Chapter 13 Measuring Economic Performance (NWU)

Faculty of Economic and Management Sciences CHAPTER 13 Measuring the performance of the economy Text Book pp. 103 - 119  LECTURE OUTCOMES Once you have studied this chapter you should be able to: dis...

Faculty of Economic and Management Sciences CHAPTER 13 Measuring the performance of the economy Text Book pp. 103 - 119  LECTURE OUTCOMES Once you have studied this chapter you should be able to: distinguish between microeconomics & macroeconomics. explain the five main macroeconomic objectives and discuss the South African macro economy. understand the uses of National Income Accounts. define GDP and how it is measured/calculated. apply the three methods of calculating GDP. distinguish between real GDP and nominal GDP. WHAT IS MACROECONOMICS? It is the study of economic aggregates or the “big picture” i.e. It studies the economy as a whole. Thus, with macroeconomics we deal with national economic goals such as total output, economic growth, total employment, inflation, BOP trade deficits, distribution of income and economic growth. The difference between microeconomics and macroeconomics is in “I” and “A”. I for individual (micro) and A for aggregate (macro). WHY STUDY MACROECONOMICS? 1. To measure the health of the whole economy. - in terms of the 5 macroeconomic objectives. 2. To guide government policies. - The right remedial policies are informed by the state of the economy. 3. To assess quality and effectiveness of government policies. - Policy makers can determine whether policies that were implemented in the past were effective or not. 4. Macroeconomics affects society`s well-being. - Many of the societal ills or challenges in South Africa today are a direct consequence of poor macroeconomic performance. WHY MEASURE THE ECONOMY? In the past, the South African national accounts were compiled by Statistics South Africa (Stats SA) and South African Reserve Bank (SARB). Since 2016, the function has exclusively been performed by Stats SA. Five Macroeconomic Objectives 1. ECONOMIC GROWTH 1st step is to determine gross domestic product (GDP). Gross domestic product (GDP) is the market value of all final goods and services produced within the boundaries of a country in a given period of time (usually a year). Economic growth is the rate at which a nation`s real GDP changes/grows from year to another. Nominal GDP is GDP calculated using the prevailing market or current prices. Real GDP is GDP adjusted for inflation by using constant prices (2010 prices) in order to capture the actual volume/quantity of output and services produced. MACROECONOMIC OBJECTIVE 1 An Overview of South Africa`s GDP (OECD) YEAR Annual Growth rate (%)  2018 1,5% 2019 0,3% 2020 -6,3% 2021 4,9% 2022 2% SOUTH AFRICA`S MACROECONOMIC OUTLOOK FIGURE 1: REAL GDP ANNUAL GROWTH RATE FOR SOUTH AFRICA GDP Annual Growth 4.9 GDP ANNUAL GROWTH RATE 2.0 1.5 2018 0.3 2019 2020 2021 2022 -6.3 YEARS  Is GDP a good economic barometer for measuring the living standards of people? Discuss  MACROECONOMIC OBJECTIVE 2 2.FULL EMPLOYMENT WHAT IS UNEMPLOYMENT? Structural, Seasonal, Frictional, Cyclical MACROECONOMIC OBJECTIVE 2 2. UNEMPLOYMENT - It is an economic phenomenon in which a person who is actively looking for employment is unable to find work. - Unemployment rate is the number of unemployed people as a percentage of the total labour force. - There are 4 types of unemployment to be covered in detail in chapter 21 (Structural, Cyclical, Seasonal, and Frictional). - Calculation of unemployment rate, the socio-economic effects of, and remedial policies for unemployment to be covered in detail in chapter 21. This shall be discussed in detail in chapter 21. SOUTH AFRICA`S MACROECONOMIC OUTLOOK FIGURE 4: UNEMPLOYMENT RATE FOR SOUTH AFRICA Unemployment Rate (total labour force) 28.77 28.84 UNEMPLOYMENT RATE 25.54 24.22 24.34 2018 2019 2020 2021 2022 YEARS  MACROECONOMIC OBJECTIVE 3 3. PRICE STABILITY (INFLATION) WHAT IS INFLATION? R200 R200 R200 INFLATION Inflation is a continuous and considerable increase in prices in general. – It is a process of rising prices. the inflation rate is measured as a percentage change in the average level of prices or the price level. it is the change in the Consumer Price Index (CPI) Inflation target range is 3 – 6 % in South Africa. Hyper-inflation is an extreme form of inflation – An inflation rate of 50% per month. YPER-INFLATION YPER-INFLATION Nov 1918: 1 mark Nov 1922: 163marks Sep 1923: 1,500,000marks Nov 1923 : 200,000,000,000 marks SOUTH AFRICA`S MACROECONOMIC OUTLOOK FIGURE 3: INFLATION RATE (CPI) FOR SOUTH AFRICA CPI 7.0 Consumer Price Index 4.5 4.6 4.1 3.2 2018 2019 2020 2021 2022 YEARS  INFLATION Measurement of inflation, effects and causes of inflation, and remedial policies for combating inflation to be covered in detail in chapter 20. This shall be discussed in detail in chapter 20.  