1.1 Economic Indicators

ECS2603

CHAPTER 1

1.1 ECONOMIC INDICATORS.

Economic indicators only indicate something if compared to something else.

Reasons for monitoring indicators:

• To expand businessand explore new markets
• Asses general performanceof the economy
• Effectiveness of economic policy
• Compare economic policiesbetween countries.
• Make economic forecasts
• Speculators monitor to decide whether to buy or sell socks.

‘Pure’ economic indicator terms:

• Gross Domestic Products (GDP)
• Rate of economic growth
• Consumer price index (CPI)
• Producer price Index (PPI)
• Inflation rate
• The money stock
• Balance of payments
• Exchange rates
• Budget deficit
• National Debt

1.2 ASSESING THE PERFORMANCE OF THE ECONOMY

At the microeconomic level the following objectives usually serve as criteria for judging the state of the economy:

• Economic Growth: How does one measure performance of the economy in relation to the growth target
• Full Employment: How is the employment performance of the economy measured?
• Price Stability:Inflation how is it measured? What is an index, how are they calculated?
• Balance of Payments Stability: What is the BOP? What is the significance of the subaccounts of the BOP?
• An Equitable Distribution of Income: How to assess the distribution of income and techniques?

1.3 SOURCE OF ECONOMIC DATA.

The main sources of the South African economic data and data required to make comparisons. Two most important agencies which collect economic data in SA are Statistics South Africa (Stats SA) and the South African Reserve Bank (SARB).

Stats SA is the central government body in SA that is authorised in terms of the Statistics Act to compile and publish national statistics.

• SARB Quarterly Bulletin: Best known and most frequently quoted data sources and contains economic data only. It contains an extensive summary and interpretation of recent economic developments, including short-term policy. Greater part consists of 150+ statistical tables covering most aspects of SA economy.
• SARB Annual Report: This incorporates the Annual Economic Report which contains a review of economic and financial conditions during the past 12 months. Data is presented as ratios in rate of changes.
• Release of Selected Monthly Data: SARB updates monthly money and banking and other stats by issuing a brief Release Selected Monthly Data.
• South African Statistics: This is the most comprehensive collection of annual South African data.
• Bulletin of Statistics: Regular quarterly publication of Stats SA which can be used to update South African Statistics.
• P Series or Statistical Releases:When data becomes available between the Bulletin of Statistics and South African Statics, SARB publishes the P Series.
• Stats in Brief: Annual release pocket guide containing data on 18 different topics.
• Quarterly Labour Force Survey: Contains the results of rotating panels household survey specifically designed to measure the dynamics of employment and unemployment in the country.
• Budget Review: Published by treasury to coincide with the Minister of Finance Budget speech.
• Secondary Data Sources: Data supplied by firms who specialise in providing economic data and making them available to end users.
• International Economic Data: The IMF, World Bank and United Nations regularly collect and publish data for all countries. Useful source is the International Financial Statistics from the IMF contains data of all IMF countries on exchange rates, international liquidity, banking, trade and prices and national accounting data.

1.4 INTERPRETING ECONOMIC DATA

Interpreting data requires an understanding of the data, knowledge of which data to use and an awareness of the limitations of the data. Here below are basic hints when economic data is being interpreted.

• The definitionsthe indicators should always be checked carefully
• Determine the period to which the data relates.
• Always make sure data is seasonally adjusted.
• Always check whether the variable is a stock or flow.
• Ascertain the geographic coverageof the data.
• Check if the data has been adjusted for inflation.
• Check who produced the data, government or private company.
• Many time data is not collected but arise as a by-product of some administrative process.
• Check whether the data will be revised or if still needs to be revised.
• For observations over time, it may be useful to plot the data on a graph.
• Ascertain the start and end pointsfor calculating changes.
• A frequent mistake is to confuse levels with rates of change(or percentages).
• Determine what other yard stickswill aid interpretation.
• Bear in mind that correlation does not result in causation.
• Be cautious of international interpretations as definitionsmay differ between countries.

1.5 SOME BASIC CONCEPTS AND TECHNIQUES.

Volume, price and value.

• Value (PQ) = price (P) x quantity (Q)

Or

• Volume (Q) = value (PQ) / price (Q)

Real and nominal values.

Unadjusted original values are expressed at current prices in Nominal Terms. The current price (nominal) data are then deflated by a price index to obtain Constant Price or Real Data.

• Nominal value = PQ
• Real value = Q = PQ/P

Percentages

The percentage difference between two numbers is calculated by expressing the absolute difference between the two numbers as a ration of the original number.

Percentages, percentage points and basis points.

