Measuring the performance of the

economy

Chapter 13

Prepared by Mrs L. Omara-Ojungu

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 (CPI).
• Explain the balance of payment.
• Explain a Lorenz curve and Gini Coefficient.
Introduction
• Macroeconomics deals with issues what concerns the economy as a whole
( studies aggregate or total economic behaviour).
• Examples:
– Economic growth,
Prepared by Mrs L. Omara-Ojungu
 – total Employment in the country
– general price level/inflation,
– aggregate/ total demand and supply in the economy
– Total production, income and spending in the economy
– etc. (See box 1-3 on pg 12 )
• 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.
• 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.
The Macroeconomic Objectives
• The 5 major macroeconomic objective:
➢ Economic Growth: Is the increase in total production of all goods and
services in the economy from one period to another (i.e. between years, or
quarters).
Prepared by Mrs L. Omara-Ojungu
➢ Economic growth is most commonly used measure of economic
performance.
➢ GDP (Gross Domestic Product) is commonly used to measure economic
growth and economic performance.

➢ 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: A continuous increase in general price level, referred to as
inflation - has numerous effects 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 interact with the
rest of the world through export and import of goods and services, and
financial flows.

Prepared by Mrs L. Omara-Ojungu

 ➢ 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 overestimating, only the value of the final
goods is included in the GDP statistics. Note that the value of the
intermediate good is not included.
• 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, the Total value added and value of sale.
•

Prepared by Mrs L. Omara-Ojungu

 Participants Value ssale Value added
of
Farmer R10 R10 000
000
Miller R12 R2500
000
Baker R18 R5500
000
Shopkeeper R21 R3000
000
Total R61 R21 000
000

Exercise 1:
• Value added in the production of shirts.

Prepared by Mrs L. Omara-Ojungu

 • A farmer grows cotton and sells to factor for R20000. The factor
manufacture cloth rolls and sales the to manufacturers for R25000. The
manufacturer makes shirts and sells to wholesalers for R35 000. The
wholesaler sells the shirts to retailer for R48 000 and retailer sell to
consumers for R55000.
Measuring the level of economic activity: Gross Domestic Product (GDP)cons.
• GDP is geographic concept – only the goods produced within the country
is included.
• GDP is GROSS – depreciation cost (consumption of fixed capital) is not
deducted/accounted for when compiling GDP statistics..
• Depreciation deducted from GDP = Net Domestic Product (NDP)
• Therefore:

▪ NDP = GDP – Depreciation

• GDP is a flow – measured over a period of time (over a year or quarterly)

Prepared by Mrs L. Omara-Ojungu

• Only goods produced in the period is included. Goods produced in the
previous period and sold in the current period is excluded.
• Resale (second hand sales) not included in GDP statistics.
• GDP also calculated by adding all the income earned during the various
stages of the production process (Income Approach/method).
• Note: The definition of GDP specifies what is included in the GDP statistics
(i.e. value of the final products, products produced within a geographical
area (country) and in a specific period.

The 3 Methods of calculating GDP

1. The Production method (value added] – Total value of all final goods and
services is calculated.
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]. Therefore:
GDP = C + I + G + [X – Z]
3. The income method – income earned by all the FOP in the country is
added. Example salaries and wages, rent, interest, profits. But excluding
transfer payments such as grants, old age pension.
Prepared by Mrs L. Omara-Ojungu
• The 3 methods yield the same answer.
To add value, producers use FOP (inputs)
• Primary inputs include wages and salaries, rentals, interest etc.
• Secondary inputs are the intermediate goods – goods for resale or further
processing.

• Calculations of primary and secondary inputs and profits.

• What is the retailer’s primary input, secondary input and profits given the
following:
• Rent- R500, Labour – R150, Electricity – R100

Value of sale Value added Value of

intermediate
Goods and
services
Farmer 2000 2000 -
Factory 2500 500 2000

Prepared by Mrs L. Omara-Ojungu

 Wholesaler 3100 600 2500
Retailer 4000 900 3100
Total 11600 4000 7600
• Note: Value of the final good (4000) is equal to total value added (4000).
Value of intermediate goods and services – 7600

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 [pg238].
• 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

