Economics Chapter 13 Flashcards
Measuring the performance of the economy
What are the 5 key objectives?
Economic growth
Full Employment(or low employment)
Price Stability(or low inflation)
Balance of Payments(or external stability)
Socially acceptable(or Equitable)distribution of income
Economic growth
Most important criterion concerned with measuring total production of goods and services. If the population is growing and there is no economic growth, average living standards cannot increase, and it will also not be possible to create enough
jobs for the growing population
Full unemployment
Ideally all the country’s factors of production, particularly labor ,
should be fully employed .At the macro level unemployment poses a serious threat to social and political stability
Price Stability
Price stability does not mean that all prices should always stay constant. The objective of keeping inflation as low as possible
Balance Of Payments
Some balance between
exports and imports is therefore required. the balance of payments and exchange rates should be fairly stable. This is what the objective of balance of payments stability (or external stability)
is all about
Equitable (or socially acceptable) distribution of income
a highly unequal distribution of income tends to generate social and political conflict. It can also have important effects on the structure and development of the economy
Gross Domestic Product
The value of all the final goods and services provided within the boundaries of a country in a particular period
Measuring the level of economic activity
The first step is to determine the total production of goods and services. The production of all the different goods and services must be combined into one measure of total production or output
Who combines all different production of goods and services under one measure of total production/output
StatsSA and SARB
But how do the national accountants succeed in adding up all the different types of economic activity in the country during a particular period
Value.The solution is to use the prices of the various goods and services to
obtain the value of production.Final.we distinguished between final goods and intermediate
goods and we mentioned that this distinction is very important as far as the measurement of economic activity is concerned
How can double counting be avoided?
the national accountants
use a concept which became familiar to most South Africans
with the introduction of value-added tax
Intermediate good or service
any good or service that is purchased for reselling or processing
How else can double counting be avoided
Double counting can also be avoided by only counting the value of those sales where a good or service reaches
its final destination. Such sales involve final goods and services which have to be distinguished from intermediate
goods and services
Final Goods and services
Goods and services sold for final consumption
Another way in which double counting can be avoided
The incomes earned
during the various stages of the production process by the owners of the factors of production. Income is earned by producing, that is, by adding value to goods
and services
What does adding value mean?
Increasing production which also means increasing income.
What happens when we don’t distinguish?
Failure to distinguish may lead to double counting(counting certain items’ value more than once)
What is GDP measured as?
Gross value added
3 methods of calculating GDP
production method (value added)
expenditure method (final goods and services)
income method (incomes of the factors of production)
What is production(adding value)
It is the source of income earned by different factors of production. It equals spending on final goods and services.
Value of total sales=
Total primary income+value of intermediate goods and services
Value of final goods and services =
Total Income
Within the boundaries of a country
GDP is a geographic concept, include all the production within the geographic area of a country. This is signified by the term domestic
During a particular period
GDP is concerned with the production of new goods and services also called current production during a specific period.. Goods produced during earlier periods and sold during the period under consideration are not included in GDP for the latter period. Moreover, the resale of existing goods such as houses or motorcars is also not part of GDP
What is GDP?
A flow which can be measured over a period of time
Gross meaning
Means that no provision has been made for that part of a country’s capital equipment (buildings, roads, machinery, tools, etc) which is “used up” in the production process.
Net Total
Gross Total-Consumption of fixed capital(depreciation)=net total.
The net amount is a more correct measure of economic performance
since it adjusts gross production for the decrease in the value of capital goods. In practice, however, the gross
measure is used more often than the net measure
Three sets of prices that can be used to calculate GDP
market prices,
basic prices and factor cost (or factor income)
Market Prices
Used in practice when calculating GDP using expenditure method
Basic Prices
GDP determined by applying value added(production) method.
Factor cost/income
Utilized when income method is used to calculate GDP
What effect do indirect taxes have?
Have the effect of making market prices of goods and services higher than their basic prices/factor cost due to excise duty and VAT. Subsidies have the opposite effect
What happens when there are indirect taxes and subsidies?
Indirect taxes(tax on production and products) or subsidies (on production/products) leads to difference in between amount paid for a good/service and cost of production and income earned by relevant factors of production
List the 2 types of taxes and subsidies
Taxes on products
Tax on production
Subsidies on products
Subsidies on production
Subsidy effect
Subsidies have just the opposite effect. They result in market prices being lower than basic prices or factor
cost
Tax
Tax on products-refer to taxes which are payable per unit of some good or service(VAT, taxes)
Tax on production-Taxes that are not linked to specific goods and services (payroll taxes, recurring taxes on fixed assets)
Subsidy
Subsidies on products-include direct subsidies payable per unit exported to encourage exports, and product-linked subsidies on product used domestically.