MACROECONOMIC OBJECTIVE 4 4. Balance of Payment (BOP) (External Stability) The BOP is a set of accounts that record all international financial transactions made by a country`s residents with the rest of the World. The BOP consists of two accounts: The Current / Trade account and the Financial account. The current account (CA) records all sales of goods & services to the rest of the world (exports) and all purchases of goods & services from the rest of the world (imports). - A trade surplus  that exports > imports (net exports > 0) - A trade deficit  that exports < imports (net exports < 0)  MACROECONOMIC OBJECTIVE 4 The financial account (FA) records all international transactions in assets and liabilities. The financial account has 3 main components: Direct investment, Portfolio investment, Other investment. For more insights regarding these components visit page 251 – 252. - A surplus  that inflows > outflows (net capital inflow) - A deficit  that inflows < outflows (net capital outflow) CA balance + FA balance = BOP balance  MACROECONOMIC OBJECTIVE Ways to Correct4a Trade Deficit 1. Import Controls - Import quotas and tariffs 2. Import Substitution - Local production of imported products for self reliance. 3. Exchange rate devaluation - The downside is that it could result in high inflation via high import prices. 4. Export promotion - Government may provide credit & incentives and tax concessions to exporters.  MACROECONOMIC OBJECTIVE 5. EQUITABLE DISTRIBUTION OF INCOME  Equitable Distribution of Income Income inequality refers to the extent to which income is distributed unevenly among individuals or households. South Africa has one of the most unequal distribution of income in the World. See previous slide. Three measures are used to measure income inequality: Lorenz curve Gini coefficient Quantile ratio For more details about each of these measures read pages 252 – 254. MEASURING INEQUALITY: THE DISTRIBUTION OF INCOME Three of the measures used to calculate: 1) Lorenz curve 2) Gini coefficient 3) Quantile ratio MEASURING INEQUALITY: THE DISTRIBUTION OF INCOME 1) Lorenz curve The Lorenz curve is a simple graphic device which illustrates the degree of inequality in the distribution of income (or any other variable). MEASURING INEQUALITY: THE DISTRIBUTION OF INCOME 2) Gini coefficient. Gini coefficient = area of inequality shown in the Lorenz curve Area of the right angled triangle formed by the axis and the line of equality Gini index Gini index = Gini coefficient x 100 MEASURING INEQUALITY: THE DISTRIBUTION OF INCOME 3) Quantile ratio income received by the highest per cent of the population Quantile ratio = income received by the lowest per cent of the population MEASURING INEQUALITY: THE DISTRIBUTION OF INCOME The distribution of income in South Africa (2023) Gini index 63 Gini coefficie nt 0,6 3  BRIEF ASSESSMENT Macroeconomics is a branch of economics 1 that studies A the determination of total economic activity. the behaviour of individual decision-making units in B the economy. the effects and consequences of the aggregate C behaviour of all decision-making units. D both A and C Which of the following does not represent a 2 key macroeconomic variable? A both inflation and unemployment rate B Income distribution C Economic growth D Population growth rate  BRIEF ASSESSMENT Since 2016, the South African National 3 Accounts are compiled by A National Treasury B National Treasury & South African Revenue Services (SARS) C Statistics South Africa (Stats SA) Statistics South Africa (Stats SA) & South African Reserve D Bank (SARB) The market value of all final goods and 4 services produced in a country during a particular year is called the A Gross national income B Gross domestic product C Net domestic product D Total domestic product  BRIEF ASSESSMENT If there is a deficit on a country`s current 5 account it means that during that period A the value of imports exceeded the value of its exports B the value of exports exceeded the value of its imports C there was net inflow of foreign capital D there was net outflow of foreign capital If a country`s financial account is in surplus it 6 means that during the period under review A the value of imports exceeded the value of its exports B the value of exports exceeded the value of its imports C there was net inflow of foreign capital into the country D capital outflows exceeded capital inflows.  