In the financial markets each percentage points consists of 100 basis points. E.g. 100 or 50 basis points.

Levels and rates of change.

There is a tendency to confuse levels with rates of change when interpreting economic data. I.e. A high level should not be confused with a high rate of change.

Stocks, flows and ratios.

A stock has no time dimension and is measured at a specific point in time.

A flow is measured over a period of time, irrespective of how short.

Stocks – Capital stock, money stock, saving balance and wealth of an individual.

Flows – production, spending, income, investment, consumption and saving.

Averages.

A single number which expresses the central or representative value of the data. i.e. Measure of central tendency

Simple average or arithmetic meanis the sum of values divided by the number of values.

Weighted Averages- calculated when the different observations are not equally important. This is important when price indices and other indices are compiled.

Moving Averages– used to smooth erratic movements in time series to obtain a general trend. The moving average for a specific period is the average or previous, current and future values, with the current value as the centre number of values used to calculate the averages. Disadvantage is moving averages are slow to respond to genuine change in economic direction.

The Median– The value of the middle item when items are arranged in an increasing or decreasing order of magnitude.

CHAPTER 2

TOTAL PRODUCTION, INCOME AND EXPENDITURE: THE NATIONAL ACCOUNTS

2.1 The National Accounts

Constituting the most important source of information about the condition and performance of the economy. National accounts are compiled jointly by Stats SA & SARB. Compiled in accordance with the System of National Accounts.

Two Types of Equality

Identical Equality and a Conditional Equality (Equation)

Any values of the unknown variables will satisfy an identity, while an equation is satisfied by a unique value or set of values.

Identity is a statement derived directly definitions or arithmetical ratios and is therefore always true. Often indicated by the sign. They do not reflect aspects of economic behaviour but are means of ordering and organising our thinking.

2.2 Total production, income and expenditure.

The most important identity in the national accounts is the equality of total production, income and expenditure during a particular period. Production gives rise to income which gives rise to spending. For the economy at large the value of total product always equals the value of total income.

Product = Income = expenditure on product.

Always three ways to measure total value of economic activity; production method, income methodand the expenditure method.

2.3 Gross Domestic Product.

GDP Is thetotal value of all final goods and services produced within the geographic boundaries of a country in a particular period (usually one year)

We need to examine various five elements:

1. Value– Using the price of good and services the national accountants can obtain a value of production.
2. Final -Used to avoid double counting, only final goods and services are taken into account. Consumer goods are those that are consumed by households and government sector. Capital goods are those man-made goods used by firms to produce other goods. Goods that are purchased to be resold or used as inputs in producing other goods are called intermediate goods.
3. ‘Within the geographical boundaries of the country’ – I.e. all production within the geographic area of the country.
4. During a particular period –Goods resold such as cars and houses are not included in GDP.
5. Gross –Indicates that no provision has been made for consumption of fixed capital (depreciation)

2.4 Three Approaches to the measurement of the GDP.

1. Production Method–Only necessary to compute the value add during each round of manufacturing.
2. Income Method– Focus’s on the income earned in the form of rent, wages and profits in the production process. Total income must by definition be equal to production.
3. Expenditure Method– To avoid double counting, expenditure on intermediate goods are ignored and only expenditure on final goods and services.

Stats SA is responsible for estimating the GDP according to the production and income approaches, while SARB is responsible for compiling the expenditure side of the national accounts. The SARB Quarterly Bulletin the data collected according to three methods are presented in three tables:

• National income and production accounts of South Africa (Account 1)

The first few items represent income of the factors of production. Distinction is between compensation to employees(salaries,wages) and the net operating surplus(rent, interest, profit). With the consumption of fixed capital these items yield gross value added at factor cost.

• Gross Value added by kind of economic activity (Account 2)

The production side in account 2 is more comprehensive with nine economic activities in three sectors, primary, secondary and tertiary. Valuation at basic prices, data provided at constant & current prices.

Table 2.1: Gross value added by kind of economic activity at current prices, 2009

• Expenditure on GDP (Account 3)

Expenditure breakdown used most. Valuation is at market prices and presented at current and constant prices. Contains the main components of expenditure.

Table 2.2: Expenditure on gross domestic product at current prices, 2009

Final consumption expenditure by households – Divided into to four categories, durable goods, semi-durable good, non-durable goods and service.

Final consumption expenditure by general government – Consists of current expenditure on salaries and wages and on goods and other services of non-capital nature by service departments of government. Two types of expenditure

1)Individual consumption expenditurepertains to individual consumption on goods and services like education & health.

2)Collective consumption expenditurepertains to collective expenditure such as defence, law & order and public admin.

Gross capital formation – divided into Gross fixed capital formation and Change in inventories.

