ECS2603CHAPTER 11.1 ECONOMIC INDICATORS.Economic indicators only indicate something if compared to something else.

Reasons for monitoring indicators: To expand business and explore new markets Asses general performance of the economy Effectiveness of economic policy Compare economic policies between 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.

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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 definitions the 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 coverage of 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 points for calculating changes. A frequent mistake is to confuse levels with rates of change (or percentages). Determine what other yard sticks will aid interpretation. Bear in mind that correlation does not result in causation. Be cautious of international interpretations as definitions may 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

PercentagesThe 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 tendencySimple average or arithmetic mean is 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.

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CHAPTER 2TOTAL PRODUCTION, INCOME AND EXPENDITURE: THE NATIONAL ACCOUNTS2.1 The National AccountsConstituting 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 EqualityIdentical 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 method and the expenditure method.

2.3 Gross Domestic Product.GDP Is the total 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.

Production (Value Added) Income Expenditure on final goods and services

Farmer R5 000 Rent & interest R1 400 Bread R5 000Miller R2 000 Wages R1 750Baker R2 000 Profit R1 850TOTAL R5 000 TOTAL R5 000 TOTAL R5 000

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.

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Table 2.1: Gross value added by kind of economic activity at current prices, 2009Primary Sector R Millions %Agriculture, forestry and fishing 66 049 3.0Mining and quarrying 212 469 9.7Secondary SectorManufacturing 329 166 15.1Electricity, gas and water 53 133 2.5Construction (contractors) 84 450 3.9Tertiary SectorWholesale and retail trade, catering and accommodation 290 957 13.3Transport, storage and communication 206 271 9.5Financial intermediation, insurance, real-estate and business services 474 111 21.7Community, social and personal services 464 632 21.3Gross Value added at basic prices 2 181 238 100.0

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, 2009R Millions

Final consumption expenditure by households 1 472 824Final consumption expenditure by general government 504 169Gross fixed capital formation 543 392Change in inventories -75 514Residual item -921Gross domestic expenditure 2 443 950Export of goods and services 657 113 Minus import of goods and services -677 740Expenditure on gross domestic product at market prices. 2 423 323

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 expenditure pertains to individual consumption on goods and services like education & health.

2) Collective consumption expenditure pertains 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 formation refers to additions in the country’s capital stock. No provision is made for consumption(depreciation) and fixed capital formation refers 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.

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Market prices = basic prices + taxes on products minus other subsidies on productsBasic prices = factor costs + other taxes on production – subsidies on productionBasic prices = Market prices – taxes on products + subsidies on productsFactor costs = market prices - all taxes on products and production + all subsidies on products and productionFactor 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

trading etc. 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 incomeIncome 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 worldOr

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

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. 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 living of the residents of a country.

2.9 Expenditure on GDP versus GDE

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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.

R MillionsCompensation of employees 1 086 907Net operating surplus 728 426Consumption of fixed capital 332 824Gross value added at factor cost 2 148 157Plus: Other taxes on production 38 173Less: Other subsidies on production -5 092Gross value added at basic products 2 181 238Plus: Taxes on production 245 198Less: Other subsidies on production -3 113Gross domestic product at market prices 2 423 323Final consumption expenditure by households 1 472 824Final consumption expenditure by general government 504 169Gross fixed capital formation 467 878Residual item -921Gross domestic expenditure (GDE) 2 443 950Plus: Export of goods and services (X) 657 113Less: import of goods and services (Z) -677 740Expenditure on gross domestic product (GDP at market prices) 2 423 323Plus: primary income from the rest of the world 34 075Less: primary income to the rest of the world -87 593Gross national income at market prices (GNI) 2 368 805Plus: Current transfers from the rest of the world 10 334Less: Current transfers to the rest of the world -32 762Gross national disposable income at market prices 2 347 377

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2.11 SavingSaving is defined as the difference between income and expenditure. Gross saving consists of savings by households, companies, general government and consumption on fixed capital. Data only available at current prices only and expressed as a ratio called the saving rate.

Net saving = gross saving less consumption on fixed capital Corporate Net Saving = Total current income less expenditure or business enterprises Private saving = Sum of saving by households and companies. Government saving (Net) = current income of government less current expenditure Consumption of fixed capital is the amount set aside to replace capital equipment used up in the

production process. Contractual saving refers to the act of saving against agreed contracts Discretionary saving is all current disposable income that is not spent or saved contractually.

CHAPTER 3ECONOMIC GROWTHChanges in nominal GDP reflect change in prices (inflation) and cannot be used to measure economic growth. Nominal GDP needs to be adjusted to obtain real GDP or GDP at constant prices.

3.1 Calculating annual rates of change.The growth rate between any two successive periods, expressed as an annual rate, can be calculated with the following formula:

% change between t – 1 and t = [( ¿¿−1)

f❑−1] x100

Where I = Variable in questiont-1 = Initial periodt = current periodf = frequency of time series (12 for monthly, 4 for quarterly, 1 for annually)

for quarterly data: [( ¿¿−1)

4❑−1] x100 and for annual data [( ¿

¿−1)−1] x100To calculate the average annual growth rate in annual data over periods spanning more than a year.

[( ¿¿−k )

1k−1] x100

Where t = final period (year)t-k = initial period (year)k = number of years over which the rate is calculated.

3.2 The appropriate basis for calculating economic growth.Which aggregate should be used to calculate economic growth?The basic choice is GDP or GNI to recap,

GDP is a geographical concept which measure the total value of economic activity within a country

GNI measure the total production or income of the residents of a country on a worldwide basis.

If one is interested in the volume of production within a country, real GDP should be used. If one is interested in the economic welfare of the residents, real GNI should be used. However:GDP includes exports and excludes imports, i.e. changes in exports prices are taken into account but changes in import prices are ignored.

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For example, when the price of gold increases, the value of gold production is adjusted for the price increase when real GDP is calculated. In other words, if the price of gold increases but the volume of gold production remains the unchanged, nominal GDP will increase but real GDP will remain unchanged. However, if the price of an imported good (oil) increases, real GDP will be unaffected as long as volume does not change but a price increase will mean the country will, ceteris paribus, be able to afford a smaller volume of imports with the same volume as exports as before due to the terms of trade, which is a ratio between export and import prices. A massive increase in gold price will leave real GDP unaffected, ceteris paribus, while a sharp rise in the oil price will also have no effect on real GDP, ceteris paribus. Real GNI data thus indicate the volume of goods available for domestic consumption, while real GDP data indicate the volume of domestic output. Generally changes in real GNI are a better measure of changes in economic welfare while real GDP in practice is the best indicator for changes in the domestic economic activity, changes in employment and economic growth. Neither real GDP or real GNI reflect the economic growth on average member of society but can be shown by expressing real GDP or GNI on a per capita basis (GDP or GNI divided by population)

3.3 Graphic representation of economic growth.

A semi-logarithmic graph a straight line represents a constant percentage change over the period. Semi-logarithmic graph helps to avoid the illusion of increased variability and i dentify possible structural breaks in a growth trend.

(a) Variable increasing at an increasing rate

(b) Variable increasing at an increasing rate

(c) Variable increases at a decreasing rate

(d) Variable decreases at an increasing rate

(e) Variable decreases at a constant rate

(f) Variable decreases at a decreasing rate

CHAPTER 4BUSINESS CYCLES4.1 Definitions

Business cycle refers to the fluctuations in the overall level or pace of economic activity. It is the pattern of expansion and contraction in economic activity relative to its long-term trend. One cycle usually last one year and has four elements, trough, upswing, peak and downswing.A full cycle in aggregate economy activity is called a reference cycle, i.e. when people want to know whether the economy is in an expansionary or in a recession, they are inquiring into the position of the economy in terms of the reference cycle.

