Macroeconomics, Sixth Canadian Edition Solution Manual

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ContentsChapter 1: Introduction to Macroeconomics..............................................................1Learning Objectives .........................................................................1Teaching Notes ................................................................................1Additional Issues for Classroom Discussion ...................................5Answers to Textbook Problems .......................................................7Review Questions ................................................................7Numerical Problems.............................................................8Analytical Problems.............................................................9Chapter 2: The Measurement and Structure of the Canadian Economy................11Learning Objectives .......................................................................11Teaching Notes ..............................................................................11Additional Issues for Classroom Discussion .................................19Answers to Textbook Problems .....................................................21Review Questions ..............................................................21Numerical Problems...........................................................22Analytical Problems...........................................................26Chapter 3: Productivity, Output, and Employment ...............................................28Learning Objectives .......................................................................28Teaching Notes ..............................................................................28Additional Issues for Classroom Discussion .................................37Answers to Textbook Problems .....................................................40Review Questions ..............................................................40Numerical Problems...........................................................42Analytical Problems...........................................................47Chapter 4: Consumption, Saving, and Investment.................................................52Learning Objectives .......................................................................52Teaching Notes ..............................................................................52Additional Issues for Classroom Discussions................................60Answers to Textbook Problems .....................................................63Review Questions ..............................................................63Numerical Problems...........................................................65Analytical Problems...........................................................69

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Chapter 5: Saving and Investment in the Open Economy .....................................75Learning Objectives .......................................................................75Teaching Notes ..............................................................................75Additional Issues for Classroom Discussion .................................83Answers to Textbook Problems .....................................................84Review Questions ..............................................................84Numerical Problems...........................................................85Analytical Problems...........................................................89Chapter 6: Long-Run Economic Growth...............................................................94Learning Objectives .......................................................................94Teaching Notes ..............................................................................94Additional Issues for Classroom Discussion ...............................103Answers to Textbook Problems ...................................................105Review Questions ............................................................105Numerical Problems.........................................................106Analytical Problems.........................................................109Chapter 7: The Asset Market, Money, and Prices ...............................................113Learning Objectives .....................................................................113Teaching Notes ............................................................................113Additional Issues for Classroom Discussion ...............................122Answers to Textbook Problems ...................................................123Review Questions ............................................................123Numerical Problems.........................................................124Analytical Problems.........................................................126Chapter 8: Business Cycles..................................................................................128Learning Objectives .....................................................................128Teaching Notes ............................................................................128Additional Issues for Classroom Discussion ...............................136Answers to Textbook Problems ...................................................137Review Questions ............................................................137Analytical Problems.........................................................138Chapter 9: TheIS-LM/AD-ASModel: A General Framework forMacroeconomic Analysis...................................................................140Learning Objectives .....................................................................140Teaching Notes ............................................................................140Additional Issues for Classroom Discussion ...............................155Answers to Textbook Problems ...................................................156Review Questions ............................................................156Numerical Problems.........................................................159Analytical Problems.........................................................162

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Chapter 10: Exchange Rates, Business Cycles, and Macroeconomic Policy inthe Open Economy ...........................................................................166Learning Objectives .....................................................................166Teaching Notes ............................................................................166Additional Issues for Classroom Discussion ...............................187Answers to Textbook Problems ...................................................188Review Questions ............................................................188Numerical Problems.........................................................190Analytical Problems.........................................................192Chapter 11: Classical Business Cycle Analysis: Market-ClearingMacroeconomics...............................................................................195Learning Objectives .....................................................................195Teaching Notes ............................................................................195Additional Issues for Classroom Discussion ...............................208Answers to Textbook Problems ...................................................209Review Questions ............................................................209Numerical Problems.........................................................210Analytical Problems.........................................................215Chapter 12: Keynesian Business Cycle Analysis: Non-Market-ClearingMacroeconomics...............................................................................219Learning Objectives .....................................................................219Teaching Notes ............................................................................219Additional Issues for Classroom Discussion ...............................232Answers to Textbook Problems ...................................................234Review Questions ............................................................234Numerical Problems.........................................................236Analytical Problems.........................................................241Chapter 13: Unemployment and Inflation ...........................................................250Learning Objectives .....................................................................250Teaching Notes ............................................................................250Additional Issues for Classroom Discussion ...............................262Answers to Textbook Problems ...................................................263Review Questions ............................................................263Numerical Problems.........................................................264Analytical Problems.........................................................267

