Ch13-22 + Chain reactions. Ch 13 - Measuring the performance in the economy, Ch 14- The monetary sector, Ch 15- The government sector, Ch 16- The Foreign sector, Ch 17- Simple Keynesian Model of the economy, Ch 18- Keynesian Model with government and foreign sector, Ch 19- More on macroeconomic the...
EECF 1625: Ch13- measuring the performance of the economy.
Micro-field that looks at behaviours of indiv (individual) HH, and companies.
Macro- takes a wider view and looks at the economy. on a larger scale, national/global
Macroeconomics objectives: judge the performance of the economy.
1. Economic growth- ↑capacity of an economy to produce g+s (goods and services), compared from different time
periods. An outward shift of the PPC _growth in potential output_ can illustrate economic growth. Economic
growth is affected by the balance between the production of capital and consumer goods in an economy. ↑ In
the production of capital goods ↑ the overall economy's potential output, which in turn creates > potential
production of consumer goods in the future - necessary condition for ↑ employment opportunities.
2. Full employment- where all a country's factors of production (especially labor) are fully employed, when all the
production is being used. Unemployment- measured as a number of those who are not working, + are looking
for work and are available to work at any one time. Has a serious cost for people + society at large.
3. Price stability- obj (0bjective) keeping inflation as low as possible. (Inflation: a process where prices of goods
tend to ↑ from one year to the next)
4. Balance of payments stability- record of a country's transactions with the rest of the world, kept by that country.
The S.A. balance of payments summarizes the transactions between SA households, firms and gov and foreign
HH, firms and gov during a particular period (usually a year). Kept by agency. The S.A. Reserve Bank records
transactions in S.A, with the SARS providing much of the info.
5. Equitable distribution of income- The way personal income is divided between indiv’s and HHs in a society.
A socially acceptable and fair spread of personal income between indiv’s and HH in a society. A subjective
(normative) issue.
MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GROSS DOMESTIC PRODUCT (GDP)
Step 1: measuring economic growth determines a country’s total production of g+s 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).
central concept = the gross domestic product (GDP).
The gross (No provision for depreciation, consumption of capital) domestic product is the total value (expressed
in terms) of all final (goods used/consumed by consumers) (value added: to avoid double counting) goods and
services produced within the boundaries of a country in a particular period (usually one year).
Value added: The amount by which the value of the firm’s products exceeds the value of the g+s the firm
purchases from other firms at each stage of production.
GDP = C (consumption)+ I (investment)+ G (gov spending) + (X(exports) – Z(imports)) > spending
3 ways of calculating GDP:
1. Production method: (value added by participants in the production process) Uses basic prices. GDP calculated
using this method = Gross Value Added (GVA).
2. Expenditure method: final g+s only) Uses market prices. The sum of the spending by HH, firms, and the gov on
final goods and services produced in the domestic (SA) economy.
3. Income method: (incomes of the factors of production) Uses factor cost. 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.
(The three methods essentially measure the same thing, albeit at different points in the circular flow.)
Measurement at market prices, basic prices, and factor cost (or income):
1. Market prices (expenditure method) price at which a g/s can be bought/sold. Signals of scarcity indicate to
consumers what they need to sacrifice to buy a g/s while at the same time indicating to the owners of the
1
, factors of production how to use these factors best. Determined by supply + demand Including taxes and
subsidies. In contrast to basic prices and factor costs.
2. Basic prices (production method) The price at which a g/s can be bought/sold, excluding all taxes and
subsidies. In contrast to market prices and factor costs.
3. Factor cost (income method) The sum of all the costs of the factors of production used in the production of
a g/s. excludes the effects of taxes and subsidies, in contrast to market prices and basic prices.
Measurement at current/nominal (in terms of the name) prices and at constant/real(actual/essential) prices:
• GDP at constant prices = real GDP (excludes price changes)
• In base year: real GDP = nominal GDP OR GDP at constant prices = GDP at current prices
• One period to the next = growth in GDP
• Nominal/current GDP= price increase/ inflation
Real GDP = quantity of this year × the price of base year.
OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE:
Gross national income- indication of the national income, income of all permanent residents of a country/ 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 SA.
• GNI (= GNP) = GDP (production must take place on SA soil)
- all income earned in South Africa by foreign factors of production.
+ All income earned by SA factors of production in the rest of the world.
expenditure on GDP = C + I + G + X – Z = GDP @ market prices
Gross domestic expenditure (GDE) = total value of all spending in SA= 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
Relationship between GDE and GDP
• GDE = C + I + G THUS: GDP = GDE + (X–Z)
GDP = C + I + G + X – Z If GDP > GDE, then X > Z (ie (X–Z) is +)
If GDP < GDE, then Z > X (ie (X–Z) is - )
# The difference between domestic spending and domestic production is reflected in the balance of payments.
Measuring unemployment rate: (Ratio) %
2
,Strict definition – only those who have looked for work but have not found any.
Expanded definition – everyone who desires employment and does not have a job (discouraged)
Measuring prices: the consumer price index (prices and purchasing power)
-Purchasing power: The real value of money: what number of goods/services can be brought with one unit of money.
Consumer price index (CPI)- index of prices of a representative basket of consumer goods + services.
ELEMENTS: Basket, weights, base year, formula, price collection (CPI serves as the basis for measuring inflation)
Construction of a price index; use the prices and the contents of the CPI basket to calculate the CPI.
-Formula:
The major purpose of CPI = measure inflation
Inflation rate- % change in the price level from one year to the next (↑ inflation ↓ purchase power)
-Formula:
Measuring the links with the rest of the world (balance of payments)- summary of all the transactions with the rest of the
world.
BALANCE OF PAYMENT: balance between imports and exports of a country that is required (foreign currency earning
exports are required to pay for imports necessary for the country) The balance of payments and exchange rates should
be stable.
Key elements:
o Current account- A record of all the sales of g+s to the rest of the world (exports), all the purchases of g+s from
the rest of the world (imports), and all the primary income receipts and payments of a country [Exports (+),
Imports (–), Service receipts (+), Service payments (–), Income receipts (+), Income payments (–)]
-Surplus= value exports > value imports; deficit= value exports < value imports
(Trade balance = exports-imports)
o Financial account- A record of all international transactions in assets and liabilities (i.e. all the purely financial
flows in and out of a country, like purchases and sales of assets such as bonds and shares). Eg Direct
investment, Portfolio investment, other investment
-Surplus= inflow of funds > outflow; deficit= inflow of funds < outflow
o Unrecorded transactions- All errors and omissions that occur in compiling the individual components of the
balance of payments. Unrecorded transactions ensure that the balance of payments is balanced.
o Gold and other foreign reserves- Assets held on reserve by a central bank in foreign currencies and gold.
Measuring inequality: the distribution of income
1. Lorenz curve
2. Gini coefficient
3. Quantile ratio
3
, Lorenz curve is a simple graphic device that illustrates the degree of inequality in the distribution of income (or
any other variable).
Gini coefficient - a measure of inequality in the distribution of income that is obtained by dividing the area of
inequality shown by the Lorenz curve by that area of the right-angled triangle formed by the axes and the
diagonal (the line of inequality). Varies between 0 and 1, where 0 represents perfect equality and 1 represents
perfect inequality.
Gini index= Gini coefficient ×100
Quantile ratio:
4
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