1. Unit 2: Measuring the Performance of the Economy
Objectives
Distinguish between GDP at factor cost and at market prices.
Distinguish between GDE and expenditure on GDP.
Calculate GDP using the three different methods.
Differentiate between nominal and real GDP.
Derive personal disposable income from GDP.

2. 1. Definition and content of the Various Accounts
Countries record all transactions that take place inside the country as well as with other countries.
The methods used to measure the performance of the economy is known as the National Accounts (NA).
NA helps us to measure and analyse: How much our nation is producing and consuming.
All economic activities regarding production, income, expenditure and trade with rest of the world as illustrated in the circular of income are summarised in the National Accounts.

3. National Accounts Account 1: Gross Domestic Product and Expenditure
Account 2: Gross National Income and the way it is appropriated.
Account 3: Gross Capital Formation and the way it is financed.
Account 4: The account with the rest of the world (Balance of payment).
Account 1,2 and 3 deals with the domestic economy.
Account 4, Deals with foreign sector and record all transactions with the rest of the world.

4. 2. Account 1: Gross Domestic Product and Gross Domestic Expenditure
GDP is the market value of all final goods and services produced inside the borders of a country for a period of one year.
Final goods and services: Everything that is produced and sold to the end user for consumption. They are not used to produce other goods and services. E.g. If you buy bread at a shop and take it home to eat, the loaf of bread is a final good and is included in the GDP.
Intermediate goods are not included in the GDP. E.g. If you buy bread and use it to make sandwiches to sell at school, the bread is an Intermediate good and the Sandwich is the final good.
Market value: GDP is measured in terms of the prices paid for goods on the market.
Taxes and subsidies influence the prices of goods and we need to take them into consideration.

5. “Within the borders of the country” or domestic: Production that takes place in a country by citizens of the country as well as foreigners who live and work in the country is included in the GDP.
GDP vs GNP
GDP: Measure production that takes place inside Namibia. Including production by foreigners who live and work in Namibia but excludes production by Namibians who live and work in other countries.
GNP: Measure production by Namibians. It excludes the production of Foreigners who live and work in Namibia.

6. 3 Methods used to calculate the GDP
The income method: It involves adding up all the income received by the four factors of production.
The expenditure method: This method involves counting expenditure on goods and services by the four sectors of the economy.
The value added method: This method measures activities inside businesses that occur as products move through the different stages of production.

7. Income method
The income method uses the income earned by various factors of production to calculate the GDP.
Compensation of employees: This item includes all salaries and wages.
Net operating surplus: Profit earned by entrepreneurs.
Consumption of fixed capital: Capital goods such as machines and equipment are consumed when production takes places. A part of every year’s production must be used to replace the old capital goods. In the national accounts it is called consumption of fixed capital.
Taxes on production and products: Refer to indirect taxes that are levied on economic transactions. They are added because they increase the market prices of goods and services.
Subsidies on the production and products: subsidies are deducted, because they decrease the market prices of goods and services.

8. Factor cost and Market prices
GDP at factor cost: Measures the cost to businesses to employ the four factors of production.
GDP at market prices: Include the prices consumer will pay for the goods on the market.
The difference between GDP at factor cost and Market prices is subsidies and taxes levied by the Government.

9. Table 1: Income method Income method N$ millions
Compensation of employees
Net operating surplus
Consumption of fixed capital
GDP at factor cost
Other taxes on production
16 023
Less: Other subsidies on production
2 367
Taxes on products
84 453
Less: Subsidies on products
4 809
GDP at market prices

10. Expenditure method
This method uses various types of expenditures on goods and services by four sectors to calculate the GDP at market prices. It is shown on the right hand side of Account 1 in Table 3 below. The expenditures are:
Consumption expenditure by households (C)
Gross Capital formation (Investment by firms I)
Consumption expenditure by the general government (G)
Exports of goods and services (X)
Imports of goods and services (M)
Residual (Discrepancy)

11. Expenditure method GDP= Expenditure on GDP Y = C+I+G+(X-M)
Gross Domestic Expenditure (GDE): Refers to the expenditure inside the country and excludes the foreign sector.
GDE= C+I+G
I= Gross Capital Formation

12. Final consumption expenditure by Household (C):
Expenditure by households on all final goods and services can be divided into the following categories:
Durable goods: Goods that are not used up in the process of consumption and last longer than one year, e.g. cars and furniture.
Semi-durable goods: Goods such as clothing and shoes that can be consumed for a period of time but they do not last as long as Durable goods.
Non-durable goods: These goods can be consumed only once e.g. food, petrol and cigarettes.
Services: Intangible consumption items that are consumed as they are produced, e.g. Medical services and transport services.

