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    of 27

    POME02-6

    Topic 2 (Chapter 5-Measuring the level of economic activity)


    Topic outline
    5.1 Measuring the level of economic activity: gross domestic
    product
    5.2 Other measures of production, income and expenditure
    Macroeconomic Objectives
    • There are 5 objectives that are important for economists:

    • Economic growth
    • Full employment
    • Price stability
    • External stability
    • Equitable distribution of income

    • To see if you have reached your objectives, you have to be able to


    measure it!
    Macroeconomic Objectives

    • In order to measure…
    • …economic growth, economists use
    the increase in economic activity. The amount of
    economic activity is expressed in GDP.
    • We will also look at measuring production, income and expenditure.
    • …full employment , economists use the unemployment rate.
    • …price stability , economists use the consumer price index.
    • …external stability, economists use the balance of payments.
    • …equitable distribution of income, economists use the Lorenz curve, Gini
    coefficient or the quantile ratio.
    Measuring the level of economic activity: Gross domestic product

    • Gross domestic product (GDP) is:


    • total value of all final goods and services
    • produced within the boundaries of a country
    • in a particular period (usually a year)
    • Gross means that economists do not subtract all the
    depreciation that happened to all capital goods in
    order to generate that year’s GDP. (Example: pot
    holes in roads, rust on machinery, equipment that
    broke)
    • In order to add different final goods together,
    economist use the prices of the goods and services.
    The prices express the value of the goods.
    Measuring the level of economic activity: Gross domestic product

    • Gross domestic product (GDP) is:


    • total value of all final goods and services
    • produced within the boundaries of a country
    • in a particular period (usually a year)
    • Note: Only FINAL goods are included in GDP, if all the
    goods needed to make bread and all the bread are
    counted, then there is DOUBLE COUNTING!
    • GDP is a geographical concept, that is why it is called
    “domestic”; it is only within one country.
    • The flow variable, GDP is measured over a certain
    time. GDP is only concerned with new goods and
    services; all production that happened in this year.
    Measuring the Level of Economic Activity:
    Gross Domestic Product

    Table 5-1 Calculating value added: a simple example of the production and distribution of
    bread
    Gross domestic product
    • There are three methods to calculate GDP:
    • The production method (use basic prices)
    Sum of all the values added in each step of the production
    line
    • The expenditure method (use market prices)
    Sum of all the final goods and services only
    • The income method (use factor costs)
    Sum of all the incomes earned by the factors of production in
    each step of the production line
    • All the methods should give the same answer. They
    just take different routes to get there!
    Gross domestic product (GDP)
    • The difference in market prices, basic prices and
    factor cost are due to various taxes and subsidies.
    • Indirect taxes makes market prices higher than basic
    prices/factor cost.
    • Subsidies have the opposite effect – make them
    lower.
    Gross domestic product (GDP)

    • GDP at factor cost (or income) – Impala, ACE,


    White Star
    + other taxes on production
    -̶ other subsidies on production
    = GDP at basic prices

    • GDP at basic prices – Pick n’ Pay, Makro,


    Shoprite
    + taxes on products
    -̶ subsidies on products
    = GDP at market prices – Final
    Consumer
    Gross domestic product (GDP)

    • GDP at market prices


    + subsidies on products
    -̶̶ taxes on products
    = GDP at basic prices

    • GDP at basic prices


    + other subsidies on production
    -̶̶ other taxes on production
    = GDP at factor cost (or income)
    Current Prices and Constant Prices

    • The difference between nominal and real GDP is the


    prices used to calculate the GDP.
    • Nominal GDP uses the prices of that particular year.
    • Real GDP uses prices in the base year in order to
    exclude the effects of inflation, meaning to only see
    how GDP grew due to an increase in PRODUCTION
    and not an increase in the price level.
    EXAMPLE

    2014 2015

    P Q P Q

    CD R15 1,000 R20 1,200

    Tape R5 2,000 R10 2,200


    EXAMPLE
    Nominal GDP in 2014 = (R15 x 1,000) + (R5 x 2,000)
    = R25,000
    Nominal GDP in 2015 = (R20 x 1,200) + (R10 x 2,200)
    = R46,000
    By how much did nominal GDP increase between
    2014 and 2015?
    From Year 2014 to Year 2015 the nominal GDP
    increases by?.
    EXAMPLE

    2014 2015

    P Q P Q

    CD R15 1,000 R20 1,200

    Tape R5 2,000 R10 2,200


    EXAMPLE

    Using Year 2014 as the base year – GDP is?