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A specific cycle is a full cycle exhibited by such an individual time series. A reference cycle is actually an average of a large number of specific cycles.

1. Idealised business cycle.

4.2 Determining the turning points of the reference cycle. The examination of the movements in the real GDP, which is the level of aggregate economic activity, is the identification of peaks and troughs of the reference cycle.The isolation of the cyclical component of any time series requires that the series’ first be decomposed into its different components. A few methods used to determine these turning points are:

1) A time series is a set of observations of a phenomenon taken at different points over time, usually at fixed intervals (weekly, monthly, quarterly, annually).

2) Whereas time series data is ordered according to time, cross-section data are for a particular moment or period and ordered to criteria other than time (gender, geographic, education level).

3) Panel data is a cross section or group of people, firms, countries, etc. that are observed periodically.

A time series can four trends:1. Trend (T) – Is the long-term pattern or movement of a time series.2. Cyclical variations or cycles (C) - are non-periodic recurring fluctuations around the long run

trend usually associated with business cycles. 3. Seasonal variations (S) – Occur within a year and are variation in the level of the variable which

occur from year to year. E.g. holidays, pay practices, tax deadline, weather conditions.4. Random or irregular variations (I) – are the erratic and unpredictable variations in the time-series

data as a result of unpredictable disturbances. Multiplicative model: Generally used for economic time series because these series usually exhibit exponential trends and because the various influences are usually interrelated rather than independent of each other. Y = Tt Ct St It

Additive Model: Y = Tt + Ct + St + It

To isolate cyclical variation formula is therefore: C= YtT t C t I t

Reference turning points are determined as follows: All available time series data collected. If necessary, some of the series are adjusted for such factors as prices changes and number of

working days in each month or quarter. Each individual series is analysed to isolate the cyclical component and determine the specific

turning points. The info on turning points is assembled to determine the reference turning points. The cluster of turning points involves using a sufficiently large number of specific turning points to

represent all the various economic sectors.

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A diffusion task is a measure of the distribution of changes in a number of time series occurring within a particular period.

As a rule two diffusions indices are calculated: a historic and current diffusion index. The historic index is determined by first dating the specific turning points. The current index is calculated without first determining specific turning points.

4.3 Business Cycle Business cycle indicators are identified by comparing the turning points of the cyclical components of individual time series with the reference turning points.

Leading indicator: if the specific turning points of an individual time series tend to always precede the reference turning points.

Coincident indicator: if the specific turning points coincide with the reference turning points. Lagging indicator: If the specific turning points occur after the reference points.

A business cycle indicator should1) Represent an important variable or process2) Bear a consistent relationship over time with business cycle movements and turning points3) Not to be dominated by irregular and other non-cyclical movements4) Be promptly and frequently reported.

4.4 Other approaches to forecasting economic activity. Econometric models: Consists of a number of identities and a set of functions which have been fitted to historical data using various statistical techniques. It is a quantitive version of an economic model.Models differ widely in size, it may be a single equation which links levels of GDP to the money stock and/or government spending or may consist of hundreds of equations. They are used for forecasting, structural analysis and policy simulations to estimate the possible impact.

CHAPTER 5EMPLOYMENT AND UNEMPLOYMENTThe main macroeconomic objective is to fully employ the factors of production, mainly labour. Simply to keep the unemployment rate as low as possible. In developing countries like SA, with its large informal sector and large volumes of legal or illegal immigration accurate employment data is difficult to obtain

5.1 Population DataThe basic starting point is to count the total population of the country with Stats SA census.

5.2 Economic Active Population The estimate requires how many people are willing and able to work. The unemployment rate is obtained by expressing the number of people who are willing and able to work but do not have jobs as a percentage of the total number of people who are willing and able to work. This is called the labour force or economic active population (EAP). EAP includes those in and out of work.The EAP depends on factors such as:

The age distribution of the population Retirement rules and the availability of social security. Social, cultural, religious or other conventions about the role of woman in society. The availability of household appliances, childcare centres and other institutions. The level of development and structure of the economy.

Economically active workforce (age 15-64) is called the labour force participation rate (LFPR)

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5.3 EmploymentTrends in employment in different sectors or industries indicate important structural changes in the economy. Data is also used to calculate productivity, earnings per works and other economic indicators. SA has history of unreliable employment data. One of the better data series was the standard employment series, generated in 1984 by Roukans de Lange and Van Eeghen to address the short comings of existing data. Series is available up to 1998 and provide data about trends and structural changes. (Pg. 85 text book)

Important report is the monthly Employment Situation Report published by the US Bureau of Labour Statistics. It is important because it gives first indication of what is happening to employment, unemployment and household income in the largest economy in the world and where it is heading. No other indicator can move equity and bond markets like the data on employments and unemployment contained in the report, hence it is closely followed by the investment community and policy makers.

Stats SA publishes estimates of employment on its Quarterly Employment Statistics (QES) and Quarterly Labour Force Server (QLFS) . The QES is based on a survey of enterprises that is aimed at obtaining data on employment and earnings in the formal non-agricultural sector of the economy. The QLFS is the main source of data and is a survey of households/dwellings to obtain data on employment and unemployment. In contrast to the QES, the informal sector is also covered.

Formal and Informal EmploymentThree primary reasons why people engage in the informal sector:

1. They do not want to pay tax.2. They cannot find employment in the formal sector.3. They are engaged in illegal activities.

Informal Sector activitiesLegal / Socially acceptable Illegal / Socially unacceptableProducersSelf-employed artisans, shoemakers, home brewers, craft and curio makers.

ProducersDagga producers, counterfeiters

DistributorsHawkers, flea-market traders, petty traders, carriers, shebeeners.

DistributorsPickpockets, burglars, robbers, gamblers, drug traffickers, black marketeers.

Service ProvidersTaxi operators, money lenders, musicians, launderers, barbers, backyard mechanics.

Service ProvidersHustlers, pimps, smugglers, loan sharks.

Employment Coefficient.As a result of the decline in economic growth the formal employment tended to stagnate and decline in the 80’s and 90’s. There is a possibility that a smaller proportion of additional jobs were created for each percentage point growth in real GDP during this period. A useful indicator is the employment coefficient or production elasticity of employment. This measures the degree of responsiveness of employment to economic growth.It is calculated by dividing the percentage change in formal employment by the real GDP growth rate for successive period of about 5 years. A long period should be used as employment does not react immediately to changes in production or employees can be locked into contracts. There tends to be a lag of up to two years between changes in production and employment.

Labour Absorption Capacity.

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Labour absorption capacity is the ratio or percentage of new entrants to the labour force that are able to find employment in the formal sector of the economy.

Labour absoption capacity (% )= increase∈formal employmentincrea se∈labour force(EAP )

x100

The marginal labour absorption capacity differs from the labour absorption rate. The labour absorption rate is calculated as the ration between the number of employed people and the total working-age population.

5.4 UnemploymentThe unemployment rate is obtained by expressing the total number of unemployed persons as a percentage of the total number of available works. Strict Definition – An unemployed person are those within the economically active population (15-64) who:

a) did not work during the seven days prior to the surveyb) were available to work during the reference weekc) actively looked for work or tried to start a business in four weeks prior to the survey.

The three conditions are thus: without work, available for work, and seeking work.

Expanded definition – only requires a desire to find a job i.e. excludes criterion ‘c’ above and thus include discouraged work-seekers. A discouraged work-seeker is a person who was not employed during the reference period, was available to work or start a business but did not take steps to find work during the last four weeks because of any of the following: no jobs were available, the person unable to find work requiring their skills or had lost hope of finding any work.

