CHAPTER 13
Measuring
the
performance
of the
economy
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
CHAPTER OUTLINE
LEARNING OUTCOMES
INTRODUCTION
13.1 MACROECONOMICS OBJECTIVES
13.2 MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GROSS DOMESTIC
PRODUCT
13.3 OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE
13.4 MEASURING EMPLOYMENT AND UNEMPLOYMENT
13.5 MEASURING PRICES: THE CONSUMER PRICE INDEX
13.6 MEASURING THE LINKS WITH THE REST OF THE WORLD: BALANCE OF
PAYMENTS)
13.7 MEASURING INEQUALITY: THE DISTRIBUTION OF INCOME
IMPORTANT CONCEPTS
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LEARNING OUTCOMES
Once you have studied this chapter you should be able to
•
•
•
•
explain the five main macroeconomic objectives
explain what the national accounts represent
define the most important national accounting concepts
show how the basic national accounting concepts are linked
• define the unemployment rate
• define and interpret the consumer price index (CPI)
• explain the balance of payments
• explain a Lorenz curve and the Gini coefficient
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
INTRODUCTION
How is the economy performing?
What are our economic prospects?
Are things going to improve and, if so, when?
This leads the economist to ask….
What criteria should be used?
How can these criteria be quantified or measured?
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain the five main macroeconomic objectives
13.1 Macroeconomics objectives
13.1 MACROECONOMICS OBJECTIVES
The five macroeconomic objectives
Economic
growth
Full
employment
Price
stability
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
Balance of
payments
stability
Equitable
distribution
of income
13.2 Measuring the level of economic activity: Gross domestic
product
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
13.2 MEASURING THE LEVEL OF
ECONOMIC ACTIVITY: GROSS
DOMESTIC PRODUCT
• The first step in measuring economic growth is to determine a country’s total
production of goods and services in a specific period.
• Performed by the national accounting sections of Statistics South Africa
(Stats SA) with contributions by the South African Reserve Bank (SARB).
• The central concept in the national accounts is the gross domestic product
(GDP).
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Defining GDP
The gross1 domestic product is the total value2 of all final3 goods
and services produced within the boundaries of a country4 in a
particular period5 (usually one year).
1
Gross: No provision for depreciation, consumption of capital
2
Value: expressed in terms
3
Final goods and services: value added: to avoid double counting
4
Geographic aspect: within a country’s boundaries
5
Current production:Click
during
a particular
period
on the corresponding
numbers
to examine the elements of the definition
Click again to hide
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
GDP = C + I + G + (X – Z)
Investment
Exports
Imports
Consumption
Government spending
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Three methods of calculating GDP
1
2
3
Production method (value added)
Expenditure
(final
goods
and services)
Productionmethod
method
(value
added)
This method estimates GDP by adding up the contribution of each
Income
method
(income
of the
factors
ofservices)
production)
industry
to GDP.
To avoid
double
counting,
the contributions are
Expenditure
method
(final
goods
and
measured in terms of value added. Uses basic prices.
The
expenditure
method
estimates
GDPofbyproduction)
adding up all the
WhyIncome
do they
yield the
same answer?
method
(income
of
the factors
components of final demand. To avoid double counting only the
expenditure
on essentially
final estimates
goods measure
andGDP
services
(e.g
the
bread)
should
income
method
by
adding
up
all the
incomes
The The
three
methods
the
same
thing,
albeit
at be
considered.
Uses
market
prices.
(rent,
interest,
wages
& profits)
different
points
in
the
circular
flow.received by the FOP. Uses factor
cost.
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Three methods of calculating GDP
One of the major problems that national accountants
have to deal with is the problem of double counting.
Add the totals of each
An example
sale:
• A farmer produces 1 000 bags of wheat which he sells to a R10 000
miller at R10 per bag, yielding a total of R10 000.
+ R12 500
• The miller processes the wheat into flour, which he then
+ R18 000
sells to a baker for R12 500.
+ R21 000
• After baking bread with the flour, the baker sells it to a =shopR61 500
for R18 000.
• The shop subsequently sells the bread to final consumers
You need to consider the value
add for each transaction
for R21 000.
• What is the value of these four transactions
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
?
