine Progress Indicator(GPI), Gross NationalHappiness (GNH) and Sustainable National Income (SNI) are used.

Government of Canada

Type: Confederation with parliamentary democracy.

Confederation: July 1, 1867.

Constitution: The amended British North America Act of 1867 patriated to Canada on April 17,1982, Charter ofRights and Freedoms, and unwritten custom.

Branches: Executive--Queen Elizabeth II (head of state represented by a governor general),prime minister (head of government), cabinet. Legislative--bicameral parliament (House ofCommons has been 301 members, and will be 308 members as of the June 28, 2004 elections;105-seat Senate). Judicial--Supreme Court.Federal-level political parties: Liberal Party, Bloc Quebecois, New Democratic Party,Conservative Party of Canada.

Subdivisions: 10 provinces, 3 territories.

Inside The Canadian Government

Canada is a constitutional monarchy with a federal system, a parliamentary government, andstrong democratic traditions. The 1982 Charter ofRights guarantees basic rights in many areas.Queen Elizabeth II, as Queen of Canada, serves as a symbol of the nation's unity. She appoints a


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governor general, who serves as her representative in Canada, on the advice of the primeminister of Canada, usually for a 5-year term. The prime minister is the leader of the politicalparty in power and is the head of the cabinet. The cabinet remains in office as long as it retainsmajority support in the House of Commons on major issues.

Canada's parliament consists of an elected House of Commons and an appointed Senate.Legislative power rests with the 308-member (as of the June 28, 2004 elections) Commons,which is elected for a period not to exceed 5 years. The prime minister may ask the governorgeneral to dissolve parliament and call new elections at any time during that period. Federalelections were last held in November 2000. Vacancies in the 104-member Senate, whosemembers serve until the age of 75, are filled by the governor general on the advice of the primeminister. Recent constitutional initiatives have sought unsuccessfully to strengthen the Senate bymaking it elective and assigning it a greater regional representational role.

Criminal law, based largely on British law, is uniform throughout the nation and is under federaljurisdiction. Civil law is also based on the common law of England, except in Quebec, which has

retained its own civil code patterned after that of France. Justice is administered by federal,provincial, and municipal courts.

Each province is governed by a premier and a single, elected legislative chamber. A lieutenant-governor appointed by the governor general represents the Crown in each province.

Principal Government Officials (as of July 20, 2004)Head of State--Queen Elizabeth IIGovernor General--Adrienne ClarksonPrime Minister--Paul MartinMinister of Foreign Affairs--Pierre Pettigrew

Ambassador to the United States--Michael KerginAmbassador to the United Nations--Allan Rock


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A S M a c r o e c o n o m i c s / I n t e r n a t i o n a l E c o n o m y

Measuring National Income

We need information on how much spending, income and output is being created in an economy

over a period of time. National income data gives us this information as we see in this chapter.

Measuring national income

To measure how much output, spending and income has been generated in a given time period we

use national income accounts. These accounts measure three things:

1. Output: i.e. the total value of the output of goods and services produced in the UK.

2. Spending: i.e. the total amount of expenditure taking place in the economy.

3. Incomes: i.e. the total income generated through production of goods and services.

What is National Income?

National income measures the money value of the flow of output of goods and services produced

within an economy over a period of time. Measuring the level and rate of growth of national

income (Y) is important to economists when they are considering:

The rate of economic growth

Changes over time to the average living standards of the population

Changes over time to the distribution of income between different groups within the

population (i.e. measuring the scale of income and wealth inequalities within society)

Consumer spending accounts for over two thirds of total spending. Consumer spending has been

strong in recent years, a reflection of rising living standards and low unemployment, but this may


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now be coming to an end because of the mountain of household debt

Gross Domestic Product

Gross Domestic Product (GDP) measures the value of output produced within the domestic

boundaries of the UKover a given time period. An important point is that our GDP includes the

output of foreign owned businesses that are located in the UK following foreign direct investment

in the UK economy. The output of motor vehicles produced at the giant Nissan car plant on Tyne

and Wear and by the many foreign owned restaurants and banks all contribute to the UKs GDP.

There are three ways of calculating GDP - all of which should sum to the same amount since the

following identity must hold true:

National Output = National Expenditure (Aggregate Demand) = National Income

Firstly we consider total spending on goods and services produced within the economy:

Nissan at Sunderland Celebrating 20 years of production

The Nissan plant at Washington, Tyne and Wear is celebrating its 20th anniversary in July 2006, the

first car having rolled off the line on July 8th, 1986. In that first year of production 470 staff had a

production target of 24,000 Bluebirds. Twenty years on, more than 4,200 employees produce

around 310,000 Micras, C+Cs, NOTEs, Almeras and Primeras each year. That car has been followed

by 4.3 million others thanks to a total investment of 2.3 billion. Production is set to rise from

310,000 per year last year to 400,000 in 2007 with the introduction of a new small 4x4, and

Sunderland has been rated as Europe's most productive car factory for the last eight years.

Sources: Reuters News, Sunderland Echo, July 2006

(i) The Expenditure Method of calculating GDP (aggregate demand)

This is the sum of spending on UK produced goods and services measured at current market prices.