Methods of information used to estimate unemployment. The Census Method – used to determine the economic status of the population, the problem is that is used to estimate the country’s population rather than obtaining information on unemployment. Estimates are a by-product of the census exercise and only generated every 5 – 10 years.

The registration method – A person is classified as a registered unemployed person if that person is of working age, out of work, available for work and registered as a work-seeker with the department. The main issue is it is voluntary and unpublished data since Sep 1998. Only those eligible for unemployment benefits and hope the department will be able to place them in employment take trouble to register. It therefore does not reflect level of unemployment.

The Sample Survey Method Current Population Survey – Oct 1977, sample basis to obtain estimates of black unemployment and discontinued in 1990.October Household Survey (OHS) – Started 1993, aimed at providing insights into perspectives on the most important elements of the country’s unemployment profile. Labour Force Survey (LFS) – Feb 2000, a twice-yearly rotating panel household survey designed to measure the dynamics of employment and unemployment in the country. Quarterly Labour Force Survey (QLFS) – July 2008, a survey of +/- 30 000 households. 25% of the households rotate out of the sample and replaced by new households. QLFS generates data by industry, sex, occupation, formal, informal, race etc.

UnderemploymentVisible underemployment – Occurs when a person involuntarily works less than full time and include part-time workers, casual workers and seasonal workers who would prefer to be in full time employment. Inadequate employment as a result of an insufficient amount of work.

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Invisible underemployment – is the result of a misallocation of labour e.g. As a result of under-utilisation of skills or low productivity.

5.5 International Comparisons. Data may not be comparable from one country to another since they are drawn from different definitions in respect of age limits, reference periods, criteria for seeking work and treatment of persons temporarily laid off. Other differences include approaches towards counting homes, domestic servants, part-time staff, people with more than one job and data may be subject to government manipulation. One should always check the definitions and sources.

CHAPTER 6INFLATIONInflation is defined as a sustained increase in the general price level. To measure inflation a yardstick of the general price level and an appropriate period for measuring changes in the yardstick have to be measured.

6.1 Index NumbersThe quantities of goods and services are measured in different units (tonne, kilogram, litre, meter, watt) so the general price level of goods and services is not directly observable. So we use index numbers to construct a price index.Index number is the ratio between a value of a variable or group of variable at a given time during a specified period and its value at a base time or during a base period. The base is normally 100. An index number indicates the level of a single or composite variable in relations to its level at another time. An index is a series of numbers with a fixed frequency (month, quarter, year). A specific index contains a single component. A general index is obtained by combining variable or specific indices into one index. The construction of an index involves 5 steps:

1. The choice of items or components2. The choice of a base period3. The assignments of weights to the different items or components4. The collection of data5. The calculation of the index numbers

Choice of base periodThe main criteria used in selecting a base period include:

The base period should be relatively recent, the more recent the period the more comparable the current figures are.

The base period should fall in an economically stable or normal period. Useful to compare many indices if they have a common base period. Census, survey or sample years are often used a base periods as comprehensive data is available

for the relevant variable in such years.

The assignment of weights to the different items is determined by the proportion of income spent on the product concerned.

6.2 Price IndicesA composite price index is used to measure the cost of a group or goods and services as a ratio of their cost in the base period. It is calculated by comparing the weighted average cost of the same basket in the base year.

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Priceindex number= cost of basket∈current periodcost of basket∈base period

x 100

Following steps are taken to construct a composite price index Basket (or regimen) selection – A representative sample of goods and services to be included

therefore has to be determined. Base year selection – To facilitate international comparisons common round base years are

usually chosen (1995, 2000, 2005) Weighting – Need to assign weight to each item as not all items in the basket are equally

important. Usually based on spending habits of consumers, business, government. Price Collection – The systematic gathering of information on prices usually on a monthly basis. Calculation of price index number – The CPI and PPI are calculated according to Laspeyres using

fixed weights for the different items. The advantage is that a series of Laspeyres index numbers have a common denominator and comparable in the strict sense. But because fixed weights are used, a Laspeyres price index tend to overstate price index and understate price decreases and therefore has an upward bias.

Problems associated with price indices Laspeyres tend to have an upward bias. Bias will be small if no drastic changes in the composition

of the basket. Quality may change but no direct method of how it is measured. New products in the market may have a major influence on spending patterns. The difference between advertised prices and actual transaction prices. Discounts are often

varied in response to changes in market conditions. Certain goods are custom made which is associated in particular with the PPI A price index is an average and thus conceals more than it reveals.

Shifting the base period of an index and linking two indices. To compare different indices over a long period, it may be necessary to shift the base period of an index. Suppose that we wanted to shift the base period of the annual CPI from 2000 to 2005. Each index would need to be transformed by dividing each original index by the 2005 number and multiplying by 100. This is known as technical shifting and can be applied to a fixed-weight (Laspeyers) index only if the same weights have been used to calculate all the index numbers.

Year CPI (2000 = 100) Calculation CPI (2005 = 100)2001 105.7 (105.7/128.0) x 100 82.62002 115.4 (115.4/128.0) x 100 90.22003 122.1 (122.1/128.0) x 100 95.42004 123.8 (123.8/128.0) x 100 96.72005 128.0 (128.0/128.0) x 100 100.02006 134.0 (134.0/128.0) x 100 104.72007 143.5 (143.5/128.0) x 100 112.1

Splicing or chaining is used to link two differently based indices. It can only be done if the olf and the new series have at least one over lapping period. Years 2004-2007 are obtained by technically shifting the base period to 2008.

Year Old index Revised index Calculation Spliced index

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(2000 = 100) (2008 = 100) (2008 = 100)2004 123.8 (123.8/160.0) x 100 77.42005 128.0 (128.0/160.0) x 100 80.02006 133.9 (133.9/160.0) x 100 83.72007 143.5 (143.5/160.0) x 100 89.72008 160.0 100.0 100.02009 107.1 107.1

6.3 The Consumer Price IndexThe CPI is an index of the prices of a representative basket of consumer food and service and published monthly by Stats SA.The CPI is a fixed-weight or Laspeyres index. The basket of goods and services and the weights accorded to the different goods and services are based on detailed surveys of household income and expenditure. Surveys are conducted approximately every 5 years and after each survey a new index is constructed with a new basket of set weights. Stats SA intends to introduce a new CPI weights every 3 years. In SA the basket comprises of 416 goods and services and weights are based on spending patterns in the different urban areas.

Collection of price dataA team at Stats SA collects prices for services during the first 3 weeks of the months, an average of 100 000 prices are collected each month. Some prices (household rent, bus fares) are collected every 3 months, while some are collected annually (school fees, medical aid contributions, doctor fees) except if an identifiable adjustment occurs. This results in CPI result being steeper rather than smooth. CPI should be judged over a periods of at least 12 months.

Interpretation and uses. The index number needs to be compared to be useful. The most common use is to calculate inflation rates. Can be used to inflate or deflate other time series data. Or adjust prices, wages, salaries, rent and other variables to changes in the price level.

It is also subject to indiscriminate use or abuse such as linking salaries, rent, prices and other variable increase the inflationary bias of the economy due to such index-linking virtually ensures that any price increase is automatically passed on in the form of further increases.

Advantages and disadvantagesThe CPI is an explicit index calculated directly and become rapidly available, relatively accurate and is not revised. The CPI is subject to all the standard defects of an explicit price index based on fixed, base-year weights, meaning it is upwardly biased because changes in the composition of consumer expenditure are ignored and not all consumer goods and services are included. SA coverage of CPI is broad even by international standards. CPI is not directly applicable to any individual household. CPI includes direct tax (VAT) and shift in direct tax will reflect in an increased CPI.

Deflating/Inflating a time series or index.Deflating a time series means converting a nominal (current-price) time series to a real (constant-price) time series or index. In other words the effect of price increases is removed. Real values are obtained by dividing each nominal value by the corresponding price index number and multiplying the result by 100.

