Households= own factors

Production of production
Households= wage/salary
Households spends their
income.
Businesses start again
with production.

Spending
Income
Exclude:
Secondhand
goods &
Intermediate
goods

GDP- Gross domestic product GNI- Gross national Income

All goods and services produced within the borders All goods and services produced by a SA citizens
of SA in a specific period irrespective of where they are producing the goods

ECONOMIC GOODS AND SERVICES:

• The ultimate aim of any good economy is to satisfy its population’s wants and needs.
• The welfare and prosperity of a country depend largely on the volume of production within it.
• When better and services are produced in a country, it leads to more people being employed.
• This in turn increases the level of income of the population.
• A higher income level leads to an increase in the standard of living.

FINAL GOODS AND SERVICES:

• Include all manufactured goods and services that satisfy human wants and needs.
• Are ready to be consumed.
• Final goods and services are divided up into:
- durable goods e.g., house, furniture and cars
- semi-durable e.g., clothes and domestic appliances
- non-durable goods e.g., food, petrol and gas
- services e.g., medical services

CAPITAL GOODS AND SERVICES:

• Include all goods and services that are not directly consumed.
• Help to manufacture other goods and to provide other services.
• Include machines and tools a manufacturer uses in the production process.
• Also included are goods and services that are half-finished.
Calculating GDP

EXPENDITURE METHOD

The expenditure method: - GDP (E) / GDE

The expenditure method is a method whereby we determine the gross domestic product – GDP – at market
prices by adding the spending of the four main sectors of the economy – households (C), government (G),
businesses (I) and foreign sector (X – M).

Differentiate between GDE and Expenditure on GDP: GDE = C + I + G

Expenditure on GDP = C + I + G + (X – M).

GROSS DOMESTIC EXPENDITURE AND GDP AT Current figures (Millions)

MARKET PRICES
Final consumption expenditure by households
+ Final consumption expenditure by government
+ Gross capital formation
+/- Residual items
= Gross domestic expenditure
+ Exports of goods and services
- Imports of goods and services
= Expenditure on gross domestic product at
market price

FINAL CONSUMPTION EXPENDITURE BY HOUSEHOLDS (C)

Definition:

• is the total spending of all households on final goods and services for a specific period, usually
one year.

Classification:

• households spend their money on goods and services, including:

- durable goods: can last for a relative long period e.g., house, furniture and cars
- semi-durable: last for a relative short period e.g., clothes and domestic appliances
- non-durable goods: can oly be used once e.g., food, petrol and gas
- services e.g., medical services

Importance of final consumption expenditure by households:

• Household are the most basic units in the economy.

• They consume goods and services, but also provide factors of production.
• Strong correlation between total income and total consumption by households.
• The more people earn, the more they spend.
• This is an injection in the circular flow of income.
• Consumption spending by households account for about 64% of total spending in the economy.
• Makes up a very large percentage of GDP.
• Consumption is positive even if income is zero.
• Consumption is a very important driver of economic growth.
FINAL CONSUMPTION EXPENDITURE BY GOVERNMENT (G):

Definition:

• Amount spent on goods and services to meet the needs and wants of the citizens in the country

Classification:

Three divisions of government expenditure:

• Functional division – based on nature of services that is performed:
- Social services e.g., Education, Health, Housing.
- Economic services e.g., Research and government entrepreneur.
- Government debt expenses e.g., general administration.
- Protective services e.g., defence and police forces.
• Administrative division – deals with departmental expenditure.
• Financial division – state’s expenditure according to budget.

Importance of final consumption expenditure by government:

• Government provides a legal framework for the economy to operate efficiently.

• Much of its spending is on enforcing laws that entrench private ownership of property.
• This enables the market economy to function well, drive economic growth and create jobs.
• The government is responsible for important injections into the circular flow of income.

GROSS FIXED CAPITAL FORMATION (I): also called EXPENDITURE BY FIRMS

Definition:

• Refers to goods that are bought by firms and government to produce other goods and
services.

Gross fixed capital formation:

• Classified by the kind of economic activity and by type of organisation:

• Mining and quarrying, manufacturing, electricity/gas and water, transport/storage and

communication, financial intermediation/insurance and community, social and personal services are
all examples of the classification by kind of economic activity.

• Capital formation can also be classified by type of organisation, for example, general government,
public corporations and private business enterprises.

Importance of fixed capital formation (I):

• Capital formation is important for economic growth.

