Macroeconomics Notes
ECON1014
,DISCLAIMER:
These summaries are prepared with the intent to closely align with the content of the specified textbook. Full credit and
acknowledgment are given to the authors and publishers of the original textbook for the material on which these summaries
are based. All images are taken directly from:
Parkin, M. et al. (2020) Economics: Global and Southern African perspectives. 3rd edn. Cape Town, Western Cape:
Pearson South Africa.
While every effort has been made to ensure accuracy, the author of these summaries cannot guarantee that the
information contained herein is entirely free from errors or omissions. As such, no liability is accepted for any inaccuracies,
errors, or any resultant consequences arising from the use of this material.
Users are encouraged to refer to the original textbook for comprehensive understanding and to verify any information. Any
reliance you place on the content of these summaries is strictly at your own risk.
Be advised that the distribution of these notes via any platform, including but not limited to email, WhatsApp, AirDrop, or
any other digital means, leaves an identifiable trail. Unauthorized distribution or reproduction of these materials may be
considered a violation of plagiarism and copyright laws in South Africa. Perpetrators found involved in such actions are
liable to be prosecuted under the relevant legal provisions. Exercise caution and respect intellectual property rights.
Unauthorised dissemination/distribution of this document is strictly prohibited.
By downloading this document, the purchaser acknowledges and agrees to the following terms:
• The purchaser accepts full responsibility to refrain from distributing, sharing, or reproducing this document, in whole or
in part, without the express written consent of the author. Any unauthorized distribution is strictly prohibited.
• Should the purchaser be found distributing or enabling the distribution of this document, they acknowledge that they
may be subject to legal action. The author reserves the right to take legal recourse, including but not limited to initiating
court proceedings, against any individual or entity found in violation of these terms.
• Your download and use of this document indicate your acceptance of these terms and your understanding of the
potential legal consequences of non-compliance.
,CHAPTER 22
MEASURING GDP & ECONOMIC GROWTH
Gross Domestic Product
• Market value of final goods and services produced within a country in a given time period
• Market value:
- Value items at market value therefore prices at which items are traded in markets
• Final goods and services:
- Final good is an item that is bought by its final user during specified time period
- Different to intermediate good which is an items produced by one firm, bought by another and used as a
component of a final good/service
- Adding value of intermediate goods/services produced to final goods/ services = DOUBLE COUNTING
- Whether good is final or intermediate depends on its use
- Some goods neither final nor intermediate therefore not part of GDP eg. Shares, bonds, second-hand goods
• Produced within a country:
- Only goods/services produced within a country form part of country’s GDP
- Emphasis only on location of production activities not ownership of means of production
• In a given time period:
- Value of production measured in given time period
- Usually quarterly/annual GDP data
- GDP measured value of total production AND total income and total expenditure
- Equality between value of total production and total income is NB as it shows direct link between productivity and
living standards
- Standard of living improves when income increases but must produce more goods/services to earn more to buy
more goods/services
- Higher incomes and higher value of production are two aspects of same phenomenon = increasing productivity
GDP & Circular Flow of Expenditure
• Economy consists of households, firms, governments and rest of world, which trade in factor markets and goods/
services markets
• Households and firms
- Households sell and firms buy services of labour, capital, and land in factor markets
- For these factor services firms pay income to households
~ Labour = wages
~ Capital = interest
~ Land = rent
- Fourth FOP is entrepreneurship which receives profit
- Firm’s retained earnings (profits not distributed to households) are part of household sector’s income
- Retained earnings can be thought of as income households save and lend back to firms
- Aggregate income = total income
- Firms sell and households buy consumer goods/services
- Total payment for these goods/services = consumption expenditure
- Firms buy and sell new capital equipment in goods market
- Some of what firms produce is not sold thus added to inventory
- Purchase of new plant, equipment and buildings as well as additions to inventory = investment
, • Governments
- Buy goods/services from firms and this expenditure = government expenditure
- Finance their expenditure with taxes
- Make financial transfers to households eg. Social security grants for elderly, child support grants, subsidies to firms
- These taxes and financial transfers NOT part of circular flow of expenditure and income
• Rest of World
- Firms in SA sell goods/services to rest of world (exports) and buy goods/services from rest of world (imports)
- Value of exports (X) minus value of imports (M) = net exports
- If net exports positive: net flow of goods/services is from SA firms to rest of world
- If net exports negative: net flow of goods/services is from rest of world to SA firms
• GDP = Expenditure = Income
- GDP can be measured in two ways
~ Total expenditure on goods/services
~ Total income earned producing goods/services
- Total expenditure (AE), aggregate expenditure, equals Consumption (C) + Investment (I) + Government
expenditure (G) + Net exports (X - M) ie. sum of red flows
- Total income (Y), aggregate income, equals total amount paid for services of FOP used to produce final goods/
services such as wages, rent, profit ie. blue flow
- Because firms pay out as incomes (including retained profit) everything received from sale of its output thus
aggregate income (blue flow) equals aggregate expenditure (sum of red flows)
- Y = AE
Y = C + I + G + (X - M)
• Circular flow model is foundation on which national economic accounts are built
Gross and Domestic
• Domestic product is production within a country
- Contrasts related concept, national product, which is value of goods/ services produced anywhere in world by
residents of a nation
• GNP, Gross National Product, equals GDP + net income from FOP owned in other countries
• Gross is amount before subtracting depreciation of capital
• Opposite of gross is net which means after subtracting depreciation of capital
• Depreciation is decrease in value of firms’ capital that results from wear or tear and obsolescence