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Year Average monthly earnings in manufacturing at

current prices (R)

CPI(2008 = 100)

Calculation Average monthly earnings at constant

2008 prices (R)2000 4 698 62.5 (4 698/62.5) x 100 7 5172001 5 216 66.1 (5 216/66.1) x 100 7 8912002 5 653 72.1 (5 653/72.1) x 100 7 8402003 5 980 76.3 (5 980/76.3) x 100 7 8372004 6 575 77.4 (6 575/77.4) x 100 8 4952005 6 972 80.0 (6 972/80.0) x 100 8 7152006 7 152 83.7 (7 152/83.7) x 100 8 5452007 7 957 89.7 (7 957/89.7) x 100 8 8712008 8 855 100.0 (8 855/100.0) x 100 8 855

Inflating a time series index is converting the real (constant-price) to obtain the nominal (current-price) value.

6.4 Calculating an Inflation RateIt is a process of sustained price increase so should be measured over a period of not less than one year and expressed as an annual rate. Once CPI data are published, various methods can be used to calculate inflation. Month on same month of previous year – This rate is reported in the media each month and rates calculated this way are subject to fluctuations. A major drawback is it suffers from the base effect in that what happened one year ago has as much impact what happened in the latest period. Comparing the index number for a particular month with the index number of a corresponding month the previous year and express as a percentage. If December 2009 was 109,2 and December 2008 was 102.7, inflation rate is calculated as such:

109.2−102.7102.7

x 100=6.3%∨( 109.2102.7−1) x100=6.3%

Annual average on annual average (or 12-month average) – The procedure is to compare the average of all the monthly indices in a particular year with the corresponding average for the previous year. Short term fluctuations are eliminated as based on all 24 month figures. It also gives a better indication of the intensity of the inflation process over a long period. Any 12-month average can be calculated. This format eliminates the effect of technical factors.

Month on previous month at an annual rate - Compares a particular months figure with that of the immediately preceding month and the express the change at an annual rate. Obtain the ration of the two successive monthly figures, raise to the power of 12, subtract 1 and multiply 100 to get a percentage. If December 2009 is 109.2 and November 2009 is 108.9, inflation rate is calculated as such:

¿ 108.9)12 – 1] x 100 = 3.4%Calculating inflation rate this way is not significant unless CPI data have been seasonally adjusted but a significant degree of variation will remain.

Quarterly average on previous quarterly average at an annual rate – Obtain the ratio of the two consecutive quarterly averages, raise this to the power 4, subtract 1 and multiply by 100. This is also subject to fluctuations but can be alleviated using the seasonally adjusted averages. If third quarterly average for 2009 is 108.5 and fourth quarterly average is 109.0, inflation rate is calculated as such:

¿ 108.5)4 – 1] x 100 = 1.9%16 | P a g e

6.5 Subindices of the CPI1) Expenditure GroupsStats SA publishes CPI for 5 different expenditure groups as spending patterns vary between groups. It is useful when changes in cost of living of different expenditure groups needs to be estimated. The data can only be used to compare changes in the CPI, they cannot be used to compare difference in the level of the cost of living.

2) Geographic areasStats SA publishes CPI for each of the nine provinces. Data again can only be used to compare changes in the CPI only and cannot be used to compare the living expenses of households between provinces. SA CPI is mainly focused on metro areas. The headline inflation measure also serves as the basis for calculating inflation targets is the CPI for all urban areas.

3) Administered and regulated prices.Stats SA publishes price indices for regulated prices. An administered price is defined as a price that is set consciously by an individual producer of group of producers and/or any price that can be determined or influenced by government without reference to market forces.

6.6 The Producer price index (PPI)The PPI measures prices at the level of the first significant commercial transaction. i.e. import goods measured when they enter the country and manufactured goods measured when they leave the factory. There are 3 separate PPI’s, one for domestic output, one for imports and one for exports. The data is used by the private sector for contract price adjustment, and as deflators in the compilation of the national accounts. The PPI is estimated on a monthly basis and refers to the first seven days of the month except for mining and agriculture where it is monthly. PPI is a Laspeyers (fixed-weight) price index, the basket and weights are based on statistics of production and foreign trade. Prices of more than a 1000 goods are collected from producers, government and other organisations required for the price index. 13000 quotes from 2700 outlets and 1500 questionnaires. Some prices are collected at 3 month intervals. PPI should be interreted over a period of at least one year.

Differences between the PPI and CPI PPI estimates the cost of production, CPI estimates the cost of living CPI pertains to consumer goods and services, PPI pertains to goods only. Prices obtained from different sources and different weighting systems. VAT is included in CPI and excluded in PPI

Links between the PPI and CPIPPI measured the cost of production and included imported capital and intermediate goods, a significant change in the PPI usually indicate the rate of increase in the CPI at a later stage. Eg, rand depreciates and cost of capital and intermediate goods, however this link became weaker as imports are no longer included in the headline PPI while exports are. Export commodities have a greater impact in movement in the headline PPI. The implication I that an increase in international commodity prices is reflected in n increase in PPI, even though it has little or no relevance for inflation in SA.

6.7 Implicit price deflatorsAn implicit price deflators is derives by dividing a nominal (current-price) magnitude by the corresponding real (constant-price) magnitude. It can be express as a quotient or as an index by multiplying the quotient by 100. It is implied by (or derived) the difference between the value of the magnitude expressed at a current and constant prices respectively.

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A price deflator can be derived for any magnitude that is estimated at both constant and current prices. Best known are the GDE deflator, GDP deflator and GNI deflator.

GDE DeflatorGross domestic expenditure is an implicit index of the domestic price level and is obtained by dividing the GDE at current prices but the GDE at constant prices.

GDE deflator = GDE at current pricesGDEat constant prices

The base year of the index is the base year for estimating the value of the GDE at constant prices.Year GDE at

current prices

(a)

GDE at constant

prices(b)

GDE deflator (ratio)(a)/(b)

(c)

GDE deflator (index)

(c) x 100(d)

% Change in GDE deflator

(e)2002 1 126 162 1 317 641 0.855 85.5 -2003 1 242 787 1 383 661 0.898 89.8 5.02004 1 419 502 1 490 735 0.952 95.2 6.02005 1 578 472 1 578 472 1.000 100.0 5.02006 1 810 678 1 714 312 1.056 105.6 5.62007 2 076 262 1 824 753 1.138 113.8 7.82008 2 352 714 1 885 686 1.248 124.8 9.72009 2 443 950 1 851 377 1.320 132.0 5.8

The difference between nominal GDE and real GDE yields an index which we can use to calculate an inflation rate for the economy as a whole. GDE consists of the total spending by households, firms and government on final goods and services. Whereas the CPI and PPI pertain to limited baskets only.

GDP DeflatorThe transformation of GDP from current to constant prices is to measure economic growth, it also yields a measure of inflation. It is derived the same way as GDE deflator. It is a much broader based index than CPI and PPI. Since the GDP includes exports but excludes imports if follows that the GDP deflator reflects changes in export prices. However import prices are important with regard to inflation, exports are of little significance. Likewise changes in import prices are not reflected in the GDP deflator but have a definite impact on domestic price levels.The GNE and GDI deflator are preferred to the GDP deflator due to the shortcoming when the import and export prices are increasing at significantly different rates.

GNI DeflatorGross national import is obtained by dividing GNI at current prices by GNI at constant prices. GNI include net primary income to the reast of the world i.e. also include exports and excludes imports. However when converting nominal GNI to real GNI, an adjustment is made for changes in terms of trade (ratio of imports and exports) and as a result real GNI measures the volume of exports in terms of the volume of imports that it can be exchanged for. GNI is a better measure for price level when terms of trade fluctuate. Advantages of implicit price deflators

Provide a more comprehensive coverage of the price level than explicit price indices Suited to international comparisons because of greater standardisation of concepts and methods. Based on current weights (Paasche indices) and therefore reflect actual expenditure.