Click on the question mark for
more
Click again to hide
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
What is the value add?
The amount by which the value of the firm’s products
exceeds the value of the goods and services the firm
purchases from other firms at each stage of production.
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
Three methods of calculating GDP
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Click on each letter to view the steps of
the example. Click again to hide
Let us look at each method:
1
Production method
This method estimates GDP by adding up the contribution of each stage to
GDP.
Value added
A
farmer
produces
1
000
bags
of
wheat
A
The shop
subsequently
theinto
bread
to
After
baking
bread with
the
flour,
theflour,
baker
miller
processes
thesells
wheat
R10 000
which
he
sells
to
a miller
at R10
bag,
final
for
R21
000.
sells
itconsumers
to athen
shop
R18
which
he
sells
to
a baker
forper
R12
500.
B
yielding a total of R10 000.
R2 500
R5 500
R21
R18
000
Value added = R18
R12 000
500 – R12
R10 500
C
R3
000
= R5
His value added
is 500
R10 000
R2
R3 000
D
R21 000
Calculate the total value added by adding up
E
the value added per stage
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
2
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Expenditure method
The expenditure method estimates GDP by adding up all the
components of final demand. This is the sum of the spending by
households, firms, the government and the ROW on final goods and
services produced in the domestic (SA) economy.
Or
The expenditure approach measures GDP as the sum of
consumption expenditure, investment, government purchases of
goods and services, and net exports.
GDP = C + I + G + (X – M)
Click on the number to reveal. Click again to hide
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
3
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Income method
The income method estimates GDP by adding up all the incomes (rent,
interest, wages and profits) received by the factors of production (land,
capital, labour and entrepreneurship) during the various stages of the
production process.
Click on the number to reveal. Click again to hide
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Measurement at market prices, basic prices and
factor cost (or income)
The three sets of prices that can be used to calculate GDP
1
Market prices
(used in expenditure method)
2
Basic prices
(used in production method)
3
Factor cost
(used in income method)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Measurement at market prices, basic prices and factor cost (or income)
• GDP at market prices
– taxes on products
+ subsidies on products
= GDP at basic prices
• GDP at factor cost (or income)
+ other taxes on production
– other subsidies on production
= GDP at basic prices
• GDP at basic prices
•
+ other subsidies on production
– other taxes on production
= GDP at factor cost (or income)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
GDP at basic prices
+ taxes on products
– subsidies on products
= GDP at market prices
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Measurement at current prices and at
constant prices
• Measurement always first at current prices (nominal GDP)
• During inflation, adjustments for price increases required
− nominal GDP converted to real GDP
− use prices in a base year (constant prices)
• GDP at current prices = nominal GDP (reflects price changes)
Click on the triangle to reveal Table 13-2 GDP at current prices and constant prices and
nominal and real growth, 2006-2018. Click again to hide.
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
13.2 Measuring the level of economic activity: Gross domestic
product (cont.)
Measurement at current prices and at constant prices
•
GDP at constant prices = real GDP (excludes price changes)
•
In base year:
OR
real GDP = nominal GDP
GDP at constant prices = GDP at current prices
See Box 13-1: Nominal values, real values and purchasing power
(p. 261)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.3 Other measures of production, income and expenditure
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
13.3 OTHER MEASURES OF
PRODUCTION, INCOME AND
EXPENDITURE
Gross national income or gross national product
• GDP – geographical concept; reflects what happened on SA soil,
irrespective of who created the product
•
We also want to know what happened to the economic position of South
Africans
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.3 Other measures of production, income and expenditure
(cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Gross national income or gross national product
• GNI (= GNP) = GDP
all income earned in South Africa by foreign
factors of production
all income earned by South African factors
of production in the rest of the world
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.3 Other measures of production, income and expenditure
(cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Click on the arrows for more
information
Click again to hide
Expenditure on GDP
Let’s recap:
The elements of total spending
The
major sectors
Three approaches
to four
calculating
the GDPof the economy
Three
approaches
to calculating
the GDP (C)
• consumption expenditure
by households
• Households
• Production
investment approach
spending (or capital formation) by
•
Firms
The four major sectors
of(I)
the
economy
• Income
approach
firms
• Government
• Expenditure
government approach
spending (G)
• Foreign sector
The elements of total
spending on exports (X) minus expenditure
• expenditure
on imports (Z)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.3 Other measures of production, income and expenditure
(cont.)