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Chapter 14: Monetary Policy and the Bank of Canada........................................269Learning Objectives .....................................................................269Teaching Notes ............................................................................269Additional Issues for Classroom Discussion ...............................280Answers to Textbook Problems ...................................................281Review Questions ............................................................281Numerical Problems.........................................................282Analytical Problems.........................................................284Chapter 15: Government Spending and Its Financing.........................................288Learning Objectives .....................................................................288Teaching Notes ............................................................................288Additional Issues for Classroom Discussion ...............................302Answers to Textbook Problems ...................................................303Review Questions ............................................................303Numerical Problems.........................................................305Analytical Problems.........................................................308

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CHAPTER 1: INTRODUCTION TO MACROECONOMICSLEARNING OBJECTIVESI.Goals of Part I: IntroductionA.Introduce students to the main concepts in macroeconomics (Ch. 1)B.Introduce national income accounting and major economic magnitudes (Ch.2)II.Goals of Chapter 1A.Major economic issues—growth, business cycles, unemployment, inflation,the international economy, macroeconomic policy, aggregation (Sec. 1.1)B.What macroeconomists do—forecasting, analysis, research, datadevelopment (Sec. 1.2)C.Why macroeconomists disagree—Classicals vs. Keynesians, the text'sapproach (Sec. 1.3)III.Notes to Sixth Edition UsersA.All Figures have been updated to reflect the newly available dataTEACHING NOTESI.What Macroeconomics Is About (Sec. 1.1)A.Long-run economic growth1.Growth of real output in Canada over time2.Sources of growth—rising population, increase in the average labourproductivityThis may be a good place to introduce students to the calculation of a growth-rate,which is used throughout the textbook. You can write it first in general terms, as%∆X = [(Xt+1– Xt)/Xt]×100% = [(Xt+1/Xt) –1] x 100%.Then you might use an example with something you're talking about, such as real GDPgrowth over the past year, or the inflation rate. We also recommend explaining how thegrowth rate of a ratio is approximately the growth rate of the numerator minus that of thedenominator. Throughout the text, students may come across mathematical calculationsthat are unfamiliar to them. The Appendix at the end of the textbook contains somehelpful basic guidance to mathematical topics, including discussions of functions andgraphs, slopes of functions, elasticities, functions of several variables, shifts of a curve,exponents, and growth rate formulas.B.Business cyclesC.Unemployment; Canadian experienceAnalytical Problem 1 asks students to think about average labour productivity andunemployment and their relationship to output.D.Inflation1.Canadian experienceAnalytical Problem 2 asks students to think about the welfare consequences of having ahigher price level.

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2Chapter 12.Deflation (falling prices)3.Inflation rateYou may wish to note here that the inflation rate is just the growth rate of the price level,so thatπ= [(Pt + 1/Pt) - 1×100%. Numerical Problem 1 gives students practicecalculating growth rates, including the growth rate of average labour productivity,unemployment rate, and the inflation rate.E.The international economy1.Open vs. closed economies2.Trade imbalances; the trade deficit and the trade surplus3.The exchange rateF.Macroeconomic policy1.Fiscal policya.Effects of large federal deficitsb.Canadian experiencec.Relation to decline in productivity growthNumerical Problem 2 serves two purposes: (1) to get students to look at some real dataon the economy; and (2) to give them some idea how large are the trade deficit andgovernment budget deficit or surplus.2.Monetary policy; the Bank of CanadaG.Aggregation; from microeconomics to macroeconomicsII.What Macroeconomists Do (Sec. 1.2)A.Macroeconomic forecasting1.Relatively few economists make forecastsData ApplicationThere are many firms that provide forecasts for macroeconomic variables in Canada,such as the Conference Board of Canada, DRI Canada, and most private banks. Inaddition the Federal Department of Finance and the Bank of Canada make projectionsfor the economy based on large scale macroeconometric models. Finally internationalagencies such as the Organization for Economic Cooperation and Development(OECD) provide annual surveys of the Canadian economy which make forecasts for theeconomy.2.Forecasting is very difficultData ApplicationFrancis X. Diebold presents a comprehensive survey of the development of structuraland non-structural forecasting in his article, "The Past, Present, and Future ofMacroeconomic Forecasting,"Journal of Economic Perspectives,Spring 1998, vol. 12,pp. 175-92. Despite the difficulties in macroeconomic forecasting, he is optimistic aboutits future with the rapid advances in numerical and simulation techniques.B.Macroeconomic analysis1.Private and public sector economists—analyze current conditions

