Learning Unit 5.

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Macroeconomic Aspects
5 Main Macroeconomic Goals
1. High and sustainable economic growth
2. High or full employment
3. Price stability
4. Balance of payments equilibrium
5. Equitable distribution of income

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1. High and sustainable economic
growth
• Primary objective of all economic
activities?
– Produce goods and services for current
and/or future consumption
• Therefore attainment of the highest
possible rate of growth is important in an
economy

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1. High and sustainable economic
growth
• How do we measure economic growth?
– Most comprehensive & basic measure of
total economic activity = GDP
– GDP is the market value of all final goods
and services that are produced during a
specified period (usually one year) within the
boundaries of a country.
– GDP can be measured at current (nominal)
or constant (real) prices

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1. High and sustainable economic
growth
• Nominal / Current prices
– When GDP is valued at the actual market
price which prevailed in the period during
which production took place.
• Real / Constant prices
– When GDP is measured at a set of prices
which prevailed in a specific base year (2000).
• Difference between the two =
INFLATION!

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1. High and sustainable economic
growth
• Which one do we use to measure economic
growth?
– Real GDP
• Why?
– An increase in nominal GDP means that prices
increased and not necessarily that the economy grew.
– An increase in real GDP takes inflation into
consideration and an increase here shows that the
economy has grown from the previous period.

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1. High and sustainable economic
growth
Period % Growth
1961 – 1970 5.73
1971 – 1980 3.39
1981 – 1990 1.56
1991 – 2000 1.84
2001 - 2010 3.55
2011 3.46
2012 2.55

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Calculation of growth rate
• [(GDP in current period / GDP in
previous period) – 1] x 100
• E.g. [(GDP 2012 / GDP 2011) – 1] x 100
= Economic growth for 2012

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High and sustained economic
growth
• Why an objective?
– An increase in production of goods and
services would make a higher standard of
living possible for the country’s population.
• It also depends on the rate of population
• A country’s average standard of living is
measured by looking at per capita GDP
• GDP per capita = GDP / size of
population
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High and sustained economic
growth
• Economic growth rate in market oriented
economy usually not even.
• Growth rate tends to fluctuate cyclically
around a long term growth trend.
• Such cyclical movements – known as
business cycle: periods of expansion and
contraction in real GDP which occur at
fairly regular intervals.
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Business Cycle

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Summary – Economic growth
• Measure: GDP
• Source: SARB & StatsSA
• Available quarterly
• Seasonally adjusted
• Real vs. Nominal

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2. High / full employment
• Generally a positive correlation between
employment and economic growth.
• High unemployment = serious economic
& social problem
• Full employment = controversial

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2. High / full employment
• In SA unemployment figures are very
unreliable due to various reasons.
• Informal vs. formal activities
• Reasons why people engage in informal
activities:
– They don’t want to pay tax
– They can’t find employment in the formal
sector
– They are engaged in illegal activities
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Informal sector
LEGAL ILLEGAL
Producers
Craft makers Dagga producers
Distributors
Hawkers Burglars
Services
Taxi operators Prostitutes
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Unemployment – strict def
• An unemployed person is someone who seeks
but cannot find employment.
• Strict def: Persons being 15 years and older
a. Are not in paid employment or self-employment
b. Were available for paid employment or self-
employment during the seven days preceding the
interview and
c. Took specific steps during the four weeks preceding
the interview to find paid employment or self-
employment

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Unemployment – expanded def
• Expanded definition
a. Are not in paid employment or self-
employment
b.Were available for paid employment or self-
employment during the seven days preceding
the interview, and
c. Had the desire to work and to take up
employment or self-employment

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Types of unemployment
• Frictional
• Seasonal
• Cyclical
• Structural

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Summary - Employment
• Measure: Strict vs. Expanded definitions
• Source: StatsSA Labour Force Survey
(LFS)
• Quarterly indicator
• Reliability?????

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3. Price stability
• Implies that the general level of prices does not
increase or decrease too fast.
• Inflation def: Sustained increase in the general
price level
• Part of life!
• Generally accepted measure of the general level
of prices – consumer price index (CPI)
• An index number is the ratio between the value
of a variable or group of variables during a
specified period and its value during a base
period, the latter being taken as 100.

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3. Price stability
• CPI (also known as headline inflation) -
Index of the prices of a representative
basket of consumer goods and services
that an average household purchase
during a certain period.

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Sub-indices of CPI
• Core inflation
– CPI without certain items excluded on the
basis that their prices are highly volatile,
subject to temporary influences or affected by
government intervention and policy

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Calculation of inflation rate
• [(CPI current/CPI previous period) - 1] x
100
• E.g. [(CPI 2012 / CPI 2011) -1] x 100
• =Inflation rate for 2012

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3. Price stability
• Why an objective?
• Market prices are a measure of economic
value
• Causes a biased distribution of income
• Decreases the competitiveness in
international markets

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Summary - Inflation
• Measures: CPI
• Monthly indicator
• Source: StatsSA

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4. BoP equilibrium
• All economies are open in the sense that
all countries participate in the
international trade in goods and services,
their citizens travel all over the world for
business and other purposes; and
individuals, companies and governments
lend and borrow money over international
borders.

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4. BoP equilibrium
• The balance of payments is a systematic
statistical summary or record of all economic
transactions between residents in a reporting
country (e.g. SA) and the rest of the world
during a particular period (quarter or year).
• It includes all transactions by individuals, firms
and government agencies and covers the
exchange of physical goods, services, assets, gifts
and all financial claims.

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4. BoP equilibrium
• Accounts / Sections
– Trade in goods and services are recorded in
the current account
– Financial transactions such as loans and
exchange of financial assets and liabilities are
recorded in the financial account

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4. BoP equilibrium
• If monetary values of a country’s exports >
monetary value of its imports = Surplus in
current account
• If monetary value of a country’s exports <
monetary value of its imports = Deficit in
current account
• Unless a deficit is off-set by an inflow of capital
from abroad, country’s supply of international
liquid reserves will decline and foreign value of
its currency tends to drop

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Exchange rates
• Important that a country keep a watchful
eye on its exchange rates.
• Exchange rate is the rate at which its own
currency can be exchanged with that of
another country.
• Movements in exchange rates influence
imports and exports

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Exchange rates
• If a country’s exchange rate increases (its
currency becomes more expensive ito
foreign currencies, depreciates) its exports
will become more expensive and therefore
less competitive in the world markets,
which will lead to its exports declining
relative to its imports.
• Vice versa

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Summary - BoP
• Measure: Balance on the current account
(Imports = Exports)
• Source: SARB
• Quarterly indicator

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5. Equitable distribution of
income
• Distribution of income in a market
economy is determined by the ownership
distribution of the production factors and
the prices of production factors as
determined by supply and demand.
• Usually very inequitable
– Different regions, races etc.
• Important objective
– Economic, social & political implications
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5. Equitable distribution of
income
• Measure: Lorenz curve & Gini coefficient
• What can the government do?
– Progressive taxation
– Income transfers
– Subsidies

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