• An increase in capital formation will expand production.
• Government can help to increase capital formation by lowering the interest rates.
• South Africa is rich in natural resources, we export high volumes of raw natural resources and
import many final products from other countries because we do not have the necessary skills or
capital formation to produce all the required final goods and services.
• The increase of capital formation through investments in the private sector will reduce
unemployment rate in the country.
• The more industries and factories we can sustain, the more work opportunities will be created.
• This will increase the income and welfare of the workers, resulting in an increase in the economic
growth rate of the country.
• Improved infrastructure like roads, transport and electricity, will ensure that the distribution of goods
and services through the existing markets will be easier.
2.1 Spending on durable goods 143 134
Spending on semi-durable 58 604
Spending on services 89 812
R291 550 (the R is important!!!!!!)

2.2 Expansion of iron plants 28 500

Investment in mine… 19 614
Change of stock 9 442
R57 556 (Again R is important!!

2.3
Durable 33 305 68 840

Semi-durable 45 629 74 945

Non-durable 174 623 260 521

Services 105 576 205 830

Total R 359 133 R610 136

33 305 100 68 840 100

359 133 1 610 136 1

= 9.27 % = 11.28 %
 NATIONAL ACCOUNT AGGREGATES:

Deriving national account aggregates:

• The national account aggregates are methods that are used to determine the value of economic
activity.
• The production method, income method and expenditure method are three different ways the
economic activity is measured.
• They are all used at different times and for different purposes.

Factor cost:
Factor cost is used with the income method of measuring economic activity.
GDP at factor cost plus other taxes on production minus other subsidies on production = GDP at basic
price.

Basic prices:
Used with the production method.
Includes taxes on production and excludes subsidies on production.
Taxes on production are payroll taxes (SITE and PAYE), recurring taxes on land & buildings, business
licenses.
Subsidies on production include employment subsidies and subsidies paid to prevent pollution.

Market prices:
Used with the expenditure method.

Conversion of values from:

Basic prices to market prices:
GDP at basic prices + taxes on products – subsidies on products
= GDP at market prices.

Factor cost to market prices:

GDP at factor cost + other taxes on production – subsidies on production
= GDP at basic prices + taxes on products – subsidies on products
= GDP at market prices.

Taxes on products are payable per unit, e.g., VAT.

Subsidies on products include direct subsidies paid per unit.
EXPENDITURE METHOD GDP (E)
PRODUCTION METHOD
The production (value added) method: - GDP (P) / GVA

The production method is a method whereby we determine the Gross Domestic Product at basic prices by
adding the final values of all goods and services produced in the primary, secondary and tertiary sectors.
In the national accounts Gross Domestic Product at basic prices is usually referred to as Gross Value
Added (GVA) at basic prices.

PRODUCTION OR VALUE ADDED GVA Current figures (R – millions)

Primary sector
+ Secondary sector
+ Tertiary sector
= Gross value added at basic price
+ Taxes on products
- Subsidies on products
= Gross domestic product at market price
The income method: - GDP (I) / GDI

The income method is a method whereby we determine the gross domestic product – GDP at factor prices
(factor cost) by adding all the income earned by the owners of the factors of production (gross domestic
income).
In the national accounts this is referred to as Gross Value Added at factor cost.
GDI = wages + profit + interest.

NATIONAL INCOME OR GROSS VALUE-ADDED Current figures (R-Millions)

AT FACTOR COST
Compensation of employees
+ Net Operating surpluses
+ Compensation of fixed capital
= Gross value added at factor cost
+ Taxes on production
- Subsidies on production
= Gross domestic product at basic prices
+ Taxes on products
- Subsidies on products
= Gross domestic product at market prices
Conversion of Domestic to National figures:

GDP at market price

+ Factor income earned abroad by South Africans
- Factor income earned in South Africa by foreigners
= GNI at market prices

GDP at market prices 2 396

- MINUS taxes on products (232)

+ PLUS subsidies on products 13

GDP at basic prices 2 177

- MINUS taxes on production (42)

+ PLUS subsidies on production 10

GDP at factor cost 2 145

```````````
Expenditure method Production method Income method GDP(I)
GDP(E) GDP(P)
Consumption expenditure by Output if primary sector +Compensation of employees
households (C)
+Consumption expenditure by +Output of secondary sector +Net operating surpluses
government (G)
+Gross capital formation (I) +Output of tertiary sector +Consumption of fixed capital
=Gross fixed capital =GDP at factor cost
formation
+/-Change in inventories Plus taxes on production
=GDE Minus subsidies on production
+Plus exports =GDP at basic prices =GDP at basic prices
-Minus imports +Plus taxes on products Plus taxes on products
-Minus subsidies on products Minus subsidies on products
=GDP at market prices =GDP at market prices =GDP at market prices