BRIEF ASSESSMENT Which of the following is GDP measured in 7 actual market prices? A Actual GDP B Potential GDP C Nominal GDP D Real GDP Which of the following is GDP calculated in 8 constant / invariant prices? A Actual GDP B Potential GDP C Nominal GDP D Real GDP  BRIEF ASSESSMENT 9 Inflation is a ________. A process of rising prices B process of falling prices C minor change in the price level D large, one-time increase in the price level 10 ________ occurs when prices decline. A Inflation B Hyperinflation C Deflation D Disinflation  BRIEF ASSESSMENT Which one is not a method for measuring 11 /calculating GDP? A Expenditure approach B Income approach C GDP deflator approach D Production / Valued-Added approach GDP at ________ prices will usually be greater 12 than GDP at ________ prices because of ________. A constant; current; inflation B current; constant; inflation C current; constant; depreciation D current; constant; depreciation  BRIEF ASSESSMENT 13 Exports minus imports equals ________. A GDP B CPI C Inflation D Net exports 14 The unemployment rate is ________. A total number of people unemployed in the economy. B the percentage of the population that is unemployed. C the percentage of the labour force that is unemployed. D none of the above MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP  MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Defining GDP The gross1 domestic product is the total value2 of all final3 goods and services produced within the boundaries of a country4 in a particular period5 (usually one year). 1 Gross: No provision for depreciation, consumption of capital 2 Value: expressed in terms 3 goods and services: value added: to avoid double countin Final 4 Geographic aspect: within a country’s boundaries 5 CurrentClick production: during on the corresponding a particular numbers to examine theperiod elements of the definition Click again to hide MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Defining GDP GDP = C + I + G + (X – Z) Investment Exports Imports Consumption Government spending MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Three methods of calculating GDP 1 Production method (value added) 2 Expenditure method Expenditure (final(final method goodsgoods and services) and services) 3 Income Income method (income The expenditure method method of the factorsGDP (incomeestimates of production) of the factors byof adding up all the components of final demand. To avoid double production) Why docounting they yield the only same the answer? on final goods and expenditure The income services method (e.g estimates the bread) shouldGDP by adding up be considered. all Uses The three the methods incomes market essentially (rent, interest, prices. wagesmeasure the & profits) same received thing, by the albeit FOP. at Usesdifferent points in the circular factor cost. flow. MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Three methods of calculating GDP One of the major problems that national accountants have to deal with is the problem of double Add the totals o counting. each sale: R10 000 An example + R12 500 A farmer produces 1 000 bags of wheat which he + R18 000 sells to a miller at R10 per bag, yielding a total of + R21 000 R10 000. = R61 500 The miller processes the wheat into flour, which he then sells to a baker for R12 500. After baking bread with the flour, the bakerYou sells itconsider the need to ? to a shop for R18 000. value add for each The shop subsequently sells the bread totransaction final consumers for R21 000. What is the value of these four transactions MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP What is the value add? The amount by which the value of the firm’s products exceeds the value of the goods and services the firm purchases from other firms at each stage of production. MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Three methods of calculating GDP Let us look at each method: 1 Production method This method estimates GDP by adding up the contribution of each stage to GDP. A farmer After The miller shop baking produces subsequently processes bread 1 with 000 thesells the wheat bags flour, the ofinto Value A added wheat flour, the bread baker which to which final sells he he consumers it then sells to asells to shop a for to miller for aR21 baker R18at R10 000 B R10R12 for 000. per500. bag, yielding a total of R10 R2 500 C 000. R5 500 Value added = R21 R12 000 R18 500 – R18 R10 000 R12 500 R3 000 D His value added is R10= 000 R2 000 R5 R3 500 R21 000 Calculate the total value added by E adding up the value added per RESET stage MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Three methods of calculating GDP 2 Expenditure method The expenditure method estimates GDP by adding up all the components of final demand. This is the sum of the spending by households, firms, the government and the ROW on final goods and services