Chapter 13: Measuring Economic Performance (2024) PDF

CHAPTER 13 Measuring the performance of the economy 1  Objective 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 conc...

CHAPTER 13 Measuring the performance of the economy 1  Objective 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. Explain the balance of payment. Explain a Lorenz curve and Gini Coefficient. 2  Introduction Measuring the performance of the economy allows us to tell how well the economy is preforming (i.e. has it improved, contracted or worsened), comparing economies, making informed macroeconomic decisions and developing appropriate macroeconomics policies. Remember macroeconomics deals with issues that concern the economy as a whole. For Example, Economic growth, Employment, general price level/inflation, aggregate/total demand and supply etc. (See box 1-3 on pg. 12) In this chapter therefore, we look at: Criteria used for measuring performance of the economy (macroeconomic objectives) How these criteria (or macroeconomic objectives) are measured. 3  The Macroeconomic Objectives There are 5 major macroeconomic objectives:  Economic Growth: Is the increase in total production of goods and services from one period to another (i.e. between years, months or quarters). GDP (Gross Domestic Product) is commonly used to measure economic growth.  Full Employment: Full employment does not mean zero unemployment. There is always a type of unemployment that is unavoidable (frictional unemployment). Unemployment has both economic, social, political and psychological effects. It should therefore be kept as low as possible.  Price Stability: Continuous increase in general price level which is referred to as inflation has numerous effect on the economy. Inflation therefore has to be kept as low as possible. Inflation is commonly measured using the Consumer Price Index  Balance of payment/External stability: BOP is the summary of transaction between a country and the rest of the world. Countries 4  interact with the rest of the world through export and import of goods and services; and financial flows.  Equitable distribution of income: Unequal distribution of income and wealth generates social and political unrest and affects development of the economy. Measuring the level of economic activities: Gross Domestic Product [GDP] GDP is the total value of all final goods and services produced within the boundary of a country in a particular period of time. GDP is a value – total value of all final goods and services are added by using the prices of the various goods and services. To avoid double counting and over estimating, only the value of the final goods is included in the GDP statistics. Note that the value of the intermediate good is not included. 5  GDP is sometimes referred to as Gross Value Added. Total Value Added is equal to Value of the final product. (Look at pg. 235 and table 13-1) Be able to calculate the value of sale at each level of production and the Total value added. GDP could also be calculated by adding all the income earned during the various stages of the production process. Note: the definition of GDP specifies what is included in the GDP statistics (i.e. value of the final products, products produced with a geographical area (country) and in a specific period. 3Methods of calculating GDP 1. The Production method (value added] – Total value of all final goods and services is calculated. 6 2. The expenditure method - spending on all the final goods and services is added (i,e. expenditure by households [c], investment expenditure by firms [I], Government expenditure [G] and Net export {X-Z] GDP = C + I + G + [X – Z} 3. The income method – income earning by all the FOP is added. Example salaries and wages, rent, interest, profits. But excluding transfer payments such as grants, old age pension.  Primary inputs include wages and salaries, rentals, interest, and profits. And secondary inputs are the intermediate goods.  GDP is a gross figure – meaning that the wear and tear on capital goods during production which is referred to as Depreciation or Consumption of fixed capital is not accounted for.  GDP – Depreciation = Net Domestic Product (NDP) – which is a more correct measure of economic performance. 7  Measurement at market price, basic price and factor cost (or income) These are the 3 sets of prices that can be used to calculate GDP. Market price used when calculating GDP using the expenditure method, basic price for production method and factor cost or factor income for income method. Look at what differentiates the 3 set of prices which are tax and subsidies [pg. 238]. GDP at market price –taxes on products + subsidies on products = GDP at basic price GDP at basic price – other taxes on production + other subsidies on production = GDP at factor cost. GDP at factor cost + other taxes on production – other subsidies on production = GDP at basic price GDP at basic price + taxes on products – subsidies on products = GDP at market price. 