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Introduction to Macroeconomics3Data ApplicationThe Canadian financial sector hires a large number of economists, most of whom areengaged in dataanalysis on a daily basis. Their job is to tell traders what the currentdata means in terms of their effect on the financial markets in general, as well as on theprices of individual assets. Many of them also make their own detailed forecasts of theeconomy.2.Does having lots of economists ensure good macroeconomic policies?No, since politicians, not economists, make major decisionsC.Macroeconomic research1.Goal: to make general statements about how the economy works2.Theoretical and empirical research are necessary for forecasting andeconomic analysis3.Economic theory: a set of ideas about the economy, organized in alogical framework4.Economic model: a simplified description of some aspect of theeconomyThis is a good point for you to talk about your own research interests. It has been foundthat students are very interested in learning about the kind of research their instructorsdo. You may want to talk about your research later, if and when you come to a sectionof the textbook that discusses the topic on which you do your research.5.Usefulness of economic theory or models depend on reasonablenessof assumptions, possibility of being applied to real problems,empirically testable implications, and theoretical results consistent withreal-world dataTheoretical ApplicationThe classic discussion of research issues by Milton Friedman is, "The Methodology ofPositive Economics,"Essays in Positive Economics,Chicago: University of ChicagoPress, 1953.Analytical Problem 3 is an exercise in how to formulate and test a theory.D.Data development—very important for making data more usefulIll.Why Macroeconomists Disagree (Sec. 1.3)A.Positive vs. normative analysisAnalytical Problem 4 gives students practice in distinguishing positive from normativeanalysis.B.Classicals vs. Keynesians1.The classical approacha.The economy works well on its own; the "invisible hand" leadspeople, acting in their own best interests, to maximize thegeneral welfareb.Wages and prices adjust rapidly to get to equilibriumc.Result: Government should have only a limited role in theeconomy

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4Chapter 1Theoretical ApplicationAt this point in the discussion, you may want to talk about philosophies of economics.Students are often fascinated by how philosophical differences arise and what theymean, especially for policy. This helps to reinforce the idea that the Keynesian andclassical models are very different in their implications. You might suggest the idea thateconomists who are skeptical of government's role in the economy are more likely tobelieve in a classical model, while those who believe the government can do good aremore likely to become Keynesians. You can point out, however, that things arechanging; some New Keynesians seem skeptical of government intervention.2.The Keynesian approacha.The Great Depression: Classical theory didn't appear to workb.Keynes: Persistent unemployment occurs because wages andprices adjust slowly, so markets remain out of equilibrium forlong periodsc.Result: Government should intervene to restore full employmentAnalytical Problem 5 asks students to distinguish between how a classical economistand a Keynesian economist would think about the same issue.3.The evolution of the classical-Keynesian debatea.Keynesians dominated from WWII to 1970b.Stagflation led to a classical comeback in the 1970sc.Last 30 years: excellent research with both approachesTheoretical ApplicationYou may wish to add a discussion of the recent progression of research. You could startby a brief discussion of how the failure of Keynesian models in the stagflation of the1970s led to the growth of rational-expectations modeling, with its focus on theimportance of microfoundations. Then you could discuss New Keynesianmacroeconomics (discussed in greater detail in Chapter 13) and its attempts to providesome microfoundations for wage and price stickiness in Keynesian models.Although the textbook presents just a few versions of classical models and Keynesianmodels, it is difficult to find a prototypical classical or Keynesian economist who believesfully in that particular model. The lack of convincing evidence on which model is correcthas led macroeconomists to be eclectic, so that they often hedge their bets. As a result,a one-armed macroeconomist is hard to find; analysis tends to be of the "on the onehand, and on the other hand" variety. And of course that means that if you laid all themacroeconomists on the earth end to end, they still wouldn't reach a conclusion!C.A unified approach to macroeconomics1.Textbook uses a single model to present both classical and Keynesianideas2.Three markets: goods and services, assets, labour3.Model starts with microfoundations: individual behaviour4.Long run: wages and prices are perfectly flexible5.Short run: Classical case—flexible wages and prices; Keynesiancase—wages and prices are slow to adjust

