Measuring the Performance of the Economy.pdf

These are notes on measuring the performance of the economy. They cover the following concepts:

-Explain the five main macroeconomic objectives
-Define the gross domestic product
-Explain the difference between nominal GDP and other national accounting concepts
-Measure employment and unemployment
-Measure consumer price index
-Measure the links with the rest of the world through the balance of payments
-Explain the measures of inequality in income distribution in the South African context

1. Measuring the Performance of the Economy

Theme 1: Measuring the level of economic activity

LO1: Explain the five main macroeconomic objectives
The government’s major macroeconomic objectives are:
• Economic Growth: economic growth refers to an increase in the gross domestic
product (GDP), the amount of goods and services produced in the economy,
over a period of time. More output means economic growth. But if output falls
over time (economic recession), it can cause:
• fall in employment, incomes and living standards of the people
• fall in the tax revenue the govt. collects from goods and services and
incomes, which will, in turn, lead to a cut in govt. spending
• fall in the revenues and profits of firms
• low investments, that is, people won’t invest in production as economic
conditions are poor and they will yield low profits.
• Price Stability: inflation is the continuous rise in the average price levels in an
economy during a time period. Governments usually target an inflation rate it
should maintain in a year, say 3%. If prices rise too quickly it can negatively affect
the economy because it:
• reduces people’s purchasing powers as people will be able to buy less
with the money they have now than before
• causes hardship for the poor
• increases business costs especially as workers will demand higher wages
to support their livelihood
• makes products more expensive than products of other countries with
low inflation. This will make exports less competitive in the international
market.
• Full Employment: if there is a high level of unemployment in a country, the
following may happen:
• the total national output (goods produced) will fall

2. • government will have to give out welfare payments (unemployment
benefits) to the unemployed, increasing public expenditure while income
taxes fall – causing a budget deficit
• large unemployment causes public unrest and anger towards the
government.
• Balance of Payments Stability: economies export (sell) many of their products
to overseas residents, and receive income and investment from abroad; they
also import (buy) goods and services from other economies, and make
investments in other countries. These are recorded in a country’s Balance of
Payments (BoP).
Exports > Imports = Surplus in BoP
Exports < Imports = Deficit in BoP
All economies try to balance this inflow and outflow of international trade and
payments and try to avoid any deficits because:
• if it exports too little and imports too much, the economy may run out of
foreign currency to buy further imports
• a BoP deficit causes the value of its currency to fall against other foreign
currencies and make imports more expensive to buy, while a BoP surplus
causes its currency to rise against other foreign currencies and make its
exports more expensive in the international market.
• Income Redistribution: to reduce the inequality of income among its citizens,
the government will redistribute incomes from the rich to the poor by imposing
taxes on the rich and using it to finance welfare schemes for the poor. All
governments struggle with income inequality and try to solve it because:
• widening inequality means higher levels of poverty
• poverty and hardship restricts the economy from reaching its maximum
productive capacity.

LO2: Define the gross domestic product
GDP measures the monetary value of final goods and services—that is, those that are
bought by the final user—produced in a country in a given period of time (say a quarter
or a year). It counts all of the output generated within the borders of a country. GDP is
composed of goods and services produced for sale in the market and also includes
some nonmarket production, such as defense or education services provided by the
government.

3. LO3: Explain the difference between nominal GDP and other nominal accounting
concepts
Nominal GDP is a measure of a country's economic output that is not adjusted for
inflation. It represents the total value of all final goods and services produced within a
country's borders during a specific period, usually a year. Nominal GDP is calculated
using current market prices.
On the other hand, there are other national accounting concepts that adjust for inflation
and provide a more accurate measure of economic output. These concepts include real
GDP, GDP deflator, and GDP per capita.
1. Real GDP: Real GDP adjusts for changes in prices over time by using a constant
set of prices, known as a base year. It measures the actual physical output of
goods and services produced in an economy, excluding the effects of inflation.
Real GDP is a more accurate measure of economic growth because it eliminates
the impact of price changes.
2. GDP Deflator: The GDP deflator is a measure of the average price level of all
goods and services produced in an economy. It is calculated by dividing nominal
GDP by real GDP and multiplying by 100. The GDP deflator reflects changes in
both prices and quantities of goods and services produced. It is used to measure
inflation or deflation in an economy.
3. GDP per capita: GDP per capita is calculated by dividing the total GDP of a
country by its population. It provides an average measure of economic output
per person in a country. GDP per capita is often used to compare the standard of
living between different countries.
In summary, nominal GDP is a measure of economic output that does not account for
inflation, while other national accounting concepts such as real GDP, GDP deflator, and
GDP per capita adjust for inflation and provide a more accurate representation of
economic performance.


