Detailed and in-depth notes of Chapters 22 - 25 AND concise summaries, covering the content for ECON1014 (Macroeconomics). These colourful summaries contain all the important information from the prescribed textbook and include various diagrams to aid understanding. NOTE: Please read the disclaimer...
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Parkin, M. et al. (2020) Economics: Global and Southern African perspectives. 3rd edn. Cape Town, Western Cape:
Pearson South Africa.
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,CHAPTER 22
MEASURING GDP & ECONOMIC GROWTH
Gross Domestic Product
• Market value of final goods and services produced within a country in a given time period
• Market value:
- Value items at market value therefore prices at which items are traded in markets
• Final goods and services:
- Final good is an item that is bought by its final user during specified time period
- Different to intermediate good which is an items produced by one firm, bought by another and used as a
component of a final good/service
- Adding value of intermediate goods/services produced to final goods/ services = DOUBLE COUNTING
- Whether good is final or intermediate depends on its use
- Some goods neither final nor intermediate therefore not part of GDP eg. Shares, bonds, second-hand goods
• Produced within a country:
- Only goods/services produced within a country form part of country’s GDP
- Emphasis only on location of production activities not ownership of means of production
• In a given time period:
- Value of production measured in given time period
- Usually quarterly/annual GDP data
- GDP measured value of total production AND total income and total expenditure
- Equality between value of total production and total income is NB as it shows direct link between productivity and
living standards
- Standard of living improves when income increases but must produce more goods/services to earn more to buy
more goods/services
- Higher incomes and higher value of production are two aspects of same phenomenon = increasing productivity
GDP & Circular Flow of Expenditure
• Economy consists of households, firms, governments and rest of world, which trade in factor markets and goods/
services markets
• Households and firms
- Households sell and firms buy services of labour, capital, and land in factor markets
- For these factor services firms pay income to households
~ Labour = wages
~ Capital = interest
~ Land = rent
- Fourth FOP is entrepreneurship which receives profit
- Firm’s retained earnings (profits not distributed to households) are part of household sector’s income
- Retained earnings can be thought of as income households save and lend back to firms
- Aggregate income = total income
- Firms sell and households buy consumer goods/services
- Total payment for these goods/services = consumption expenditure
- Firms buy and sell new capital equipment in goods market
- Some of what firms produce is not sold thus added to inventory
- Purchase of new plant, equipment and buildings as well as additions to inventory = investment
, • Governments
- Buy goods/services from firms and this expenditure = government expenditure
- Finance their expenditure with taxes
- Make financial transfers to households eg. Social security grants for elderly, child support grants, subsidies to firms
- These taxes and financial transfers NOT part of circular flow of expenditure and income
• Rest of World
- Firms in SA sell goods/services to rest of world (exports) and buy goods/services from rest of world (imports)
- Value of exports (X) minus value of imports (M) = net exports
- If net exports positive: net flow of goods/services is from SA firms to rest of world
- If net exports negative: net flow of goods/services is from rest of world to SA firms
• GDP = Expenditure = Income
- GDP can be measured in two ways
~ Total expenditure on goods/services
~ Total income earned producing goods/services
- Total expenditure (AE), aggregate expenditure, equals Consumption (C) + Investment (I) + Government
expenditure (G) + Net exports (X - M) ie. sum of red flows
- Total income (Y), aggregate income, equals total amount paid for services of FOP used to produce final goods/
services such as wages, rent, profit ie. blue flow
- Because firms pay out as incomes (including retained profit) everything received from sale of its output thus
aggregate income (blue flow) equals aggregate expenditure (sum of red flows)
- Y = AE
Y = C + I + G + (X - M)
• Circular flow model is foundation on which national economic accounts are built
Gross and Domestic
• Domestic product is production within a country
- Contrasts related concept, national product, which is value of goods/ services produced anywhere in world by
residents of a nation
• GNP, Gross National Product, equals GDP + net income from FOP owned in other countries
• Gross is amount before subtracting depreciation of capital
• Opposite of gross is net which means after subtracting depreciation of capital
• Depreciation is decrease in value of firms’ capital that results from wear or tear and obsolescence
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