Other subsidies on production refer to subsidies that are not linked to specific goods or services (eg subsidies on employment, passenger transport or the payroll)
List the identities
1)GDP @ market prices-taxes on products+subsidies on product=GDP@basic prices
2)GDP@basic prices+taxes on product-subsidies on product=GDP@market prices
3)GDP@basic prices-other taxes on production+other subsidies on production=GDP@factor cost(factor income)
4)GDP@factor cost+other taxes on production-other subsidies on production=GDP@basic prices
Nominal GDP
Calculating GDP for a particular period using prices of that same period(current prices)
How to control for price increase
National accountants StatsSA and SARB convert GDP at current prices to GDP at constant prices
National Income
That is, the income of all permanent residents of the country. This is called the gross national income (GNI), which equals the gross national product (GNP)
GDP vs GNI
GDP is the best measure of the level of economic activity in the country and of the potential for creating jobs for the
country’s residents
GNI, on the other hand, is a better measure of the income or standard of living of the citizens of a country
Production approach
which measures the value added by all the participants in the economy
Income approach
which measures the income received by the different factors of production
Expenditure approach
which measures the spending on final goods and services by the different participants. the national accountants add together the spending of the four major sectors of the economy. Households,firms, gov and foreign sector
The elements of total spending
C-consumption expenditure by households
I-investment spending by firms
G-government spending
X-expenditure on exports-expenditure on imports(Z)
Gross Capital formation/Investment
additions to the country’s capital stock, that is, the purchase of capital goods. Split in two: Fixed capital formation and changes in inventories. Gross fixed cap>changes in inventories
Fixed Capital Formation
the purchase of capital goods like buildings, machinery and equipment
What does expenditure on GDP include?
Spending on GDP does not include imports, since imports are produced in the rest of the world.
Expenditure on GDP includes spending on South African produced goods and services only
Changes in inventories
reflect goods produced during the period that have not been sold, or goods produced in an earlier period but sold only during the current period
Gross Domestic Expenditure
Indicates the total value of spending within the
borders of the country. It includes imports but excludes exports, since spending on exports occurs in the rest
of the world
GDE formula
C+I+G(includes imports excludes imports)
From GDP to GNI
GDP at market prices – net primary income
payments
Limitations of GDP
Household production
Underground economic activity
Health and life expectancy
Leisure Time
Environmental quality
Political freedom and social justices
Inflation rate
The percentage increase in the overall level of prices
Unemployment rate
The number of unemployed persons can then be expressed as a percentage of the total number of people who are willing and
able to work.
Strict vs expanded definition of unemployment
Strict-Taken steps recently to find work
Expanded-Have desire to work
To measure employment
To measure employment you simply have to find out how many people have jobs at the time the measurement is done
Consumer price index
Is an index of the prices of a representative “basket” of consumer goods and services .Represents the cost of the “shopping basket” of goods and services of a typical South African household.
Constructing CPI
1)Selects the goods and services to be included in the basket
2)Assigns a weight to each good and service to indicate its relative importance in the basket
3)Decide on the base period of calculating the CPI
4)To decide on formula of calculating the value of the CPI
5)Collects prices each month to calculate the value of the CPI of that month
Why is too rapid inflation negative?
It complicates the economic decision making process and slows economic growth, it diminishes the value of savings
Balance Of Payments
Each country keeps a record of its transactions with the rest of the world. The South African balance of payments summarizes the transactions between South African households, firms and government and foreign households, firms and governments during a particular period
BOP
Is a systematic statistical account or record of all economic transactions between the residents of the reporting country and the rest of the world in a specific period
Current account
All the purchases of goods and services from the rest of the world (ie imports) as well as all the primary income receipts and payments are recorded in the current account of the balance of payments
If there is a surplus on the current account, it indicates that the value of the country’s exports exceeded the value of its imports during the period under review. If there is a deficit, then imports were greater than exports
Financial account
Like purchases and sales of assets such as bonds and shares, are recorded in the financial account of the balance of payments.
if there is a surplus on the financial account, it indicates that more funds flowed into the country than flowed out during the period concerned. In this case we say that there was a net inflow of foreign capital into the country. If there is a deficit, it indicates that the outflows exceeded the inflows. We then say that there was a net outflow of foreign capital
What happens when you add these accounts
It gives you the change in the country’s gold and foreign exchange reserves(balancing item).Compiled by SARBS and SARS.
Accounts under current account
Trade balance-goods exported or imported during the year, net gold export
Service receipts/payments for service-trade in services
Current transfers-Goods/services transferred without anything tangible in return(CTP>CTR)
Income receipt and income payments
Income receipts refer to income earned by SA residents in the rest of the world. Income payments refer to income earned by non-residents in South Africa. There are two categories of income flows: compensation of employees and investment income.Compensation of employees includes wages.Investment includes interest
Accounts under Financial account
Net direct investment-gain/have meaningful say in the management of the enterprise in which the investment is made(new business or existing business acquisition)
Net Portfolio investment refers to purchases of assets such as shares or bonds where the investor is interested only in the expected financial return on the investment
Other investment is a residual category which includes all financial transactions not included under direct investment or portfolio investment, includes loans. Short-term trade credit which is used to finance imports and exports.
Distribution of income
To quantify distribution of income one needs reliable info about individuals/HH income which is not easy to get
Income disparities
A difference in level/treatment, especially one that is seen as unfair
How to measure income inequality
Lorenz curve
Gini coefficient
Quantile Ratio
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)
The greater the distance between OB and Lorenz Curve the greater the degree of inequality
Gini Coefficient
Measuring inequality
This is obtained by dividing the area of inequality shown by a Lorenz curve by the area of the right-triangle formed by the axes and the diagonal (the line of equality)
If incomes are distributed perfectly equally, the Gini coefficient is zero
Quantile Ratio
expressing the equality or inequality of the distribution of income. A quantile ratio is the ratio between the percentage of income received by the highest x percentage of the
population and the percentage of income received by the lowest y per cent of the population
Who compiles and publishes these indexes/stats in SA
Stats SA
SARB
Other gov statistical agencies