Theme 2: Measuring employment and unemployment
LO4: Measure employment and unemployment

Employment is defined as an engagement of a person in the labour force in some
occupation, business, trade, or profession.

4. Unemployment is a situation where people in the labour force are actively looking for
jobs but are currently unemployed.
All governments have a macroeconomic objective of maintaining a low unemployment
rate.
Full Employment is the situation where the entire labour force is employed. That is, all
the people who are able and willing to work are employed – unemployment rate is 0%.

Measuring Unemployment
Economies periodically calculate the number of people unemployed in their
economies, to check the unemployment rate and see what policies they should
implement to reduce it if it is too high. They can do this in two ways:
• Claimant count: unemployed people can file for unemployment claims
(benefits/allowances provided to the unemployed job seekers) by the
government. The government can count the total number of unemployment
claims made in the economy to measure unemployment.
• Labour surveys: economies conduct surveys among the entire labour force to
collect data about it. This will include data on the number of people
unemployed.

Unemployment rate = number of people unemployed / total no. of people in the labour
force
There are some problems with measuring employment.
Under-employment: people may be officially classed as employed but they may be
working fewer hours than they would like. For example, they may have a part-time job,
but want a full-time job. This is considered as unemployment because they may not
fulfil the working hours needed to be considered employed.
Inactivity rates: the long-term unemployed may become discouraged and leave the
labour market completely. In effect they are not working, but they are classed as
economically inactive rather than unemployed. So, the unemployment rate can be
understated.


Theme 3: Measuring prices : the consumer price index

5. LO5: Measure the consumer price index

The Consumer Price Index (CPI) is a measure of the aggregate price level in an economy.
The CPI consists of a bundle of commonly purchased goods and services. The CPI
measures the changes in the purchasing power of a country’s currency, and the price
level of a basket of goods and services.



Theme 4: Measuring links with the rest of the world: balance of payments

LO6: Measure links with the rest of the world through the balance of payments
The balance of payments (BOP) is a vital tool for measuring a country's economic
transactions with the rest of the world. It consists of two main accounts: the current
account and the capital and financial account.
• Current Account: This account measures the country's trade in goods and
services, as well as income and current transfers with the rest of the world. It
reflects the links through international trade, investment income, and foreign aid.
• Capital and Financial Account: This account records capital transfers and the
acquisition or disposal of non-produced, non-financial assets. It measures the
links through capital flows, such as foreign direct investment, portfolio
investment, and changes in reserve assets.
By analyzing the balance of payments, policymakers, economists, and businesses can
gain insights into a country's economic links with the rest of the world, including its
trade relationships, investment patterns, and financial flows.

Theme 5: Measuring inequality, the distribution of income
LO7: Explain the measures of inequality in income distribution in the South African
context

6. In the South African context, income inequality is often measured using the Gini
coefficient. The Gini coefficient is a statistical measure ranging from 0 to 1, where 0
represents perfect equality (everyone has the same income) and 1 represents perfect
inequality (one person has all the income).
The Gini coefficient is calculated by plotting the cumulative share of income received by
the bottom x% of the population against the cumulative share of the population, and
then measuring the area between this curve and the line of perfect equality.
In South Africa, the Gini coefficient has been historically high, reflecting significant
income inequality. This is due to various factors such as the legacy of apartheid,
unequal access to education and employment opportunities, and disparities in wealth
distribution.
The Gini coefficient provides a snapshot of income distribution, allowing policymakers
and researchers to assess the level of inequality and track changes over time. However,
it's important to complement this measure with other indicators to gain a
comprehensive understanding of income inequality in South Africa.