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Summary ECS1601 - Chapter 5
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ECS1601 - Chapter 5 Exam Summary
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CHAPTER 5MEASURING THE PERFORMANCE OF THE ECONOMY
Macroeconomic objectives
*List the 5 macroeconomic objectives
Economic Growth
o In a growing economy total production of goods and services increase.
If the population grows and there are no economic growth average
living standards cannot increase
Full employment
o Ideally all factors of production (especially labour) should be fully
employed
o Unemployment has costs to people personally and society
o One of the purposes of economic growth is to create additional
employment opportunities
Price Stability
o Does not mean all prices should always stay constant
o Individual prices should respond to supply and demand
o Process of general level price increases = inflation
o Price stability is keeping inflation as low as possible
Balance of payments stability (external stability)
o SA exports to foreign countries and also imports from foreign countries
o To pay for imports foreign currency needs to be earned
o Balance between imports and exports is required
o Balance of payments and exchange rate need to be fairly stable
Equitable (socially acceptable) distribution of income
o Partly subjective or normative issue
o Value judgements important
o Unequal distribution of income can cause political and social conflict
Measuring the level of economic activity: gross domestic
product
*Define GDP
Total value of all final goods and services produced within the boundaries
of a country in a period (usually one year)
How are different types of economic activity added up?
Value – Use prices of various goods and services to obtain value of production
Once production is expressed in Rands and Cents the total value of production
can be determined by adding different values together
Final – Distinguish between final and intermediate, the problem is double
counting which can easily overestimate of inflate the value of GDP
Example
Farmer produces 1000 bags of wheat at R10 per bag
Miller processes wheat into flour and sells to baker for R12 500
Baker bakes bread with flour and sells to shopkeeper for R18 000
Shopkeeper sell bread to final consumer for R21 000
, Participant Value of sales Value added
Farmer R10 000 R10 000
Miller R12 500 R2 500
Baker R18 000 R5 500
Shopkeeper R21 000 R3 000
Total R61 500 R21 000
Cannot add the value of sales together as the value of production of wheat
is included in the value of flour sold to the miller etc.
Concept of value added is then used
Value of the shop’s sales to final consumers amounts to R21 000, in other
words you only need to count the value of sales where good and service
reaches its destination
This cuts out intermediate goods which do not form part of GDP
Ultimate use of product determines whether its final or intermediate
Incomes – Consider only incomes earned during various stages of production by
the owner’s factors of production
Example
R10 000 earned during farming stage
R2 500 earned during milling stage
R5 500 earned during baking stage
R3 000 earned during final selling stage
A Total of R21 000
Income is earned by producing, that is, by adding value to goods and services.
Therefore, value added, spending on final goods and income all have the
same answer giving 3 ways to calculate GDP
Three Methods of calculating GDP
*Name the 3 methods to estimate GDP
Production method (value added)
Expenditure method (final goods and services)
Income method (incomes of factors of production)
Why do they yield the same answer?
Value of final goods and services must necessarily be made up of successive
values added in different stages
Production and income can be viewed as two sides of the same coin
Income earned by factors of production (labour, capital, natural resources
and entrepreneurship) consist of (wages, salaries, interest, rent and profit)
Total value of production = Total value of wages, salaries, interest, rent, profit
Value added (Production) = spending on final goods
Wages and Salaries R2 500
Rentals (buildings) R1 000
Interest on loans R500
Total R4 000
Baker’s entrepreneurial profit (revenue (R5 500) – payments (R4 000) = R1 500
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