Chapter 2:

Total production, income and

expenditure: the national accounts
2.1 THE NATIONAL ACCOUNTS

• National Accounts play a crucial role in providing comprehensive and systematic

information about the economic activities of a country.

• They offer a detailed overview of the economic performance, structure, and

interrelationships between different sectors.

• The most important source of information about the condition and performance of

the economy.

• In the context of South Africa, Stats SA (Statistics South Africa) serves as the

official compiler of national accounts.

2.2 TOTAL PRODUCTION,
INCOME AND
EXPENDITURE

production = income = expenditure on production

• The most important identity in the national accounts
• Production gives rise to income ,which is spent on production
• Income is spent to purchase the product
2.2 (CONTINUED)

• this implies there are 3 approaches to measuring the total value of

economic activity

• Production method ,the income method and the expenditure method

• If total production for a particular year is R5 000 billion

• This implies the total value of total income for that year is R5 000
billion
• Suppose goods and services valued R4 800 Billion were sold it
means inventories increased by R200 billion
2.3 GROSS DOMESTIC
PRODUCT (GDP)

Gross domestic product is defined as the total value of all final goods
and services produced within the geographic boundaries of a country in
a particular period (usually one year).
See BOX 2-2 Gross geographic product (Textbook page 21)
2.3 Continued ……

• 1ST element is value :by using prices of goods and services national

accountants can obtain the value of production

• 2nd element in the definition is the word final : goods that are purchased

to be resold or used as inputs in the production process are called

intermediate goods

• to avoid double counting ,the value of intimidate goods and services

have to be ignored
• 2.3 Continued ……

• 3rd element of the definition is the term “within the geographic

boundaries ’’:GDP includes all the production within the geographic

area of a country

• 4th element is to note that goods and services are produced during a

particular period : GDP concerns the production of new goods and

services

• The 5th element is the word gross :no provision for depreciation has

been made for consumption of fixed capital

2.4 THREE APPROACHES TO
THE MEASUREMENT OF
GDP
• Production method-Is the total value of production
• Income method-focuses on the income earned in the form of
rent ,interest ,wages and profits in the production process
• Expenditure method-only the expenditure on final goods and
services should be considered ( Final goods are those goods that
are ready for consumption and are not used as inputs in the
production of other goods). E.g Cars, Clothes, furniture etc.
 THREE APPROACHES TO THE MEASUREMENT OF GDP

Production method

• If the value of production is not equal to R9 000(R1000 –the farmer ’ ’s

production +R3 000 the miller production +R5 000 the baker production )
• Consider the value added at each production stage
• R1 000 +R2000+R2 000=R5 000 ( the final value by the baker )
• Value adding avoids the problem of double counting
 THREE APPROACHES TO THE MEASUREMENT OF GDP

Income method
• It focuses on the income earner in the form of rent ,interest ,wages and profits
 THREE APPROACHES TO THE MEASUREMENT OF GDP

Expenditure method
• Only the expenditure on final goods and services should be considered
 THREE APPROACHES TO THE MEASUREMENT OF GDP
Expenditure method

TABLE 2-1 Gross value added by kind of economic activity at current prices, 2018
 THREE APPROACHES TO THE MEASUREMENT OF GDP
Expenditure method

TABLE 2-2 Expenditure on gross domestic product at current prices, 2018

2.5 VALUATION AT MARKET
PRICES ,BASIC PRICES AND
FACTOR COST
• Subsidies : have an effect of making market prices of goods and
services lower than their basic prices

• Taxes on production refer to taxes which are payable per unit of

some good or service
2.5 VALUATION AT MARKET
PRICES, BASIC PRICES AND
FACTOR COST
VALUATION AT MARKET PRICES, BASIC PRICES AND FACTOR COST
2.6 VALUATION AT CURRENT
PRICES AND AT CONSTANT
PRICES: NOMINAL AND
REAL GDP
 VALUATION AT CURRENT PRICES AND AT CONSTANT
PRICES: NOMINAL AND REAL GDP

TABLE 2-3 Nominal and real GDP and nominal and real growth rates, 2010 to 2018
2.7 SOME PROBLEMS
ASSOCIATED WITH GDP

• Non-market production
• Unrecorded activity
• Data revisions
 See Box 2-3 Annual and comprehensive revisions of national
accounting data (Textbook page 31)
• GDP as a measure of wellbeing or welfare
• Distribution of income
2.8 GROSS NATIONAL INCOME
(GNI)
2.9 EXPENDITURE ON GDP
VERSUS GDE
Components of expenditure on GDP
• final consumption expenditure by households (C)
• capital formation (or investment spending) (I)
• final consumption expenditure by general government (G)
• expenditure on exports (X) minus expenditure on imports (Z)

GDP = expenditure on GDP

=C+I+G+X−Z

GDE = C + I + G
GDP = C + I + G + (X − Z )
2.10 THE NATIONAL INCOME
AND PRODUCTION
ACCOUNTS

See BOX 2-4 Some hypothetical examples of how transactions are recorded in the national
accounts (Textbook page 38)
 THE NATIONAL INCOME AND PRODUCTION ACCOUNTS

TABLE 2-4 National income and production accounts of South Africa, 2018
2.11 SAVING
• Saving is defined as the difference between income and expenditure.

• Gross saving for the economy as a whole consists of saving by

households, corporate saving, saving of general government and
consumption of fixed capital (or provision for depreciation).
 SAVING

See BOX 2-5 The production, distribution and accumulation accounts

Define:
• Corporate saving (net)
• Private saving
• Government saving (net)
• Consumption of fixed capital (or provision for depreciation)

BOX 2–6 Changes regarding the estimation of GDP

2.11 SAVING (CONT)
a. Household Saving:
•This is the saving done by individuals and families. It includes money set aside
from personal incomes for future needs, emergencies, or investments.

b. Corporate Saving:
•Refers to the saving done by businesses or corporations. It includes profits that
are not distributed as dividends but retained for business expansion, research, or
other investments.

c. Saving of General Government:

•Represents the saving done by the government at all levels (local, state, and
national). Governments save money when their revenues exceed expenditures.

d. Consumption of Fixed Capital (or Provision for Depreciation):

•This component accounts for the wear and tear of physical assets used in the
production process. It is the amount set aside to replace or repair capital goods as
they age or become obsolete.
 SAVING

TABLE 2-5 Financing of gross capital formation, selected years (R millions)