    Real GDP in 2014 = (R15 x 1,000) + (R5 x 2,000)


    = R25,000

    Real GDP in 2015 = (R15 x 1,200) + (R5 x 2,200)


    = R29,000

    Real GDP increases by 16% from 2014 to 2015.


    MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GROSS DOMESTIC PRODUCT

    GDP at current prices and constant prices, and nominal and real growth, 2006–2017

    Sources: South African Reserve Bank, Quarterly Bulletin, March 2018; South African Reserve Bank, Online
    statistical query (online download facility for historical macroeconomic time series information)
    5.2 Other measures of production, income and expenditure: GNI

    • Gross national income is equal to GDP


    • minus all the income foreigners in South Africa receives
    • plus all the income South Africans abroad receives
    • Domestic GDP refers to the borders of the country.
    • GNI = GDP-net primary income payments to the rest of the
    world (-if payments are larger & + if receipts are larger)
    • National GDP considers the nationality of the citizens,
    therefore all South Africans are included no matter where
    they live.
    OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE

    Expenditure on GDP
    The four major sectors of the economy:
    • consumption expenditure by households (C)
    • investment spending (or capital formation) by firms (I)
    • government spending (G)
    • expenditure on exports (X) minus expenditure on imports (Z).

    In symbols we can therefore write:


    GDP = expenditure on GDP
    GDP = C + I + G + X – Z
    OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE
    Expenditure on GDP

    Composition of expenditure on GDP in South Africa, 2017

    Source: South African Reserve Bank, Quarterly Bulletin, March 2018


    GDP vs GDE
    • GDP = expenditure on GDP
    • GDP = C + I + G + X – Z
    • Expenditure on GDP is always equal to GDP at market prices. It indicates the total
    value of spending on goods and services produced in the country. However, it does
    not indicate the total value of spending within the borders of the country.
    • The three central domestic expenditure items (C, I and G) do not distinguish between
    goods and services manufactured locally and those manufactured in the rest of the
    world (such as French wine, Italian shoes, Japanese CD players and German
    machinery).
    • These three items constitute gross domestic expenditure (GDE).
    • GDE indicates the total value of spending within the borders of the country. It includes
    imports but excludes exports, since spending on exports occurs in the rest of the
    world.
    • GDE = C + I + G
    • GDP = C + I + G + (X – Z)
    • GDE includes imports (Z) and excludes exports (X), while GDP includes exports (X) and
    excludes imports (Z).
    OT H E R M E A S U R E S O F P R O D U C T IO N , IN C O M E A N D E X P E N D IT U R E

    A summary of the basic national accounting


    totals

    GDE = C + I + G
    where C, I and G include imported goods and services.

    GDP at market prices = GDE + X – Z


    =C+I+G+X–Z

    GNI at market prices = GDP at market prices – net primary income


    payments
    OTHER MEASURES
    OTHER MEASURES

    D – depreciation
    FI – factor income from the rest of the
    world
    FP – factor payment to the rest of the world
    X – exports
    Z – imports (sometimes “M” is used)
    OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE
    A summary of the basic national accounting totals

    Table 5-4 National accounting totals in South Africa in 2017

    Source: South African Reserve Bank, Quarterly Bulletin, March 2018


    ACTIVITY
    Use the following data and calculate the country’s NNP @ market
    prices:
    Economic Variable R (million)
    VAT R18
    Pensions paid by government R61
    Personal income tax R25
    Remuneration to Mozambican labourers working in R52
    S.A.
    Depreciation(9% of Capital goods)
    Subsidies R23
    Capital goods R92
    Remuneration to S.A. citizens doing contract work in R23
    Iraq
    GDP @ market prices R955
    The end
    • Thank you.

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