13. Final consumption expenditure by the general government
The general government includes the:
Central Government
Regional Government
Local Government
Consumption expenditure by the government includes all current expenditure on:
Salaries and wages
Goods and services of non-capital nature

14. Gross Capital Formation
Also known as Investment expenditure. It consists of the following two components:
Gross fixed capital formation: Include all expenditure by producers on production goods such as new buildings, new machines and breeding livestock. It includes new capital goods of the private as well as the public sectors. New lecture buildings at Poly will be included in this category.
Change in inventories: Include raw materials, semi-completed and completed products owned by business. These inventories change as goods are bought and sold.

15. Exports (X), Imports (M) and Residual item
Are goods produced in Namibia and sold in other countries.
Imports (M):
Goods produced in other countries and sold in Namibia. They are not part of GDP and are deducted.

16. Residual item Calculating the residual item:
When calculating GDP by income and expenditure methods, we calculate the same thing, but calculation errors can occur.
Data to calculate GDP are obtained from different sources and calculations may not be completely accurate.
Errors can be overcame by including the residual item. From table 3 GDP calculated according to expenditure method is more than GDP obtained by Income method. The residual item is difference between the two.
Calculating the residual item:
Total expenditure N$
Less: GDP at Market P N$
Residual item N$

17. Table 2: Expenditure method
N$ millions
Consumption expenditure by households
Consumption expenditure by the general government
Gross capital formation
Gross domestic expenditure
Exports of goods and services
Less: Imports of goods and services
Residual item
Expenditure on GDP
(GDP at market prices)

18. Table 3: Illustration of the income and expenditure methods
Income method
N$ Millions
Expenditure method
N$ Million
Compensation of employees
Consumption expenditure by Households
Net operating surplus
Consumption expenditure by the general government
Consumption of fixed capital
Gross Capital formation
GDP at factor cost
Gross Domestic Expenditure
Other taxes on production
16 023
Exports of good and services
Less: Other subsidies on production
2 367
Less: Imports of goods and services
( )
Taxes on product
84 453
Residual item
Less: Subsidies on product
4 809
GDP at Market prices

19. Value added method calculations:
This method calculate GDP by adding the value of each producer’s contribution to the final product.
Value added method calculations:
A grape farmer sells ten load of grapes to a wine N$ a load.
The wine cellar processes the grape and sells the wine to the N$
The wholesaler sells the wine to retailer @N$
The retailer sell the wine to

20. Table 4: Market value and value added
Firm (N$)
Market Value (N$)
Value added (N$)
Farmer
10 000
Wine cellar
18 000
8000
Wholesaler
20 000
2000
Retailer
25 000
5000
Total:
73 000

21. Value added method
The wine did not increase GDP by N$ but only by N$ Because the final product is worth N$
N$ is obtained by double counting.
The original of grapes N$ , is incl. In each market value or selling price.
We eliminate double counting by counting the total value of the first producer and the value added during the stages of production (value of the final product).
From table 4: total value added is N$ and the value of wine sold to consumer is N$
Thus, wine increase GDP by N$

22. Value added method
As product move through the production process, we refer to them as intermediate goods.
In table 4: the intermediate goods are grapes, wine processed by the cellar and wine sold by the wholesaler.
Intermediate goods are not included in the GDP because if included it will result in double counting.
Final goods form part of GDP. Final goods are purchased for consumption by individuals, households and firms.
Value added is the contribution that each stage of production makes to the final value of a good.

23. Using GDP figures
To compare one country’s GDP with that of another country, wee need to distinguish between nominal GDP and real GDP.
Nominal GDP: Is the GDP calculated at existing prices. Also known as GDP at current prices. E.g Goods produced in 2010 will measured in terms of prices.
Real GDP: Is nominal GDP adjusted for inflation. It is calculated at constant prices. P are adjusted to eliminate inflation.
We compare GDP figures from one year to those of another year to see if economic growth had taken place.