8  Measurement at current price and constant price GDP can also be measured at current prices referred to as NOMINAL GDP or at constant price which is referred to as REAL GDP. GDP at current price (nominal GDP). – is GDP measured using prices ruling at a particular period of time. For example, GDP of 2018 is calculated using price of 2018. See box 13-2 pg. 240. Where nominal GDP of 2005 is R145, calculated using price of 2005 and GDP 0f 2013 is R280, calculated using prices of 2013. GDP at constant Price (Real GDP) – is calculated using prices ruling in a certain year referred to as the base year. On box 13-2 the base is 2005 when calculating the Real GDP of 2013 – which is R155. Real GDP removes the effect of prices changes. Exercise 1. Calculate nominal and Real GDP given the following. Use 2018 as the base year. Use information on box 13-2 for guidance. 9  Nominal GDP 2010 Nominal GDP 2018 Real DP 2018 20 cars at R100 30 cars at R120 30 cars 40 computers at R50 35 computers at R65 35 computers 100 bananas at R10 110 bananas at R8 110 bananas Calculating Percentage change in GDP Calculating percentage change in GDP is basically calculating Economic growth rate. Remember economic growth is the percentage change in GDP from one period to the other (i.e. years, months or quarters) Example 1. Assuming that South Africa’s GDP increased from 250 billion in 2018 to R265 billions in 2019. Calculate the percentage change in GDP (economic growth) between 2018 and 2019. % change in GDP = GDP of 2019 – GDP of 2018 X 100% GDP of 2018 10  = 265 – 250 X 100% = 6% 250 This outcome shows that the economy grew by 6% between 2018 and 2019. Exercise 2. It is given that the GDP of the first quarter of 2020 was R400 billion and due to Covid-19 pandemic, the GDP figures fell to R380 billion in the second quarter of the year. Calculate the economic growth or the percentage change in GDP between the 2 quarters. Other measures of production, income and expenditure  Although GDP is the most commonly used measure of economic activity/production /performance of the economy, there other measures too.  Gross National Income (GNI) or gross National product (GNP)- This includes all income earned by all FOP owned by all the country’s citizens and permanent residents wherever they may be. 11   To calculate GNI/GNP,  we subtract from GDP all profits interest, dividend, and all other income from domestic investments which accrued to foreign residents; and salaries and wages of foreign workers in the country (Primary Income payments). We add to GDP all profits, dividend, interest, and all other income from investments abroad which accrued to the country’s citizens and permanent residences; and all wages and salaries earned by citizens and permanent residences of the country (primary income receipts) Pg. 242 Primary income payment – Primary income receipts = Net primary income payments. Therefore: GNI = GDP + Primary income receipts – Primary income payments OR (if payments are larger than receipts) GNI = GDP – Net primary income payment. Others measures cont. Some country’s GNI is larger than GDP when primary income receipts is greater than primary income payment. 12  Expenditure on GDP (GDE) – It indicates total value of spending on goods and services produced in the country (includes only domestic expenditure)  The 3 central domestic expenditure are spending by households [C], spending by firms [I] and government spending [G].  Therefore, GDE = (C + I + G) OR GDP – Net export (X – Z)  Remember GDP = C + I + G + (X – Z) OR GDE + (X – Z). - See table 13-3 Pg. 243 to calculate GDP. See table 13-4 Pg. 244 to calculate GDE, GDP and GNI. Example: Given the following information, calculate South Africa’s GDE, GDP and GNI of 2023. C = R20m I = R12m G = R10m X = R5m Z = R8m Primary income payment = R3m and Primary income receipts = R2,5m 13  Calculations of GDE, GDP &GNI GDE is GDP is : GNI is: GDE = C + I + G GDP = C + I + G + (X – Z) GNI = GDP – Net primary GDE = 20 + 12 + 10 GDP = 20 + 12 + 10 + (5 -8) income payment GDE = 42m GDP = 42 – 3 GNI = 39 – 0,5 GDP = 39m GNI = 38,5m EXERCISE 3. A national account of a small country is given as follows: Consumption spending = 10 500 Government spending = 3000 Depreciation = 500 Exports = 1200 Imports = 1000 Investment = 2200 Net primary income payment = 50 Calculate the country’s GDE, GDP, NDP (Net Domestic Product) and GNI. 14  Measuring Employment and Unemployment Unemployment occurs when people who are will and able, and are between 16 and 65 year actively seek and are unable to find jobs. Unemployment is often used as a measure of performance/health of