Disadvantages of implicit price deflators Consumers, politicians and policy makers are primarily interested in the prices of a limited basket of

consumer goods and services.

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Implicit price deflectors only measure pure price changes between the base period and the current period, which implies that there is a different basket in each period.

The data are only available on a quarterly basis, with lag time and always subject to revision.

6.8 Comparison between different measures of inflationThe CPI, PPI, GDP, GNI and GNE deflator never yield the same figure, they tend to cancel out over time. Economists consider all indices to analyse inflation but consumers use the CPI since it relates to the cost of living.

6.9 Reporting on and interpreting inflation dataThe main problem is the tendency to confuse levels and rates of change. E.g. When the rate increase in the CPI falls, it is often reported as a drop in the CPI which is incorrect since the level of the CPI usually increase every month. The annual rate of increase (inflation rate) in the CPI fell. Another issue is to forget that some prices in the basket may have remained unchanged or even dropped, like fuel. Given the large weight of transport cost in the CPI may reduce the cost to household in absolute terms.

CHAPTER 7INTERNATIONAL TRANSACTIONS7.1 The Balance of PaymentsThe BOP is a systematic statistical summary or record of all economic transactions between residents and the rest of the world during a particular period. It Include transactions by individuals, firms, government and covers of exchange of goods and services. The BOP is a reflection of the economic position of a country and an important base for policy formation. BOP is a flow and records the levels of change in assets or liabilities. Receipts of payments from foreigners are entered as credits (+) and payments to foreigners are entered as debits (-), every international transaction is recorded twice in the BOP once as a credit & once as a debit.

BOP Consists of five accounts1. Current account 2. Capital transfer account 3. Transfer account 4. Financial account 5. Unrecorded transactions6. Official reserves account.

2008 2009Current accountMerchandise export, fob* 655 759 503 656Net gold exports 48 534 52 776Service receipts 105 352 100 681Income receipts 48 534 34 075Less merchandise import, fob* -739 852 -554 161Less Payments for services -138 684 -123 579Less income payments -122 129 -87 593Current transfers (net receipts +) -18 909 -22 428Balance on current account -161 675 -96 573Capital transfer account (net receipts +) 208 216Financial accountNet direct investment 100 291 34 845Net portfolio investment -134 291 92 469Net other investment 130 713 -21 646

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Balance on financial account 96 139 105 668Unrecorded transactions 91 394 7 726Change in net gold and other foreign reserves owing to balance of payments transactions 26 066 17 037Change in liabilities to reserves -7 761 -2 724SDR allocations and valuation adjustments 74 214 -38 647Net monetisation (+)/demonstration (-) of gold 158 45Change in gross and other foreign reserves 92 677 -24 289

1. Current accountValue of all transactions in goods and services is recorded in the current accounta) merchandise exports includes all trade in all physical goods which consist of physical goods that include

raw materials, intermediate and final goods. It includes free on board (fob), that is article include cost of transportation to border of exporting country but excludes cost between countries.

b) Net gold exports, refers to the net foreign sales of commodity gold. Monetary gold is gold owned by the monetary authorities held as an international reserve asset. Non-monetary (commodity) gold are recorded in the current account. Net gold exports refers to commodity gold only.

c) Services receipts, Trade in service include the transportation of goods and passengers between countries, travel, construction services, financial & insurance services, various business, professional and technical services, personal, cultural, recreational, government services, travel allowances and money spent by tourists fall into this category.

d) Income receipts refer to the income earned by SA residents in the rest of the world. a. Compensation of employees includes wages, salaries and other benefits earned by individuals

from countries other than those in which they are resident. b. Investment income includes dividends, interest, profits and other income earned from the

provision of financial capital.When a SA person buys shares on the London stock exchange the value of the shares are recorded in the financial account but dividend receipts are recorded in the income receipts in the current account of the BOP. The larger the foreign investment in the country, the larger the income payments tend to become.

e) Merchandise payments, payments for services, income payments are calculated in the same way as merchandise exports, service receipts and income receipts, the difference is that the income or the expenditure flows are the opposite, that is from South Africa to the rest of the world. Income payments are the same as primary income to the rest of the world.

Merchandise exports, net gold exports and merchandise imports constitute the trade account, a subaccount of the current account which records imports and exports of goods only. Difference between exports and imports of goods only is called the trade balance. Payments for services and income payments always exceed service and income receipts often result in a negative balance on the current account. (i.e. deficit)f) Current transfers include social contributions, benefits and taxes by government, private transfers of

income such as gifts, personal, immigrant and charitable donations. In the SA BOP the amount paid usually exceeds the amount received.

Balance on current account is the net total of all various items and is sometime in surplus and deficits. Deficits have to be financed, and post 1994 financed by net inflows with sanctions could not afford to run into deficits. BOP are recorded in nominal (current prices) terms. A current account deficit is often regarded as an indication that a country is living beyond its means. A current account surplus is often seen as a strongly competitive economy.

2. Capital transfer account are offsetting transactions to the transfer of ownership of fixed assets, transfers of funds associated with the acquisition or disposal of fixed assets, debt forgiveness and transfers by migrants.

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3. Financial accountRecords all international transactions in assets and liabilities.

a) Direct investments are transactions related to the acquisition of share capital in foreign countries through new business, mergers and takeovers. The purpose of the investor must be to gain control of or meaningful say in the management of the enterprise in which the investment is made. Transactions in real estate also included. An increase in liabilities represents an inflow of foreign capital (positive sign), while an increase in assets represents an outflow (negative flow). Increase in liabilities recorded as a credit, while an increase in assets is recorded as a debit.

b) Portfolio Investment refers to the purchase of assets such as shares or bonds where the investor is interested only on the expected financial return on the investment and not aiming to gain control. Long-term debt and equity securities, money market debt instruments and tradeable derivatives also included.

c) Other investment includes all financial transactions not covered under direct investment, portfolio investment or reserve assets. Includes trade credit, loans, currency and deposits.

Balance on financial account is obtained by adding the net direct, portfolio and other investment.

4. Unrecorded transactionsA double entry system is used means that the net sum of all credit and debit entries should equal the country’s change in net gold and other foreign reserves but this does not happen. Unrecorded transactions serve to ensure that the BOP actually balance and can be significant.

5. Official reserves accountIt consists of gold, special drawing rights (SDR) by IMF, the country’s IMF reserve position and foreign exchange reserves. Reserves held in the form of foreign bank notes, demand deposits with foreign banks and other claims on foreign countries. The BOP yield the change country’s net gold and other foreign reserves owing to balance of payments transactions. The change in gold and other foreign reserves constitutes the balancing item in the BOP as a whole. The overall balance of the BOP should balance as it has the double entry system. Why the BOP always balances?Most transactions appear once in the current or financial account and once in the foreign reserves account. All inflows of goods, services or asset titles are recorded as debits (-), and all outflows of goods, services or assets titles are recorded as credits (+).In the use of reserves is recorded as a credit item and an addition to reserves as a debit item, i.e. money drawn from the reserve account as a supply of forex to the rest of the BOP is treated as a credit in the official reserves account and vice-versa for a inflow of money.