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Introduction to Macroeconomics5ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION1.How Has Increasing Productivity Changed Life in Canada?Increases in labour productivity allow people to consume more goods and services.How have rising consumption levels affected daily life—and people's expectations—over the last few generations?Even over relatively short periods of time, such as 30 years, living standards forCanadians have changed dramatically. In the 1981-2011 period, average labourproductivity has risen tremendously, (although it slowed in the 1980s and recently), asdid the quantity of consumer goods people owned. In 1981 the population of Canadawas 24.9 million people. It had risen to almost 34.3 million by 2010. Thus the populationincreased by almost 38 percent in that time. But the value of consumer durables ownedby households increased by 291 percent (from 109 billion to 426.8 billion).Do additional goods make people happier? Are Canadian's lives better today becausethey now own more cars and appliances than they did in the early 1960s?Note: Data from CANSIM II Seriesv33467 (Table 3780049, v1 (Table 051-0005)).2.Are Canadians Better Off Today?Canadians have more material goods today than they had in the 1950s. Does this meanthat life in the 2000s is better than it was in the 1950s and 1960s?Do more goods and services compensate adequately for the environmental problemsand rapid changes of life today?Although the average house has more square feet and more appliances than it had 40years ago, does that outweigh the fear that causes us to keep our doorslocked? Doesbeing able to buy many fruits and vegetables year-round improve lives enough to makeup for the additional pollution, which causes increased respiratory problems? Is it moreimportant to be able to drive two hours to work that is interesting and challenging than tobreathe clean air? Does having several cars in the garage compensate for urbancongestion? Does the exhilaration of new products and services outweigh the disruptionin our lives caused by rapid and extensive change?Robert, Frank.Luxury Fever.New York: Free Press, 1999.3.Is Economics a Science?What is a science? Does the termscienceapply to economics? If economists cannotpredict accurately what will happen in the future, can we claim that economics is ascience?If one defines as a body of knowledge gained by investigation that will allow one topredict future outcomes, can economics be considered a science? Although economistsargue that they follow scientific methods to learn about economic interactions, can theyclaim true scientific rigour? In economics it is difficult to carry out controlled experimentssuch as those undertaken by physicists, biologists, and chemists; and in most cases wecan't even repeat experiments for verification. The economy is influenced by a myriad offactors; sorting out what is cause and what is effect is quite difficult. With so manyfactors changing at once, together with shocks such as weather, earthquakes, riots, andchanges in people's preferences, it's tough to figure out the effects of changes in policy.However, economic theory does allow us to predict the direction of change if not itsexact magnitude.

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6Chapter 14.Is Macroeconomics Linked to the Modern Industrial Society?Many topics in macroeconomics are closely linked to our urban money-based economy.Inflation, unemployment, business cycles, growth, and the balance of trade have allbeen the concerns of leaders for long periods of time, yet they tended to have limitedimpact on the common person until the end of the nineteenth century. You may askyour students to think about why this is true.In the middle of the nineteenth century, a large percentage of the Canadian populationlived in farms. Much of their commerce was based on barter—trading the products oftheir fields and forests for flour, cloth, powder, and shot. In a society in which manyproduced their own food and clothing, questions of inflation, unemployment, andbalance of trade had little effect on the common person. Such questions applied mostlyto those who lived in the cities or those involved in international trade.Inflation and unemployment became concerns as people moved from mostlysubsistence farming to either cash crops or urban wage employment. Because today'sworkers specialize in the production of a particular good in exchange for money income,they are more subject to the vagaries of inflation and unemployment.5.Do Economic Conditions Change the Outcome of Elections?Many commentators believe that the condition of the economy with respect tounemployment and growth influence the outcome of general elections.For instance, if the economy is sluggish or undergoing a recession during an election,the incumbent party may be defeated. The poor state of the Canadian economy in theearly 1990s was clearly an important factor in the Conservative government's dramaticdefeat in November 1993. Although economic conditions are not the only factor thatinfluences voters, they may play a major role. Is this good or bad? Economic policiesoften take effect only after long delays. Quick-fix changes may lead to more problemslater on. While no one argues that bad economic policy should be encouraged, arethere problems with politicians being concerned with short-run results that improve theirelectoral chances, rather than long-run solutions?