the economy. Unemployment is measured using unemployment rate. Unemployment Rate is the number of people unemployed expressed as a percentage of the labour force. (labour force includes the employed + unemployed) Therefore, unemployment rate = (number unemployed /labour force) X 100% Example. Given that in 2019, South Africa’s labour force was 18m and the unemployed population were 5m. Unemployment rate of 2019 in South Africa would be: Unemployment Rate = Unemployed X 100 % Labour-force Unemployment rate = (5/18) X 100% =27,8% 15  Strict definition of Unemployment – Refers to those who are willing, able and actively looking for work, it excludes the discouraged workers. Discouraged workers are those who have given up looking for work. Broad definition of unemployment – Includes even those who have just a mere desire to find jobs. Measuring Prices: Consumer Price Index (CPI) When prices increase, it has a negative effect on the purchasing power of money (the real value of money decreases. Most commonly used measure of price changes is the consumer price index (CPI). CPI is an index of the prices of a representative basket of consumer goods. It represents the cost of a shopping basket of an average household in the country. See box 13-4 and 13-5 on how to calculate/constructing price index. Note that the CPI for the base year is always 100. Given the price index, we can calculate the percentage change in price (i.e. Inflation Rate) Inflation rate = CPI of year 2 – CPI of year 1 X 100% CPI of year 1 16  Example: Give that South Africa’s CPI increased from 125 in 2022 to 130 in 2023. Calculate the percentage change in price (inflation rate) between 2022 and 2023. Inflation rate = 130 – 125 X 100% 125 = 0,04 X 100% = 4% Exercise 4: Calculate Inflation rate if CPI increase from 160 to 176 the following year. See Table 13-5 Pg. 248 which also shows percentage changes in individual products. Measuring the links with the rest of the world A record of country’s transactions with rest of the world is referred to as a Balance of Payment (BOP). 17  BOP consists 4 components: current account, financial accounts, Gold and other foreign reserves, and the unrecorded transactions.  Current accounts: Records the value of exports and imports of goods and services.  Financial account: Records international transactions in assets and liabilities. Direct investments: Investor gains control or have meaningful say in the management of the business in which the investment is made. Which involves establishing a new business or acquiring shares in a business Portfolio investments: Involves an investor purchasing shares or bonds just for the purpose of financial returns from the investment. Other investments.  Gold and other foreign reserves: This is a portion of a country’s gold production and foreign currency reserve that is kept with the reserve bank.  Unrecorded Transaction: Entered to ensure that the BOP is actually balanced. It corrects for errors and omissions that may have occurred when compiling individual components of the BOP. See table 13-6 Pg. 251 for a structure of a BOP. 18 Measuring inequality: the distribution of income. The 3 measures of income distribution: Lorenz curve, Gini coefficient, and Quantile ratio. Lorenz Curve: Named after Max Lorenz who developed it.  Lorenz curve is a graphical illustration of the degree of inequality in the distribution of income or any other variable.  See table 13-7 and fig 13-1 for construction and an example of Lorenz curve.  On fig. 13-1, the diagonal OB is the point of reference – indicating perfectly equal distribution of income.  The degree of inequality is shown by the deviation from the diagonal (i.e. the further away the Lorenz curve is from the diagonal the greater the level of inequality and vice versa.  Shaded area on Fig. 13-1 is the area of inequality. – Gini Coefficient: It is obtained by dividing the area of inequality as shown by the Lorenz curve by the right angled triangle OAB on fig. 13-1.  Gini Coefficient = Shaded area Triangle 0AB  Gini coefficient varies from zero to 1 or zero to 100  Gini Coefficient of zero indicates a perfect equality – income is shared equally among the population. 19   1 or 100 is perfect inequality – one person has all the country’s wealth/income.  Note: the greater the Gini coefficient the greater the level of inequality and vice versa. Quantile ratio: Is obtained by dividing the income earned by the top 20% of the population by the income earned by the bottom 20% of the population.  The higher the ratio the greater the degree of inequality. Important message Please note that this is just a summary of the chapter and must be used in conjunction with the textbook. Ensure that you do the exercises given on each section as well as the ones on the learner guide. THANK YOU 20