7.2 Foreign trade statistics foreign trade statistics are released by the South African Revenue Service (Customs and Excise) until 1997 the statistics covered the whole SACU area (including the BLNS countries) the data pertain to the trade in merchandise (goods) only South African exports consist mainly of primary goods South African imports consist mainly of capital and intermediate goods South Africa's foreign trade is mainly with the developed industrial countries although trade with the

rest of Africa increased significantly in the 1990s

7.3 Measures of OpennessThe openness of a country’s economy indicates the extent of a country’s involvement in the global economy, particularly international trade. It is often measured by expressing value of exports, value of imports, or the

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combined value of imports and exports as a percentage of GDP. Expressing exports as a ratio percentage of GDP thus inevitably also involves some imports being expressed as a ratio of an aggregate of which they do not form a part of. It is best to use:

a) Exports as a percentage of GDPb) Imports as a percentage of GDPc) An average of (a) and (b).

Large economies like Japan and the US are relatively closed economies but high absolute levels of imports and exports but are relatively low to their GDP & GDE’s.The marginal import ratio (i.e. change in imports per unit change in output/expenditure) may be high if the average import ratio (i.e. ratio between the level of imports and the level of output/expenditure. A country with a high marginal import ratio is particularly vulnerable to developments in the international sphere.

7.4 Terms of TradeTerms of trade are a ratio between exports and import prices and calculated by dividing an export price index and a import price index and multiplying by 100.

T= PxPyx 100

T = terms of tradePx = Export price indexPy = Import price index

Reason for terms of trade is that the value of exports earning and payments for imports depends on the price and volume of exports and imports. When exports decline, a greater volume of exports have to be produced and sold to keep earnings constant. The terms of trade are an indication of the volume or quantity of imported goods that can be obtained per unit of goods exported. If the terms of trade improve, the country is better off since fewer exports are required to afford the same volume of imports as before (more imports can be bought with the same volume of exports).Terms of trade have a significant difference between real GDO and real GNI as well as on the differences in the growth of the different implicit price deflators (GDE, GDP and GNI deflator).

7.5 Exchange RatesAn exchange rate is the price of one country’s currency in terms of another country’s currency. Direct method – the exchange rate is shows how much of the local currency has to be exchange for one unit of a foreign currency i.e. the domestic price of the foreign currency.Indirect method – the exchange rate is expressed as the amount of the foreign currency that is required to purchase one unit of domestic currency i.e. the foreign price of domestic currency.All quoted rates are nominal bilateral exchange rates, since they are expressed in money terms and involve the currencies of two countries.

Appreciation and depreciation – There is no increase or decrease of exchange rates, it is appreciation and depreciation e.g. $1 = R9.20 to $1 = R9.30, rand depreciates against the dollar and visa-versa.Spot and forward exchange – A spot exchange rate is the rate at which the foreign exchange is bought and sold for immediate delivery, and forward exchange rate pertains to foreign exchange bought and sold for delivery at a future date.Nominal and real exchange rates – the exchange rate quoted at any particular time is the nominal exchange rate. A real exchange rate can be calculated by taking price movements into account by adjusting the nominal exchange rate by the ratio of two countries prices. Bilateral exchange rate – pertains only to trade between two countries.

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Effective exchange rate – is a weighted average rate at which is derived by weighting the exchange rates between the rand and the main currencies, using the different countries shares in south africa’s foreign weight trade. Effective foreign price ratio – is the trade-weighted ratio between SA prices and the prices in the economics of our main trade-weighted partners.Purchasing power parity – between two countries is the number of units of one country’s currency which endows the holder with the same purchasing power as one unit of the other country’s currency. PPP can refer to either parity between a country and a specific trading partner in which it is a bilateral comparison, or to parity between the country and a group of trading partners i.e. a multilateral comparison.Absolute PPP – is the equilibrium exchange rate between two currencies set by the ratio between the price level in the two countries. i.e. if similar good cost more in the US than in SA, the rand is undervalued and visa-versa.Relative PPP – states that changes in exchange rates reflect the difference in relative inflation rates. Relative is concerned with the ratio of the equilibrium exchange rate in the current period relative to the equilibrium exchange rate in the base period. Big Mac Index – A light-hearted version of the absolute PPP. It is the exchange rate that would leave hamburgers costing the same in the US as abroad. It provided an indication if a currency is over or under valued.

CHAPTER 8WAGES, PRODUCTIVITY AND INCOME DISTRIBUTION.8.1 Nominal and Real Income.When prices are changing, nominal incomes have to be adjusted for price changes to obtain real incomes, where nominal income refers to the amount received while real income refers to the purchasing power of the income.

Year (a)Nominal Wage

(R)

(b)CPI

(2008 = 100)

(c)Real Wage (R)(=(a)/(b) x 100)

(d)Real Wage

(index, 2008=100)2006 10 000 83.8 11 933 102.92007 10 800 89.8 12 027 103.72008 11 600 100.0 11 600 100.02009 12 300 107.1 11 485 99.0

To obtain real wages one needs to adjust nominal wages by the CPI. (a/b x 100=C). Real wage increase from 2006 – 2007 because the percentage increase in nominal wage was greater than the percentage increase in the price level.

Year (a)Nominal Wage

(R)

(b)Nominal Wage

(index)(2008 = 100)

(c)CPI

(2008 = 100)

(d)Real Wage

(index, 2008=100)(= (b)/(c) x 100)

2006 10 000 83.8 11 933 102.92007 10 800 89.8 12 027 103.72008 11 600 100.0 11 600 100.02009 12 300 107.1 11 485 99.0

Calculating the index of real wages with same real wage results.

8.2 Wage DifferentialsAnalysts are interested in wage differential, relative wages or the structure, i.e. they want to know how the remuneration of an individual worker or group of workers compares to that of other individuals or groups.

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8.3 Minimum living levelsImportant when a minimum wage or the remuneration of unskilled workers has to be determined. The usual procedure is to estimate the amount of money required by an unskilled worker with an average size family to satisfy reasonable needs.

8.4 ProductivityThe actual impact on costs depends on the relationship between the remuneration of labour and workers contribution to income. Productivity is a ratio which measures the amount of output produced given the amount of factors of production.Labour productivity is the ratio between output and the labour input used to produce that output and can be expressed as output per worker or output per hour.

Labour productivity= outputlabour input

xoutput perunit of labour input .

Capital productivity is obtained by dividing output by the capital input and is a measure of output per unit of capital input. The problem is that these do not indicate the impact of qualitative improvements in inputs. Multifactor productivity is a measure of the growth in output that is not explained by the growth in the quantity of inputs. Productivity can be increased in five ways:

1. Output increases while input remains constant2. Output increases while inputs decline3. Output increases faster than inputs4. Output remains constant while inputs decline5. Output declines at a slower rate than inputs.

Labour and Capital intensity of productionTwo main factors of production are labour and capital. If the production process is capital intensive, an increase in production will result will result in a proportionately small increase in employment.Capital intensity can be measured in three ways:

1. Capital output ratio – is the real fixed stock as a ratio of real output, i.e. number of units of capital to produce one output

2. Incremental capital-output ratio – measures the ratio between the change in capital stock and the change in output. It indicates the amount of additional capital to produce an additional unit of output.

3. Capital-labour ratio – is the ratio between the real capital stock and the number of workers.

8.5 Unit labour cost

Unit labour cost is obtained by dividing the nominal cost of labour by real output. It measure the average labour cost of producing one unit of output. For the economy as a whole, it can be obtained by dividing total labour cost by real GDP. Unit of labour cost is an important indicator of cost pressures, competitiveness or the cost-efficiency of labour. The link between productivity and unit of labour cost is that it is equal to the price of labour earning per worker) divided by labour productivity (output per worker).

Labour productivity = Q/N where, Q = outputN = number of workers

Unit labour cost = wN/Q where, w = wage rate earnings per workerN = number or workers

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wN = Cost of labourQ = output

In dynamic context the growth rate in labour cost is approximately equal to the growth rate of earnings per worker minus the growth rate of output worker.