Capital formationrefers to additions in the country’s capital stock. No provision is made for consumption(depreciation) and fixed capital formationrefers to purchase of capital goods.

Change in Inventories -reflect goods produced that have not been sold.

Residual Item –is a statistical discrepancy which arises from different approaches used to estimate GDP.

2.5 Valuation at market prices, basic prices and factor cost.

The differences between basic prices, factor cost and market prices are due to indirect taxes (makes prices of goods and services higher)and subsidies (makes prices or good and services lower than their factor cost). In the national accounts, production is valued at basic cost, income at factor cost and expenditure at market prices.

Taxes on products refers to the taxes payable per unit good and services. Other taxes on production refers to taxes on production not linked to a specific good or service e.g. taxes on labour, ownership of land or other assets used in production.

Subsidies on products include direct subsidies payable per unit exported to encourage exports, other subsidies on products are not linked to specific goods or services such as employments and payroll subsidies to reduce pollution.

Relationship between factor cost, basic prices and market prices:

Market prices = factor cost + all taxes on products and production – all subsidies on products and production.

Market prices = basic prices + taxes on products minus other subsidies on products

Basic prices = factor costs + other taxes on production – subsidies on production

Basic prices = Market prices – taxes on products + subsidies on products

Factor costs = market prices - all taxes on products and production + all subsidies on products and production

Factor costs = basic prices –other taxes on production + other subsidies on production.

The following thus apply:

Gross value added (GDP) at factor cost

+ other taxes on production

-Other subsidies on production

= Gross value added (GDP) at basic prices

Gross value added (GDP) at basic prices

+ taxes on products

-Subsidies on products

= GDP at market prices.

2.6 Valuation at current prices and at constant prices.

Initially all national accounting data are measured at current prices, i.e. nominal terms. To adjust for inflation Stats SA and SARB convert GDP at current prices to GDP at constant prices or real GDP by valuing all goods and services produced each year using the prices from a certain year.

The ratio between nominal and real GDP is called the GDP deflator and reflects inflation for the economy as a whole.

The conversion from GDP at current prices to (nominal) to GDP at constant prices (real) also yields and estimate inflation rate for the economy as a whole.

2.7 Problems associated with GDP.

• Non-market production– Goods and services not sold in the market such as goods and services produced by government, farmer’s consumption, DIY work and volunteer work.
• Unrecorded activity– These refer to smuggling, drug trafficking, prostitution, hawking, flea market tradingetc. If unrecorded activity remains the same changes in GDP will reflect in the aggregate level of economic activity.
• Data revisions– Unavoidable revision of certain data after they were originally published.
• GDP as a measure of wellbeing or welfare– A larger physical flow of good of services does not necessarily increase wellbeing of residents. Unwanted by products of production such as pollution, congestion, noise and stress are not measured.
• Distribution of income– National accounting data say nothing about the distribution of total income within the country.

2.8 Gross national income

Income earned by foreign owned companies, i.e. all primary income to rest of the world must be subtracted from GDP. Also, all income earned by foreign SA production i.e. primary income from rest of the world needs to be considered. This is called the Gross National Income.

GNI = GDP + primary income from the rest of the world – primary income to the rest of the world

Or

GNI = GDP – net primary income to rest of the world

GDP is the best measure of the level of economic activityin the country and of the potential for creating jobs for the country’s residents. Economic growth is therefor usually measured by calculation the percentage change in real GDP from one year to the next. GNI is a better measure of the income or standard of livingof the residents of a country.

2.9 Expenditure on GDP versus GDE

In the expenditure approach, national accounts add together the final consumption expenditure and capital formation by households, firms, government and foreign sector.

It indicates the total value of spending on goods and services produced in the country.Expenditure on GDP does not include imports since imports are produced in the rest of the world. Expenditure on GDP is always equal to GDP at market prices and indicates the total value of spending on goods and services produced in the country.

Expenditure on GDP is expressed as follows:

• Final consumption expenditure by households (C)
• Capital formation (I)
• Final consumption expenditure by governments (G)
• Expenditure on exports (X) less expenditure on imports (Z)– (X-Z = net exports)

The relationship between GDP and GDE is expressed in the following way:

• GDP = C + I + G + X – Z
• GDE = C + I + G

GDE indicates the total value of spending originating within the borders of a country. The difference between GDP and GDE is reflected in the difference between exports and imports.

If GDP is greater than GDE, it follows that exports are greater than imports. GDE>GDP means Z>X, this means the value of production in the domestic economy exceeds the value of spending within the country.

2.10 The national income and production accounts.

Notice the relationships between the various components of the table.

2.11 Saving