produced in the domestic (SA) economy. Or The expenditure approach measures GDP as the sum of consumption expenditure, investment, government purchases of goods and services, and net exports. GDP = C + I + G + (X – M) MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Three methods of calculating GDP 3 Income method The income method estimates GDP by 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. MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Measurement at market prices, basic prices and factor cost (or income) The three sets of prices that can be used to calculate GDP Market prices (used in expenditure 1 method) Basic prices (used in production 2 method) Factor cost (used in income 3 method) MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Measurement at market prices, basic prices and factor cost (or income) GDP at market prices GDP at factor cost (or income) – taxes on products + other taxes on production + subsidies on products – other subsidies on = GDP at basic prices production = GDP at basic prices GDP at basic prices GDP at basic prices + other subsidies on production + taxes on products – other taxes on production – subsidies on products = GDP at factor cost (or = GDP at market prices income) MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Measurement at current prices and at constant prices Measurement always first at current prices (nominal GDP) During inflation, adjustments for price increases required − nominal GDP converted to real GDP − use prices in a base year (constant prices) GDP at current prices = nominal GDP (reflects price changes) MEASURING THE LEVEL OF ECONOMIC ACTIVITY: GDP Measurement at current prices and at constant 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 See Box 13-1: Nominal values, real values and purchasing power (Textbook page 239) OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE Gross National Income or 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 South Africans OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE Gross national income or gross national product GNI (= GNP) = GDP all income earned in South Africa by foreign factors of production all income earned by South African factors of production in the rest of the world OTHER MEASURES OF PRODUCTION, INCOME AND The elements EXPENDITURE of total spending Expenditure on GDP consumption Let’s recap: expenditure by households Three approaches to calculating the GDP (C) investment The four major sectors of the economy spending (or capital The elements of total spending formation) by The four major sectors of the economy firms (I) Households government Firms spending (G) Government expenditure Foreign sector on exports (X) minus expenditure OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE EXPENDITURE ON GDP CONTINUED GDP = expenditure on GDP =C+I+G+X–Z Table 13-3 Composition of expenditure on GDP in South Africa in 2013 OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE Expenditure on GDP Gross domestic expenditure (GDE) GDP = C+I+G+X–Z = GDP at market prices Gross domestic expenditure (GDE) = total value of all spending in South Africa = 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 OTHER MEASURES OF PRODUCTION, INCOME AND EXPENDITURE Relationship between GDE and GDP GDE = C + I + G GDP = C + I + G + X – Z Thus: GDP = GDE + (X–Z) If GDP > GDE, then X > Z (ie (X–Z) is positive) If GDP < GDE, then Z > X (ie (X–Z) is negative) Important point The difference between domestic spending and domestic production is reflected in the balance of payments.  See Print-out / Next 2 slides QUESTION 1: COMPUTE GDP USING THE EXPENDITURE APPROACH QUESTION 2 COMPUTE GDP USING THE EXPENDITURE APPROACH & INCOME APPROACH. (RECONCILE) THE SOLUTION IS R388 USING BOTH METHODS.  EXPENDITURE APPROACH: Question 1 R` Item Descriptions millions South Africa`s Exports of Goods and Services 53.4 Consumption of Fixed Capital (Depreciation) 35.4 Government Purchases 178.2 Net Private Domestic Investment 156.3 South Africa`s Imports of Goods and Services 49.5 Personal Taxes 121.5 Net Foreign Factor Income Earned in South 6.6 Africa Personal Consumption Expenditures 657.3 1.1 Using the expenditure approach compute GDP. 1.2 Hence compute GNP.  EXPENDITURE & INCOME APPROACH Question 2 R’ TABLE 2 ITEM DESCRIPTION MILLIONS Personal consumption expenditures 245 Net foreign factor income earned 4 Transfer payments 12 Rents 14 Consumption of fixed capital 27 Interest 13 Proprietors’ income 33 South Africa`s imports of goods & services 9 South Africa`s exports of goods & services 20 Compensation of employees 223 Indirect business taxes 18 Corporate profits 56 Government purchases 72 Net private domestic investment 33 Statistical discrepancy 8