Expenditure on GDP continued
GDP = expenditure on GDP
=C+I+G+X–Z
Table 13-3 Composition
of expenditure on GDP
in South Africa in 2018
(p. 265)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
13.3 Other measures of production, income and expenditure
(cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Gross domestic expenditure (GDE)
GDP
= C+I+G+X–Z
= GDP at market prices
Gross domestic expenditure (GDE)
= total value of all spending in South Africa
= C+I+G
• Exports (X) excluded from GDE because expenditure occurs in the rest of
the world
• Imports (Z) included in GDE (ie not subtracted) because expenditure
occurs in SA
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.3 Other measures of production, income and expenditure
(cont.)
LO: Explain what the national accounts represent
LO: Define the most important national accounting concepts
LO: Show how the basic national accounting concepts are
linked
Relationship between GDE and GDP
• GDE = C + I + G
• GDP = C + I + G + X – Z
THUS: GDP = GDE + (X–Z)
If GDP > GDE, then X > Z (ie (X–Z) is positive)
If GDP < GDE, then Z > X (ie (X–Z) is negative)
Important point
The difference between domestic spending and domestic production is
reflected in the balance of payments.
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.4 Measuring employment and unemployment
LO: Define the unemployment rate
13.4 MEASURING EMPLOYMENT AND
UNEMPLOYMENT
number of unemployed persons
100
Unemployment rate = ——————————————— x ——
workforce (available workers)
1
Strict definition – only those who have looked for work but not found any
Expanded definition – everyone who desires employment and does not
have a job
See Box 13-3 The informal sector (p. 267)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.5 Measuring prices: the consumer price index
LO: Define and interpret the consumer price index (CPI)
13.5 MEASURING PRICES:
THE CONSUMER PRICE INDEX
Prices and purchasing power
Purchasing power
The real value of money; what amount of goods or services can be bought
with one unit of money.
See Box 13-4 Index numbers (p. 269)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.5 Measuring prices: the consumer price index (cont.)
LO: Define and interpret the CPI
The consumer price index
• CPI : index of prices of representative basket of consumer goods
and services
•
Elements of CPI:
 basket
 weights
 base year
 formula
 price collection
• CPI serves as basis for measuring inflation
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.5 Measuring prices: the consumer price index (cont.)
LO: Define and interpret the CPI
Table 13-5 The South African consumer price index (all urban areas), 2017 and 2018
(December 2016 = 100), seasonally adjusted (p. 270)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.5 Measuring prices: the consumer price index (cont.)
LO: Define and interpret the CPI
Constructing a price index
By using the prices and the contents of the CPI basket it is possible to
calculate the CPI. The formula is:
Cost of basket in current period
* 100
Cost of basket in base period
Furthermore, note that a major purpose of the CPI is to measure inflation.
The inflation rate is the percentage change in the price level from one
year to the next. The inflation formula is:
(CPI of this year - CPI of the previous year)
* 100
CPI of the previous year
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.5 Measuring prices: the consumer price index (cont.)
LO: Define and interpret the CPI
Click on the numbers to reveal more
information
Click again to hide
See Box 13-5 Constructing a price index (p. 269)
Lets work through an example:
Year
Meat
Bread
Total cost
of basket
Qty (kg)
Price per
kilo
Total cost
of meat
Qty
(loaves)
Price per
loaf
Total cost
of bread
2012
4
R35
R140
10
R10
R100
R240
2013
4
R45
R180
10
R12
R120
R300
1
2
25%
Total cost of basket in 2013 (current period)
Calculate the total price per basket for each year.X 100
Total cost of basket in 2012 (base period)
2012 = (4 X R35) + (10 X R10) = R140 + R100 = R240
300
= 125,0
2013 = (4 X R45) + (10 x R12)X=100
R180
+ R120 = R300
240
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.5 Measuring prices: the consumer price index (cont.)
LO: Define and interpret the CPI
Changes in purchasing power
Purchasing power
The real value of money; what amount of goods or services can be
bought with one unit of money.