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Introduction to Macroeconomics7ANSWERS TO TEXTBOOK PROBLEMSReview Questions1.Both total output and output per worker have risen strongly over time in Canada.Output itself has grown by a factor of 80 in the last 125 years. Output per worker isnow five times as great as it was in 1921. These changes have led to a muchhigher standard of living today.2.The business cycle refers to the short-run movements (expansions andrecessions) of economic activity. The unemployment rate rises in recessions anddeclines in expansions. The unemployment rate never reaches zero, even at thepeak of an expansion.3.A period of inflation is one in which prices (on average) are rising over time.Deflation occurs when average prices are falling over time. Before World War II,prices tended to rise during war periods and fall after the wars ended. Over thelong run the price level remained fairly constant. Since World War II however,prices have risen fairly steadily. In the mid 1990s, the inflation rate fell below 2%and stayed around there since then.4.The government budget deficit is the annual excess of government spending overtax collections. The Canadian federal government has been most likely to rundeficits during wars. From the early 1980s until the late 1990s deficits were verylarge, even without a war.5.Aggregation refers to the process of adding together individual economic variablesto obtain economy-wide totals. Aggregation distinguishes microeconomics frommacroeconomics. It allows us to study the economy as a whole, rather than lookingat its individual parts.6.Macroeconomists engage in macroeconomic forecasting, macroeconomicanalysis, basic research, and data development. Macroeconomic research can beuseful in investigating forecasting models to improve forecasts, in providing moreinformation on how the economy works to help macroeconomic analysts, and intelling data developers what types of data should be collected. Research providesthe basis (results and ideas) for forecasting, analysis, and data development.7.The steps in developing and testing an economic model or theory are: (1) State theresearch question; (2) make provisional assumptions that describe the economicsetting and the behaviour of the economic actors; (3) work out the implications ofthe theory; (4) conduct an empirical analysis to compare the implications of thetheory with the data; (5) if the theory fits the data well, use the theory to predictwhat would happen if the economic setting or economic policies change; (6) if thetheory fits the data poorly, start from scratch with a new model; (7) if the theory fitsthe data moderately well, either make do with a partly successful theory orcomplicate the model with additional assumptions. The criteria for a useful theoryor model are that (1) it has reasonable and realistic assumptions; (2) it isunderstandable and manageable enough for studying real problems; (3) itsimplications can be tested empirically using real-world data; and (4) its implicationsare consistent with the data.

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8Chapter 18.Yes, it is possible for economists to agree about the effects of a policy (that is, toagree on the positive analysis of the policy), but to disagree about the policy'sdesirability (normative analysis). For example, suppose economists agreed thatreducing inflation to zero within the next year would cause a recession (positiveanalysis). Some economists might argue that inflation should be reduced, becausethey prefer low inflation even at the cost of higher unemployment. Others wouldargue that inflation isn't as harmful to people as unemployment is, and wouldoppose such a policy. This is normative analysis, as it involves a value judgmentabout what policy should be.9.Classicals see wage and price adjustment occurring rapidly, while Keynesiansthink that wages and prices adjust only slowly to shocks. The classical theoryimplies that unemployment will not persist, since wages and prices adjust to bringthe economy rapidly back to its full-employment equilibrium in response to a shock.But if Keynesian theory is correct, then the slow response of wages and pricesmeans that unemployment may persist for long periods of time unless thegovernment intervenes.Numerical Problems1.a.Average labour productivity is output divided by employment:2011: 12 000 tonnes of potatoes per 1000 workers = 12 tonnes of potatoes perworker2012: 14 300 tonnes of potatoes per 1100 workers = 13 tonnes of potatoes perworkerb.The growth rate of average labour productivity is [(13/12) – 1]×100% =8.33%.c.The unemployment rate is:2011:100/1100 = 9.1%2012:50/1150 = 4.3%d.The inflation rate is [(2.5/2) – 1]×100% = 25%.2.The answers to this problem will vary depending on the current date. Numbers areat annual rates in billions of current dollars.20092010GDP1,529.01,624.6Exports439.5478.1Imports465.3508.7Federal Revenues223.3228.6Federal Expenditures254.3268.3a.Exports/GDP28.7%29.4%Imports/GDP30.4%31.3%Trade imbalance/GDP-1.7%-1.9%b.Federal Revenues/GDP14.6%14.1%Federal Expenditures/GDP16.6%16.5%Deficit/GDP2.03%2.44%