Growth in unit labour cost = growth in wages – growth in labour productivity.The above equation illustrates that unit labour cost will remain unchanged if the percentage increase in wages is matched by a similar percentage increase in labour productivity. Low productivity growth is not an issue from an inflation or competitiveness perspective, provided wages are kept in check.

8.6 Distribution issuesLorenz curve – reflects the distribution of income among individuals or households in the economy, the latter first have to be ranked poorest to richest. This is done on a cumulative basis and the diagonal represents a perfectly equal distribution of income.

Gini coefficient – or Gini ratio is a quantitive measure of the degree of inequality obtained by dividing the area of inequality shown by the Lorenz curve by the area of the right-angle triangle formed by the axes of the diagonal. It will vary between 0 & 1. Perfectly equality, Gini ratio is equal to 0. Perfect inequality is equal to 1. Gini index is the percentage (x 100)Quantile ratio – is the collective term for quartiles, quantiles, deciles and percentiles, which divide a distribution into four, five, ten and a hundreds equal parts. A quantile ratio is the ratio between the highest x% and the lowest y% of a distribution. The higher the quantile ratio the greater degree of inequality.

CHAPTER 9FINANCIAL INDICATORS.9.1 Money and Credit.Money is anything which is generally accepted as payment for goods and services or in the discharge of debt, medium of exchange, store of value and unit of account. SARB distinguishes between four money aggregates:

1. M1A – consists of coin and banknotes in circulation plus cheque and transmission accounts of the domestic private sector with monetary institutions. All assets in M1A can be used to effect payment to third parties.

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2. M1 – is M1A plus other deposits held by the domestic private sector and still relates to the function of money as a medium of exchange.

3. M2 – is M1 plus any other short-term and medium-term deposits held by the domestic private sector.

4. M3 – is M2 plus long-term deposits held by the private domestic sector. M3 is the broadest and least liquid of money aggregates and serves as the basis for money supply guidelines. The main advantage of M3 is that is less susceptible to changes in individual portfolios as a result of financial innovations or to the change in expectations and the structure of interest rates.

Money aggregates are stock variables, monetarists see a direct link between the rate of increase in the money supply and the rate of increase in prices (inflation) and are a possible indication of future trends in interest’s rates.

9.2 Interest Rate Interest is payment by a borrower to a lender for the use of funds, it is the lenders return for differing their liquidity. The interest rate is the amount of interest payable over a certain period expressed as a percentage of the borrowed funds. Often defined as the price/cost of money. Simple interest is calculated on the principle sum only, and compound interest is calculated on the principle plus any interest due at a date agreed when it is added to the loan.

Simple interest = PV x r x nCompound interest = PV (1 + r)ᵑ

Interest calculated at shorter intervals, e.g. Monthly.

Compound interest = PV (1 + in )ᵑ

9.3 Some important interest rates and determinants of interest rates. There are two main categories, money market and the bond market.

1. Money Market – is the lending and borrowing short-term financial instruments and thus interest is of a short-term nature. It includes the repo rate, prime-overdraft rates, the Treasury bill, the JIBAR rate and call money rates.

2. Bond (capital) market – is the market for lending and borrowing of long-term financial instruments. And thus interest rates are long-term. It includes the interest-bearing securities (or bonds), shares and negotiable documents all worked according to the coupon rate, rate on government bonds and rate on the bonds of public corporations.

9.4 Some Technical Issues.Interest rates - Interest is payment by a borrower to a lender for the use of funds, it is the lenders return for differing their liquidity. The interest rate is the amount of interest payable over a certain period expressed as a percentage of the borrowed funds.Discount rates – Treasury bills are issued at discount rate, which means they are issued at a discounted value to their maturity date. The higher the price of a discounted rate the lower the yield will be.Basis points and percentage points – 100 basis points is equal to 1 percentage basis point. If rate changes from 8.94% to 8.88%, there is a drop of 6 basis points and a decline of 0.06 percentage points or a drop of 0.0067 percent.Nominal interest rate – is the actual interate rate ruling at any particular timeReal interest rate – Is equal to the nominal rate deflated by the rate of inflation, i.e. subtracting the inflation rate from the ruling (nominal) interest rate less the During inflationary periods, real interest rate should be considered.

9.5 Share price and other stock exchange concepts

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Ordinary shares or equities – are shares in the issued capital of a company which are held on terms that make the holder a member of the company.Share price – is the prevailing market price of a unit of the company’s equity capital that is traded on the JSE.Earnings Yield (EY) – expresses the net profits per share of the company as a percentage of the ruling market price. Price-earnings ratio – is the inverse of the earnings yield. It is the ratio between the share price and the most recently declared annual profits per share in the company. Roughly speaking, it represents the number of years’ earning an investor is paying for the share. Dividend yield – expresses the most recently declared annual dividend per share in the company as a percentage of the ruling price share.

9.6 Economic indicators and the financial markets.Financial markets are speculative markets and are thus influenced by expectations and changes in the news, including the latest economic indicators. Markets are forward-thinking and adjust to an expected news release or indicator before it is published, markets will adjust on the difference of the actual indicator and expected result. i.e. if indicator is less than expected, market will react as if indicator had fallen. Most important indicator is the monthly employment situation in the US, it provides a first indication of where the world’s largest economy is heading.

CHAPTER 10FISCAL INDICATORS.Fiscal indicators are concerned with government revenue, expenditure , budget deficit and and the public debt. They are important for analysing the fiscal policy, one of the governments tools to controlling the economy.

10.1 Composition of the public sectorThe core is central government includes all the national governments, financial and fiscal commissions and the Human Sciences Research Council (HSRC), UIF and RAF etc. The next category is general government which is obtained by adding provincial government, general departments, and business enterprises. The final category is the public sector which consists of general government plus the public corporations which are firms that are owned and controlled by government through shares or by boards of directors.

10.2 Statistics on the government sector.

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Public corporations

General Government

Provincial GovernmentLocal Governments

Central government(national

departments)

Five possible reasons for confusion in the government sector:1. There are different categories of government, as set out above2. Different data systems, each with its own definitions, interpretaions, aims, rules and conventions3. The SARB and treasury compile data for different purposes4. National data are published for calendar years while budget data are originally published for fiscal

year.5. Government spend may be classified in several different ways such as function, level or government,

economic category or department.

10.3 Government expenditure.This can be classified into current payments, transfers and subsidies, payments for capital assets and payments for financial assets.

1. Current spending, the main categories are:a) Compensation of employees – largets component of government spending.b) Payments for goods and services such as stationary, school books, uniforms, medicine and so on.c) Interest and rent on land, where interest depends on the size of debt and levels of interest rates.

The first two constitute government consumption expenditure which forms part of expenditure on GDP. Interest payments are transfer payments and do not contribute to creation of output.

2. Capital spending or investment is mainly fixed investment in infrastructure such as shools, roads, dams and hospitals.

Government spending ratio is the ratio between government spending and an aggregate amount like GDP.

10.4 Government revenue.Revenue consists mainly of taxes:

a) Direct taxes – are levied directly on the income or property of people or companies and include taxes on personal and corporate income.

b) Indirect taxes – are levied on goods and services and include VAT, custom duties on imports and excise duties on home-product goods like cigarettes and alcohol. Separate data in taxes is published.

During 1980’s there was a decrease in company tax but a sharp increase in personal tax and GST which preceded VAT. By 1990/91 Vat and personal tax contributed 59% of the total tax revenue. It followed this pattern during the next decade but since then, company tax has risen significantly.

10.5 Budget balances. The budget balance is the difference between government revenue and government expenditure. This is where we will either get a surplus or deficit.