Prepared by Mrs L. Omara-Ojungu

 • GDP at basic price + taxes on products – subsidies on products = GDP at
market price.
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. Real GDP is used when
calculating economic growth/ comparing economic activities between
periods.
•
•
Prepared by Mrs L. Omara-Ojungu
•
•
• Example 1. Calculate nominal and Real GDP given the following. Use 2010 as
the base year. Use information on box 13-2 for guidance.
Nominal GDP Nominal GDP Real DP 2018
2010 2018
20 cars at R100 30 cars at R120 30 cars
40 computers at 35 computers at 35 computers
R50 R65
100 bananas at 110 bananas at 110 bananas
R10 R8
Calculating Nominal and Real GDP
• Nominal GDP for 2010 20 x 100 = 2000
40 x 50 = 2000
100 x 10 = 1000
2000 + 2000 + 1000 = R5000
• Nominal GDP for 2018
Prepared by Mrs L. Omara-Ojungu
 30 x 120 = 3600
35 x 65 = 2275
110 x 8 = 880
3600 + 2275 + 880 = R6755
Real GDP of 2018 (using 2010 as base year)
30 x 100 = 3000
35 x 50 = 1750
110 x 10 = 1100
300 + 1750 + 1100 = R5850
Conts
• Exercise 2: Use 2015 as the base year calculate GDP of 2015, nominal
GDP of 2016 and real GDP of 2016 from the information on the table
above.
Production and prices Production and prices
in 2015 in 2016
100 tons of Gold, R20 90 tons of gold, R25
each

Prepared by Mrs L. Omara-Ojungu

 50 Cars, R50 each 50 cars, R 60
10 Computers, R10 each 10 computer, R10 each
20 tons fruits, R 5 each 18 tons fruits, R8
Calculating Percentage change in GDP
• Calculating percentage change in GDP is 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) and calculated using
Real GDP figures.
• Example . Assuming that South Africa’s GDP increased from 250 billion in
2018 to R265 billion 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
= X 100%
= 6% Meaning the economy grew by 6% between 2018
and 2019.
Prepared by Mrs L. Omara-Ojungu
Exercise .
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 are other measures
too. These include:
• 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.
• To calculate GNI/GNP,
✓ we subtract from GDP all profits interest, dividend, and all other
income from domestic investments which accrued to foreign residents;

Prepared by Mrs L. Omara-Ojungu

 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 outside the country (primary income
receipts) Pg. 242
✓ Primary income payment – Primary income receipts = Net primary
income payments.
✓ Therefore:
GNI = GDP + Primary income receipt – Primary income payment

OR
GNI = GDP – Net primary income payment.
Others measures conts.
• Some country’s GNI is larger than it’s GDP when primary income receipts are
greater than its primary income payment.

Prepared by Mrs L. Omara-Ojungu

 ➢ 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 GNP of
2019.
C = R20m
I = R12m
G = R10m
X = R5m
Z = R8m
Prepared by Mrs L. Omara-Ojungu
Primary income payment = R3m
Primary income receipts = R2,5m
Calculations of GDE, GDP &GNI/GNP

Prepared by Mrs L. Omara-Ojungu

➢ Therefore GDE is
GDE = C + I + G
GDE = 20 + 12 + 10
GDE = 42m
➢ Therefore GDP is :
GDP = C + I + G + ( X – Z )
GDP = 20 + 12 + 10 + (5 – 8)
GDP = 42 – 3
GDP = 39m
Therefore GNI is:
GNI = GDP – Net primary income payment
GNI = 39 – 0,5
GNI = 38,5m

EXERCISE 5. 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
Ney primary income payment = 50
Calculate the country’s GDE, GDP, NDP (Net Domestic Product) and GNI.

Prepared by Mrs L. Omara-Ojungu

 Measuring Employment and Unemployment
• Unemployment occurs when people who are will and able, and are
between 16 and 65 years actively seek and are unable to find jobs.
• 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.
• 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.

Prepared by Mrs L. Omara-Ojungu

 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%
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.

Prepared by Mrs L. Omara-Ojungu

• Given the price index, we can calculate the percentage change in price
(i.e.
Inflation Rate)
• Inflation rate = CPI of year2 – CPI of year1 X 100% CPI of year
• Example:
• Give that South Africa’s CPI increased from 125 in 2017 to 130 in 2018.
Calculate the percentage change in price (inflation rate) between 2017
and 2018.
• Inflation rate = [130 -125/125] X 100%
= 0,04 X 100%
= 4%
• Exercise :
• Calculate Inflation rate if CPI increase from 128 to 132 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).
Prepared by Mrs L. Omara-Ojungu
• BOP consists of 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 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.
Prepared by Mrs L. Omara-Ojungu
 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

Prepared by Mrs L Omara-Ojungu

 ➢ Gini Coefficient of zero indicates a perfect equality – income is shared
equally among the population.
➢ 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.

Message from the lecturer.

• Please note that this is just a summary from the textbook, you MUST use it
in conjunction with the textbook.
• Make sure you do the exercise given on each section plus the ones on the
learner guide.

Prepared by Mrs L Omara-Ojungu

 Thank you

Prepared by Mrs L. Omara-Ojungu

Prepared by Mrs L Omara-Ojungu