The full equation for GDP using this approach is GDP = C + I + G + (X-M) where

C: Household spending

I: Capital Investment spending

G: Government spending

X: Exports of Goods and Services

M: Imports of Goods and Services

The Income Method of calculating GDP (the Sum of Factor Incomes)

Here GDP is the sum of the incomes earned through the production of goods and services. The main

factor incomes are as follows:

Income from people employment and in self-employment

+

Profits of private sector companies


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+

Rent income from land

=

Gross Domestic product (by factor income)

It is important to recognise that only those incomes that are actually generated through the

production of output of goods and services are included in the calculation of GDP by the income

approach.

We exclude from the accounts the following items:

y Transfer payments e.g. the state pension paid to retired people; income support paid tofamilies on low incomes; the Jobseekers Allowance given to the unemployed and otherforms of welfare assistance including child benefit and housing benefit.

y Private transfers of money from one individual to another.y Income that is not registered with the Inland Revenue or Customs and Excise. Every

year, billions of pounds worth of economic activity is not declared to the tax authorities.This is known as the shadow economy where goods and services are exchanged but thevalue of these transactions is hidden from the authorities and therefore does not show upin the official statistics!). It is impossible to be precise about the size of the shadoweconomy but some economists believe that between 8 15 per cent of national output andspending goes unrecorded by the official figures.

Output Method of calculating GDP using the concept of value added

This measure of GDP adds together the value of output produced by each of the productive sectors

in the economy using the concept of value added.

Value added is the increase in the value of a product at each successive stage of the production

process. We use this approach to avoid the problems of double-counting the value of

intermediate inputs.

The table below shows indices of value added from various sectors of the economy in recent years.

We can see from the data that manufacturing industry has seen barely any growth at all over the

period from 2001-2004 whereas distribution, hotels and catering together with business services

and finance have been sectors enjoying strong increases in the volume of output. These figures

illustrate a process of structural change, with a continued decline in manufacturing output and

jobs relative to the rest of the economy. By far the largest share of total national output (GDP)

comes from our service industries.

Index of Gross Value Added by selected industry for the UK

Mining andquarrying, inc oil

& gas extraction

Manufacturing Construction Distribution,hotels, and

catering; repairs

Business servicesand finance

2001 weights in total GDP

(out of 1000)

28 172 57 159 249

2001 100 100 100 100 100

2002 100 97 104 105 102

2003 94 97 109 108 106

2004 87 98 113 113 111


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We can see from the following chart how there have been divergences in the growth achieved by

the manufacturing and the service sectors of the British economy. Indeed by the middle of 2006,

the index of manufacturing output was below the level achieved at the start of 2000.

In contrast the service industries have enjoyed strong growth, leading to a continued process of

structural change in the economy away from traditional heavy industries towards service

businesses.

GDP and GNP (Gross National Product)

Gross National Product (GNP) measures the final value of output or expenditure by UK owned

factors of production whether they are located in the UK or overseas.

In contrast, Gross Domestic Product (GDP) is concerned only with the factor incomes generated

within the geographical boundaries of the country. So, for example, the value of the output

produced by Toyota and Deutsche Telecom in the UK counts towards our GDP but some of the

profits made by overseas companies with production plants here in the UK are sent back to their

country of origin adding to their GNP.

GNP = GDP + Net property income from abroad (NPIA)

NPIA is the net balance of interest, profits and dividends (IPD) coming into the UK from our assets

owned overseas matched against the flow of profits and other income from foreign owned assets

located within the UK. In recent years there has been an increasing flow of direct investment into

and out of the UK. Many foreign firms have set up production plants here whilst UK firms have


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expanded their operations overseas and become multinational organisations.

The figure for net property income for the UK is strongly positive meaning that our GNP is

substantially above the figure for GDP in a normal year. For other countries who have been net

recipients of overseas investment (a good example is Ireland) their GDP is higher than their GNP.

Measuring Real National Income

When we want to measure growth in the economy we have to adjust for the effects of inflation.

Real GDP measures the volume of output produced within the economy. An increase in real output

means that AD has risen faster than the rate of inflation and therefore the economy is experiencing

positive growth.

Income per capita

Income per capita is a basic way of measuring the average standard of living for the inhabitants of

a country. The table below is taken from the latest edition of the OECD World Factbook and

measures income per head in a common currency for the year 2005, the data is adjusted for theeffects of variations in living costs between countries.

GDP per capita $s GDP per capita $s

Luxembourg 57 704 EU (established 15 countries) 28 741

United States 39 732 Germany 28 605

Norway 38 765 Italy 27 699

Ireland 35 767 Spain 25 582

Switzerland 33 678 Korea 20 907

United Kingdom 31 436 Czech Republic 18 467

Canada 31 395 Hungary 15 946

Australia 31 231 Slovak Republic 14 309

Sweden 30 361 Poland 12 647

Japan 29 664 Mexico 10 059

France 29 554 Turkey 7 687

Source: OECD World Economic Factbook, 2006 edition

By international standards, the UK is a high-income country although we are not in the very top of

the league tables for per capita incomes. We do have an income per head that is about ten per

cent higher than the average for the 15 established EU countries. But we are some distance behind

countries such as the United States (where productivity is much higher). And Irelands super-

charged growth over the last twenty years means that she has now overtaken us in terms of

income-based measures of standards of living.

sagar projects

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