Conventional budget balance – is the difference between total government revenue and total government expenditure. It indicates the government borrowing requirments, which adds to public debt and provide a hint of sustainability of government expenditure. They are calculated in nominal terms which means they cannot be compared over time and between countries. This budget is referred explicitly in the budget speech.

Current Budget balance – is the difference between total current government revenue and the total current government expenditure and is important from a macroeconomic perspective. There are two types of government revenue and expenditure, i.e Capital and current revenue and expenditure. Capital revenue and expenditure are excluded from the current budget balance. If a surplus is recorded it indicates government has saved and money is available for capital expenditure. If there is a deficit government has overspent and will need to borrow to finance current expenditure.

o Current revenue is from taxes.o Current expenditure is paying of wages, stationary, books uniforms, medicines. etc

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o Capital revenue is the sale of non-financial assets. o Capital expenditure includes public outlays for construction of schools, dams, roads.

Primary budget balance – is the difference between total government revenue and total non-interest government expenditure or the conventional balance plus interest payments. It indicates government’s ability to service its debt out of ordinary revenue. If the primary surplus is greater than the interest bill, government revenue is sufficient to pay all the interest on public debt and redeem some debt. If it is smaller, some interest is paid out of revenue, mainly taxes.

Structural budget balance – is an estimate of what the budget balance would be in the absence of any cyclical influences on government revenue and expenditure. Fiscal policy is affected by the business and international commodity cycle. We estimate the structural budget in an attempt to eliminate cyclical influences on the conventional budget.

The four different budget balances are as follows:1. Conventional balance = Total revenue – total expenditure2. Current balance = Current revenue – current expenditure3. Primary balance = Total revenue – non-interest expenditure4. Structural balance = cyclical adjusted revenue - cyclical adjusted expenditure.

10.6 Government (or public) debt.Budget debts have to be financed, one option is to borrow from the central bank, this leads to increasing the quantity of money on circulation and potentially inflation. Most governments tend to borrow in the domestic and international capital markets by issuing bonds on which interest has to be paid. The public debt is the cumulative total of all government borrowing less repayments. The debt is closely monitored for sustainability of the fiscal policy. A primary budget deficit can be mainted for some time without increasing public debt/GDP ratio as long as the rate of real economic growth exceeds the real rate of interest. A general rule is that the public debt should be kept below 60% of GDP.

10.7 Government saving or dissaving.Government saving is the difference between the current income and current spending of general government.

CHAPTER 11SOCIAL AND POLITICAL INDICATORS.Stats pertaining to social economics are mainly concerned between people in respect of health, education, etc. and include social indicators, development indicators or human development indicators. Economic indicators are concerned with things.

11.2 Definitions of a few social indicators: Crude birth rate – is the annual number of live births per 1000 population Crude death rate – is the annual number of deaths per 1000 population Age-specific fertility rate – is the ratio of the number of children born live to women of a specific age

to the number of woman in the group. Total fertility rate – is the average number of children that would be born alive to a woman if she

were to live to the end of her childbearing years and bear children at each age. Life expectancy at birth – is the number of new born infant would live if prevailing patterns of

mortality at the time of birth were to stay the same. Infant mortality rate – is the number of infants who die before reaching one year of age per 1000

births in a given year.

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Under-five mortality rate – is the annual number of children deaths under the age of five per thousand live births averaged over the previous five years.

Access to health care – is the share of population for whom treatment of common diseases and injuries is available within an hour’s travel.

Access to safe water – is the percentage of population with reasonable amounts of safe water. Access to sanitation – is the percentage of population with at least adequate excreta disposal

facilities. Primary school enrolment ratio – is the ratio of children enrolled in primary school (age 6-11) Secondary school enrolment ratio – is the ratio of children enrolled in secondary school (age 12-17) tertiary school enrolment ratio – is the ratio of children enrolled in tertiary school (age 20-24) Net enrolment – is the percentage of school children who are enrolled in school. Adult illiteracy – Percentage of population over 15 who cannot read or write.

11.3 International comparisonsEstimates in SA Social indicators are subject to a significant degree of error, to compare to international indicators they will only provide a very broad indication of the position relative to other countries. SA social indicators generally compare unfavourably with those of other countries with roughly similar levels of GDP per capita.

11.4 Human development index (HDI)Human development index (HDI) can be regarded as a measure of peoples ability to live a long and healthy life, to communicate, to participate in the community and to have sufficient means to be able to afford a decent living. It includes three basic components, longevity, knowledge and income.

Longevity – only includes indicator of life expectancy at birth. Knowledge – Includes indicators of adult literacy and the combined primary, secondary and tertiary

gross ratio and assigning two thirds weight to literacy and one third to gross enrolment. Income – is measured using GDP per capita converted to purchasing power US dollars (PPP$)

11.5 Poverty indicatorsAbsolute poverty – occurs when people cannot afford a basket of goods and services that is regarded as essential for survival or a minimum standard of living. Most familiar measure is the PPP-adjusted US$1 per day determined by the World Bank in 1990. Relative poverty – draws the line between poor and non-poor by considering a person’s household’s income relative to the distribution of income or to a median or average. Relative poverty may vary from country to country, absolute poverty is supposed to be universal and objective. The multidimensional poverty index (MPI) – estimates poverty by estimating the fraction or percentage of households who lack certain basic things and reflects incidence of poverty, i.e. the portion of the population that is multidimensional poor and the average intensity of their deprecation. It has three dimensions, education, health and living standard. Ten indicators are used: schooling and child enrolment, child mortality and nutrition, electricity, sanitation, drinking water , floor, cooking fuel and assets. No income is an indicator.

11.7 Some political indicators.Freedom in the world – published by Freedom House in Washington, DC. It provides a comparative assessment of global political rights and civil liberties. Countries are ranked on a basis of criteria pertaining to political rights and civil liberties. State Fragility Index in Global Report: Conflict, Governance, and State Fragility – A report which measures on a scale the fragility of a country.Corruption Perception Index – Published by transparency International and measure an index which indicate how corrupt a country is with 1.0 being totally corrupt and 10.0 being totally incorrupt.

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CHAPTER 12INTERNATIONAL COMPARISONS12.1 Sources of Error.International comparisons are subject to two important additional sources of error:

1) Differences in definitions, methods of calculation, and the coverage and quality of data between countries.

2) Errors in converting valuations in national currencies to a common unit of valuation by, e.g., using prevailing exchange rates.

In most cases both sources of error are encountered but comparisons can be conducted in national currencies by avoiding the second error that is with ratios and rates of change. General guidelines to follow for international comparisons:

Note possible causes of errors Avoid the errors as far as possible Try to compensate for unavoidable errors in some way Always qualify findings and conclusions Discard the comparison if the margin of error appears to be unacceptably large.

12.3 The Currency ProblemThe fact that most economic data are expressed in national currencies is probably the most important obstacle to the international comparison of such data but can be avoided if working with ratios and rates of change. E.g. it would be much more significant to express the defence expenditure of a country as a percentage of GDP or GDE and compare the ratios. Another procedure is to use indicators that are not measured in value terms. E.g. comparisons of production, or living standards could be conducted using indictors such as volume of electricity production, food consumption per capita, number of motorcars., per capita ownership of TV’s, literacy, mortality rates or other social indicators.

12.4 Possible ways of dealing with the currency problem.One method of drawings international comparisons of the purchasing power of particular amounts is to express the amounts concerned in terms of the prices of certain consumer goods or a basket of goods. E.g. The annual salary of a university lecturer in SA can be expressed as a multiple of the number of motor cars of a particular make than can be bought with his salary or the period of time needed to work to afford such motorcar. In principle it would be better to use a represented basket of goods and services and not a single item. Another way is to use purchasing power parity indices, these have already been adjusted for international differences in price levels but they are all expressed in terms of a base year figure.

12.6 Politico – economic indicators.

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