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Chapter 13:
Measuring the
performance of
the economy
Learning outcomes
Measuring the economy is done by Statistics South Africa (StatsSA) and South African Reserve
Bank (SARB). It involves adding the total production of goods and services in a particular period.
• GDP (Gross Domestic Product) is the total value of all final goods and services produced
within the boundaries of a country.
• Nominal GDP-raw measurement of GDP using current prices.
• Real GDP- adjusts the value of GDP to price changes.
Measuring the level of economic activity:
gross domestic product
We have different sectors in the economy and all these contribute to the overall production in
the economy.
The output of one industry may be the input of the next industry and so caution needs be
taken so as to avoid double counting.
Therefore only the final goods/services produced, or much easily the value added by each
sector in producing the final product, is considered.
Final goods and services refers to the goods/services that have reached their final destination
e.g. the loaf of bread the shopkeeper sales to consumers. It is the final goods that are
considered in GDP calculations to avoid double counting.
• Three methods of calculating GDP
• The example we just did shows us three different ways/methods of calculation GDP and they
give the same answer. They measure the same thing at different points in the circular flow of
income.
1. Market prices are used usually when using the expenditure method:
GDP at market price= GDP at basic price + tax on products – subsidies.
2. Basic prices are normally used when the production method is used:
GDP at basic prices= GDP at market prices – tax on products + subsidies.
• Nominal GDP -raw measurement of GDP using current prices, face value, monetary value.
• Real GDP- adjusts the value of GDP to price changes, actual value, e.g. the purchasing
power of salary.
• Real GDP allows us to see the actual growth/change in output in an economy and not
change in prices.
• It is the one that will have meaning to measuring economic growth as it looks at actual
increase or decrease in value of output produced and not increase caused by inflation.
Other measures of production, income and expenditure
Gross national income (GNI) or gross national product (GNP)
GDP restricts the measurement of total production to the boarders of a country but we have some
foreign owned firms in SA and we also have SA owned firms in other nations.
If we subtract all income earned by foreign-owned factors of production in SA and add all income
earned by South African factors of production in other countries we get national income, i.e.
income of all permanent residents of the country and this is called GNI which is equal to = GNP.
GNI= GDP + profits, dividends and other incomes from investments abroad owned by SA citizens &
wages received by SA citizens working abroad - profits, dividends and other incomes made by
firms in SA owned by non-South Africans e.g. BMW, Unilever etc. & wages paid to foreigners
working in SA.
Expenditure on GDP
• The expenditure approach adds together spending by the different sectors in the economy:
• Households consumption spending C
• Firms spending on investment I
• Government spending G
Foreign sector (net exports) X-Z
The above gives us: GDP= C + I + G + X – Z
Gross domestic expenditure (GDE)
Expenditure GDP does not reflect the total value of spending within the borders of SA. GDE
will show us the spending that happened in SA:
-GDE= C+I+G whilst GDP= C+I+G+X-Z.
-GDP will show us net exports. GDE will only show us spending done within the borders of
SA. Note it also include imports since they are consumed within the borders of the country.
• Expenditure on GDP
Table 13-3 Composition of
expenditure on GDP in South
Africa, 2013
(Textbook page 243)
Box 13-5 Constructing a price index: a simple example (Textbook page 246)
The 4th macroeconomic objective is of Balance of payments (BOP) stability, i.e. the link of a
country with other countries.
Every country keeps a record of all its transactions with other countries in an account called
the BOP account compiled by the reserve bank.
Table 13-6 South Africa’s balance of payments, 2012 and 2013 (Textbook page 251)
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Measuring the links with the rest of the world: the balance of payments
• Current account
• Shows the rand value of goods exported and imported during a period, together with net
gold exports they give the trade balance.
• Services will be shown as service receipts and payments for services.
• Services includes transportation of goods and people, constructions, insurance, money
spent by tourists etc.
• We also have income receipts and income payments in the current account
• Income receipts is income earned by SA citizens in other countries (primary income from
the rest of the world) and income payments refer to all income earned by people in SA
that are not South Africans (primary income to the rest of the world).
• Income flows can be compensation of employees e.g. wages, and investment income e.g.
dividends or profits.
• The current account also has current transfers which includes social security contributions
and benefits, taxes imposed by government, immigrants remittances, gifts etc.
• These are money or goods transferred without anything being received in return e.g. a
Malawian man working in SA may send his family money back home this will be a current
transfer payment, if its coming into SA it is current transfer receipts.
Researchers use tax data and census information to try and see the distribution of income
and then use certain criteria to measure degree of equality/inequality.
2. Gini coefficient
• Another measure of inequality is called Gini ratio and is linked to the Lorenz curve.
• The Gini ratio is obtained by dividing the area of inequality shown by the Lorenz curve by
the area of a right triangle formed by the axes and the diagonal line which in our Lorenz
curve is triangle 0AB.
• The Gini coefficient ranges between 0 and 1 and when multiplied by 100 it gives the Gini
index varying from 0 to 100.
• If there is perfectly equal distribution of income the Gini ratio will be 0 in which case the
Lorenz line will be the same as the diagonal line.
• A higher Gini ratio means higher inequality.
3. Quantile ratio
• It is a ratio of the percentage of income received by the highest percent of the population to
the percentage of income received by the lowest percent of the population.
• E.g. top 20 per cent population receives 50 and lowest 20 receives 3 (table 13-7) the
quantile ratio will be 16,7 (50/3). The higher the ratio the greater the degree of inequality.
Measuring inequality: the distribution of income
• Lorenz curve