See Box 13-6 Changes in purchasing power (p. 271)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.6 Measuring the links with the rest of the world (balance of
payments)
LO: Explain the balance of payments
13.6 MEASURING THE LINKS WITH
THE REST OF THE WORLD
(BALANCE OF PAYMENTS)
• Summary of all transactions with the rest of the world
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.6 Measuring the links with the rest of the world (balance of
payments) (cont.)
Table 13-6 South Africa’s
balance of payments,
2017 and 2018
(R millions) (p. 273)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain the balance of payments
13.6 Measuring the links with the rest of the world (balance of
payments) (cont.)
Key elements
LO: Explain the balance of payments
Current account
A record of all the sales of goods and services
Current account
to the restaccount
of the world (exports), all the purchases
Financial
ofrecord
goods of
and
from the
rest of theinworld
A
allservices
international
transactions
assets
Unrecorded
transactions
(imports)
and
all the
income
receipts
and
liabilities
(i.e.
all primary
the purely
financial
flowsand
in
Financial account
Gold
and
foreign
reserves
All errors
and
occur in
compiling
payments
a omissions
country.
and
out ofof
a country,
like that
purchases
and
sales of
Assets
held
on
reserve
by
a
central
bank
in of
the
individual
components
of
the
balance
- Exports
assets
such(+)
as bonds and shares).
Unrecorded transactions
foreign currencies
and gold
Unrecorded
transactions ensure that
Imports
(–)
-payments.
Direct
investment
balance
of payments
balances.
Service
receipts
(+)
-the
Portfolio
investment
Gold and other- foreign
Serviceservices
payments (–)
Other
investment
- Income receipts (+)
- Income payments (–)
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.7 Measuring inequality: the distribution of income
LO: Explain the Lorenz curve and the Gini coefficient
13.7 MEASURING INEQUALITY: THE
DISTRIBUTION OF INCOME
Three of the measures used to calculate:
1. Lorenz curve
2. Gini coefficient
3. Quantile ratio
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.7 Measuring inequality: the distribution of income (cont.)
LO: Explain the Lorenz curve and the Gini coefficient
1. Lorenz curve
The Lorenz curve is a simple graphic device which illustrates the
degree of inequality in the distribution of income (or any other
variable).
Constructing a Lorenz curve
Click on the animation icon and
work through the steps
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.7 Measuring inequality: the distribution of income (cont.)
LO: Explain the Lorenz curve and the Gini coefficient
Click on the triangle to work through the
definition for the Gini coefficient. Click reset to
hide.
2. Gini coefficient
RESET
Gini coefficient =
area of inequality shown in the Lorenz curve
Area of the right angled triangle
formed by the axis and the line of equality
Gini index – Gini index = Gini coefficient x 100
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.7 Measuring inequality: the distribution of income (cont.)
LO: Explain the Lorenz curve and the Gini coefficient
3. Quantile ratio
Quantile ratio =
income received by the highest per cent of the population
income received by the highest per cent of the population
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
13.7 Measuring inequality: the distribution of income
LO: Explain the Lorenz curve and the Gini coefficient
The distribution of income in South Africa
See In the real world 13-1
South Africa’s international
sovereign credit rating (p. 277)
Gini
index
68
Gini
coefficient
0,68
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
IMPORTANT CONCEPTS
• Economic growth
• Production method
• Full employment/unemployment
• Expenditure method
• Price stability/inflation
• Income method
• Balance of payments (or external)
• Market prices
• stability
• Basic prices
• Distribution of income
• Factor cost
• Gross domestic product (GDP)
• Current prices
• Final and intermediate goods
• Constant prices
• Value added
• Nominal GDP
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
Important concepts (cont.)
• Real GDP
• Financial account
• Gross national income (GNI)
• Trade balance
• Net primary income payments
• Direct investment
• Consumption of fixed capital
• Portfolio investment
• Gross domestic expenditure
(GDE)
• Other investment
• Purchasing power
• Gold and other foreign reserves
• Specific index
• Gross reserves
• General (composite) index
• Net reserves
• Consumer price index
• Lorenz curve
• Balance of payments
• Gini coefficient
• Current account
• Gini index
Chapter 13 Measuring the performance of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
• Unrecorded transactions