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.
• discuss whether GDP is a good measure of economic
well-being.
• explain the Lorenz curve and the Gini coefficient.
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
wholemeasure
economy. the health of the
- in terms
macroeconomic of the
objectives. 5
2.
- ToThe
guide government
right remedial policies.are
policies
informed
economy. by the state of the
3. To assess
effectiveness quality
of government and
- policies.
Policy makers can that
determine
whether
implemented policies were
in the past were
effective or not.
4. Macroeconomics
society`s well-being. affects
- Many of thein societal
challenges South ills or
Africa
today
consequence are ofa direct
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.
• 1 st ECONOMIC
step is GROWTH
to determine gross domestic
product (GDP).
• Gross
market domestic
value of product
all (GDP)
final goods is and
the
services
boundaries produced
of a country within
in a the
given
period of time (usually a year).
• Economic
a nation`s growth
real GDPis the rate at which
changes/grows
from year to another.
• Nominal
using the GDP is GDP
prevailing market calculated
or current
prices.
• Real
inflation GDPby is
using GDPconstant
adjustedpricesfor
(2010
actual prices) in order to
volume/quantity of capture
output the
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.
- It UNEMPLOYMENT
is an economic phenomenon in whichfor
a
person who is actively
employment is unable to find work. looking
- Unemployment
unemployed rate as
people is athe number of
percentage of
the total labour force.
- There
coveredare in 4detail
typesinofchapter
unemployment
21 to be
(Structural,
Cyclical, Seasonal, and Frictional).
- Calculation
socio-economic of unemployment
effects of, and rate, the
remedial
policies forchapter
in detail in unemployment
21. to be covered

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
• Inflation target range is 3 – 6 %(CPI)
in South Africa.
• Hyper-inflation is an extreme
form of inflation – An inflation
rate of 50% per month.
HYPER-INFLATION
HYPER-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
 MACROECONOMIC
OBJECTIVE 5

In SA the richest 1% of the population has 42% of

the total wealth – (Oxfam, 2017)

The wealth of 3 SA billionaires is equal to that of the

bottom half of the country's population – (Oxfam, 2017)
 Equitable Distribution of Income
• Income
extent to inequality
which incomerefers
is to the
distributed
unevenly
households.among individuals or
• South
unequalAfrica has one
distribution of of the inmost
income the
World. See previous slide.
• Three
measure measures
income are used to
inequality:
Lorenz curve
Quantile ratio Gini coefficient
• For more details
measures about252
read pages each of these
– 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 highest per cent of the population
MEASURING INEQUALITY: THE DISTRIBUTION OF INCOME

The distribution of income in South Africa (2023)

Gini
index

63
Gini
coefficient

0,63
 BRIEF ASSESSMENT
Macroeconomics is a branch of economics that
1 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 services
4 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
12 greater 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
CALCULATING GDP

1.EXPENDITURE APPROACH

2.INCOME APPROACH

3.PRODUCTION (VALUE-ADDED) APPROACH

 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
Item Descriptions R` 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 Africa 6.6
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
Next Lecture: Unit 2
ECONOMIC GROWTH
 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 Final goods and services: value added: to avoid double counting

4 Geographic aspect: within a country’s boundaries

5 CurrentClick
production: during
on the corresponding a particular
numbers period
to examine the 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
Productionmethod
method(final goods
(value and services)
added)
This method estimates GDP by adding up the contribution of each
3 Income method
industry
Expenditureto GDP.(income
method of the
To avoid
(final factors
double
goods ofservices)
production)
counting,
and the contributions are
measured in terms of value added. Uses basic prices.
The
do expenditure
WhyIncome theymethod
yield the method estimates
same answer?
(income of GDPofbyproduction)
the factors adding up all the
components of final demand. To avoid double counting only the
expenditure
The The income
three methods on essentially
final estimates
method goods measure
andGDP
services
by (e.g
adding
the same the
up bread)
all the
thing, should
at be
incomes
albeit
considered.
(rent,
different points Uses
interest,
in themarket
wages prices.
& profits)
circular flow.received by the FOP. Uses factor
cost.
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 counting.
Add the totals of ea
An example sale:
• A farmer produces 1 000 bags of wheat which he sells to a R10 000
miller at R10 per bag, yielding a total of R10 000. + R12 500
• The miller processes the wheat into flour, which he then sells + R18 000
to a baker for R12 500. + R21 000
• After baking bread with the flour, the baker sells it to a shop = R61 500
for R18 000.
• The shop subsequently sells the bread to final consumers for
R21 000. You need to consider the value

?
add for each transaction
• 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 with
1 the
000sells
the
wheat
bagsflour,
the
ofinto
bread
wheat
theflour,
baker
to Value added
A
final it
which
sells consumers
he
to athen
sells
shopto
sells
for
for
a miller
to
R21
R18a baker
000.
000.
at R10
forper
R12bag,
500. R10 000
B yielding a total of R10 000. R2 500
C Value added = R21 R12 000
R18 500 – R18
R10 000
R12 500 R5 500
His value added is R10 000 = R3 R2 000
R5 500 R3 000
D R21 000
Calculate the total value added by adding up
E the value added per stage RESET
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

+ other subsidies on
production
– other taxes on production
= GDP at factor cost (or
income)
• GDP at basic prices
+ taxes on products
– subsidies on products
= GDP at market prices
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
EXPENDITURE
The elements of
Expenditure on GDP total spending

Let’s recap: • consumption

expenditure by
Three approaches to calculating the GDP households (C)
• investment
Three approaches to calculating the GDP
• Production approach spending (or
The four major sectors of the economy capital
• Income approach
• Expenditure approach formation) by
The elements of total spending firms (I)
The four major sectors of the economy • government
• Households spending (G)
• Firms • expenditure on
• Government exports (X)
more informationClick again to hide
• Foreign sector minus
expenditure on
imports (Z)
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.