24. Real GDP= Nominal GDP x 100
Price Index
Price index: Is a measure of how the price level has risen from one year to the next.
Example: GDP at market prices = N$ million and consumer P index= 124.4
Real GDP= /124.4 x 100= N$30 997Mil

25. Potential GDP: Refer to the GDP the economy could have earned if all its productive resources were fully employed. We refer to this as the full employment income or production level.
Example:
Real GDP in 2010 was N$ but 30% of the countries resources are unemployed. Thus, only 70% of the resources is responsible for GDP mentioned above.
Potential GDP= 100/70x = N$

26. 3. Account 2: National Disposable Income and how it is appropriated
Reflect income earned by Namibians both inside and outside the borders of the country.
National aggregate and exclude income earned by foreigners who live in Namibia.
Gross National Disposable Income indicates how income is earned.
Appropriation means how citizens use their income.
Income used in the following ways:
Household can consume their income
G spend income on consumption item
Income can be saved

27. Gross National Disposable Income
N$ million
Appropriation of national income
Compensation of employees
Consumption expenditure by household
Less: Net compensation to non residents
1 695
Consumption expenditure by general government
Gross operating surplus
Final consumption expenditure
Less: Net property income to the rest of the world
20 820
Gross saving
Taxes on production and imports
Less: Subsidies
7 176
Less: Net current transfer from the rest of the world
6 422
Residual item
4 299
Appropriation of National Income

28. Account 3
Saving: Is the difference between total available national income and total consumption expenditure. Gross domestic saving consist of:
Saving by households: Difference between household final consumption expenditure and current disposable income. Not used for consumption but available to finance investment.
Corporate saving: Is part of the company profits that is left over after company tax and dividends have been paid.
Saving by the General Government: Difference between Government current income and current expenditure.
Consumption of fixed capital: Amount provided to replace old and worn out capital stock.

29. Account 3… Net Capital inflow from the rest of the world
Shows the net amount of funds flowing to or from the country.
If more is coming in than goes out, this figure will be positive.
If more flows out than comes in, the figure will be negative.
Foreign investment: Is the balance on the current account in the BoP.
If positive (Surplus) – Inflows > outflows, represents an increase in domestic capital formation.

30. 4. Account 3: Gross Capital Formation and how it is financed
N$ million
Financing of Gross Capital Formation
Gross Fixed Capital Formation
Saving by household
2386
Change in inventories
5271
Corporate Saving
33 390
Saving by Government
Consumption of fixed capital
Gross saving
Net capital inflow from the rest of the world
6242
Change in gold and other foreign reserves
-3192
Foreign investment
3050
Financing of gross capital formation

31. 5. Account with the rest of the world (Balance of Payment)
All countries keep record of all transaction with the rest of the world. This accounting record is called the BoP
Balance of payment consists of two major accounts:
The current account
The capital and financial account

32. Current Account On the left hand side.
Records all exports, imports and transfer of money.
Transfer include cash received by Government and private organization or individuals.
Government receives grants from governments and their share of money from SACU.
NGO receives money from foreign governments.

33. Capital and Financial account
On the right hand side and records the net transfers from the rest of the world.
Net capital transfer indicate the favorable difference between capital inflows and capital outflows.
Capital includes direct investment, portfolio investment (A portfolio investment is a transaction in which securities are held purely as a financial investment).
and any other investment including change in gold and foreign reserves.
If balance on the current account shows a negative value, the financial account must provide funding through capital inflows shown on the right hand side as a positive value.

34. Table 7: Account 4: Account with the rest of the world
Current account
N$ millions
Capital account
Total exports of goods and services
268929
Net capital inflow from the rest of the world
6242
Less: Total imports of goods and services
265557
Change in gold and foreign reserves
-3192
Transfers
-6422
Balance on current account
-3050
Financial flows and change in reserves
3050

35. 6. Other Measures of Production, Income & Expenditure
Gross National Product (GNP)
Income and profits earned by Namibians in foreign countries and paid back to Namibia is called Factor receipts.
Foreigners who live and work in Namibia pay income and profits back to their countries it is referred to as Factor payments.
Factor payments – Factor receipts = Net Factor Payments
GDP – Net Factor Payments = GNP

36. Net National Product (NNP)
GNP – consumption of fixed capital = NNP
National Income (NI)
NNP is measured at market prices and NI is measured is measure at factor cost.
NNP – Indirect business taxes + subsidies= NI
Personal income (PI)
PI=NI Less:
Company tax
Company saving
Plus: Transfer payments
Personal disposable income (PDI)
PI – Personal taxes = PDI

37. END OF UNIT 2: Thank You!!! Questions???