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Introduction to Macroeconomics9Analytical Problems1.Yes, average labour productivity can fall even when total output is rising. Averagelabour productivity is total output divided by employment (of workers sixteen yearsold and over). So average labour productivity can fall if output and employment areboth rising but employment is rising faster.Yes, the unemployment rate can also rise even though total output is rising. Thiscan occur through a number of channels. For example, average labour productivitymight be rising with employment constant, so that output is rising; but the labourforce may be increasing as well, so that unemployment is rising. Or average labourproductivity might be constant, and both employment and unemployment could riseat the same time due to an increase in the labour force.2.Just because prices were lower in 1914 than they were in 2009 does not mean thatpeople were better off back then. People's incomes have risen much faster thanprices have risen over the last 95 years, so they are better off today in terms of realincome.3.There are many possible theories. One possibility is that people whose last namesbegin with the lettersAthroughMvote Liberal while those whose names beginwith the lettersNthroughZvote Conservatives You could test this theory by takingexit polls or checking the lists of registered voters by party. However, this theoryfails the criterion of being reasonable, since there is no good reason to expect thefirst letter of people's last names to matter for their political preferences.A better theory might be one based on income. For example, you might make theassumption that the Conservatives party promotes business interests, while theLiberal party is more interested in redistributing income. Then you might expectpeople with higher incomes to vote Conservatives and people with lower incomesto vote Liberal. This could be tested by taking a survey of people as they left thepolls. In this case the assumptions of the theory seem reasonable and realistic,and the model is simple enough to understand and to apply. So it is potentially auseful model.4.a.Positive. This statement tells whatwillhappen, not whatshouldhappen.b.Positive. Even though it is about income-distribution issues, it is a statement offact, not opinion. If the statement said "The payroll tax should be reducedbecause it . . . ," then it would be a normative statement.c.Normative. Saying they are too high suggests that theyshouldbe lower.d.Positive. Says whatwill happenas a consequence of an action, not whatshould be done.e.Normative. This is a statement of preference about policies.5.A classical economist might argue that the economy would work more efficientlywith NAFTA because it reduces trade barriers, making the invisible hand workeven better. Workers could specialize even more than before, so that more totaloutput would be produced by all three countries. Though the industrial mix mightchange in each country, wages and prices across industries would adjust quickly,and people in industries that closed down in a particular country would quickly findnew jobs.A Keynesian economist might be more sympathetic to concerns about NAFTAbecause of the belief that adjustment to the changes will not occur quickly. As aresult, people in particular industries in a country may become unemployed.

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10Chapter 1Wages won't adjust quickly to restore full employment, so some government action(like retraining programs to give displaced workers new skills) may be desirable.6.Keynes was responding to the suggestion of classical economists that there wasno need for a response to the Great Depression from government policymakersbecause in the long run the economy always adjusts back to full employmentequilibrium. Keynes argued that this adjustment might take a long time and that itmight be better for policymakers to take action to speed up the process ofadjustment and so relieve the suffering of those suffering unemployment.

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CHAPTER 2: THE MEASUREMENT AND STRUCTURE OF THECANADIAN ECONOMYLEARNING OBJECTIVESI.Goals of Chapter 2A.National income accounts; relationships between key macroeconomicvariables (Sec. 2.1)B.Gross domestic product—the main measure of output (Sec. 2.2)C.Saving and wealth—private and government (Sec. 2.3)D.Real GDP, Price indexes, and inflation—macroeconomic variables not in thenational income accounts (Sec. 2.4)E.Interest rates – real versus nominal interest rates (Sec. 2.5)II.Notes to Sixth Edition UsersA.Figures, Tables, and their corresponding text have been updated.B.Answers for analytical problems #5 are updated.TEACHING NOTESI.National Income Accounting: The Measurement of Production, Income, andExpenditure (Sec. 2.1)A.Three alternative approaches give the same measurements1.Product approach: the amount of output produced2.Income approach: the incomes generated by production3.Expenditure approach: the amount of spending by purchasersB.Juice business example shows that all three approaches are equal1.Important concept in product approach: value added = value of outputminus value of intermediate inputsC.Why are the three approaches equivalent?1.They must be, by definition2.Any output produced (product approach) is purchased by someone(expenditure approach) and results in income to someone (incomeapproach)3.The fundamental identity of national income accounting:total production = total income = total expenditure (Note in Chapter 5an open economy is considered in which a country’s spending neednot equal its production in every period.)4.A Closer Look 2.1: The Canadian system of national economicaccounts(a) In Canada, most of the data macroeconomists use to test theirtheories are produced by Statistics Canada (www.statcan.gc.ca)(b) The most important source of data is the Canadian System ofNational Economic Accounts (CSNEA)(c) The World Bank, IMF, OECD and the UN all provide datadescribing the economies of many countriesII.Gross Domestic Product (Sec. 2.2)A.The product approach to measuring GDP1.GDP is the market value of final goods and services newly producedwithin a national boundary during a fixed period of time

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