Chapter 3

Example Calculations
Inflation
calculations
 Year CPI

Activities 19 2002 100

– 22 are based
on the
following CPI 2003 106.2

2004 111.5
Calculus
Consider Activity 19 – 22 on pp. 13 – 14 in the Workbook
1. You bought some financial stock for R20 000 in the beginning of 2004. What is
the real value of the financial stock at the end of 2004?
Answer: Remember that the person had the stock for 1 year. Thus, you need to
calculate the inflation rate for that year and then deflate the nominal value by the
inflation rate.
Inflation rate: 111.5 – 106.2 ÷ 106.2 x % = 5%
Thus real value : nominal value/(1+CPI)
R20 000 ÷ 1.05 = R19 047.62

2. Assume that you bought some financial stock for R40 000 at the beginning of
2002. What is the real value of the financial stock at the end of 2004?
Answer: This is different from the previous calculation because CPI = 100 when
you started.
Thus, real value : Nominal value/CPI x 100
R40 000 ÷ 111.5 x 100 = R35 874
3. Assume that the CPI is forecasted to be 116.9 at the end of 2005. You started in the
beginning of 2002 with a growth-induced financial asset worth R10 000. This financial
instrument guarantees the protection of the purchasing power of the initial
investment to be paid back at the end of 2005. What is the amount that you can
expect to be paid out at the end of 2005?

Answer: Again you started with your investment when the CPI was 100. Thus, the
inflation rate for the period was 116.9 – 100 ÷ 100 x 100 = 16.9%. Thus to protect your
investment against inflation your asset must be worth:

real value : nominal value/(1+CPI)

R10 000 = nominal value/(1+ 0.169)
R10 000 = nominal value/(1.169)
R10 000 x 1.169 = R11 690 at the end of 2005.

4. Assume that your nominal salary at the beginning of 2004 is R600 000 per annum.
What is your real wage at end of 2004? What is your loss in purchasing power?

Answer: Inflation rate for 2004: 111.5 – 106.2 ÷ 106.2 x % = 5%. Thus your real wage =
R600 000 ÷ 1.05 = R571 428.57. You have lost R600 000 – R571 428.57 = R28 571.43 in
purchasing power!!!
5. Assume that for 2005 the expected nominal
GDP of country A is R15bn, the expected CPI is
120 and the total population of country A is
10m people. What is the per capita GDP for
2005?
Answer: Real GDP = R15bn ÷ 120 x 100 =
R12.5bn
Per capita GDP : R12 500 000 000 ÷ 10 000
000 = R1250
GDP
calculations
1. Assume that the GDP at market prices for country B is
$25bn, the primary income earned by the citizens and
firms of country B abroad is $500m and the national
income at market prices is $15bn. What is the primary
income generated by foreign firms & nationals in country
B?
Answer:GDP $25bn
+ Primary income from rest of world $500m
- Primary income to the rest of the world $10.5bn
= National income $15bn
(25bn + R500m – R15bn)
2. Assume the following information that
concerns the pork industry:
Value of sales of pig farmers is R15m per
annum;
Value of sales for the abattoirs is R22m per
annum;
Value of sales for the retail sector is R35m;
 The total cost structures for the pig farmers, the
abattoirs and the retail sectors are listed in the
Salaries Rent Interest Profit
following table.
Pig farmers R2m R1m R400 000 R2m
Apply the production and income methods to
determine the contribution of the pig industry to
Abattoirs R5m R2m R600 000 R3m GDP.
Retail R10m R4m R1m R4m Answer: Production method
Stage 1 R15m – 0 = R15m
Stage 2 R22m – R15m = R7m
Stage 3 R35m – R22m = R13m
Thus GDP = R35m
Income method
Salaries = R17m
+ Rent = R7m
+ Interest = R2m
+ Profit = R9m
Thus GDP = R35m
 3. Assume the following table that contains information on the real GDP and the
CPI for a particular country. Calculate the real GDP (actual output), real GDP
(constant prices) and the economic growth rate.
Year Nominal Average Real GDP CPI Real GDP Economic
GDP price (actual output) in Rbn (constant prices) in Rbn growth rate
(%)

20X2
5 𝑏𝑛 𝑏𝑛
R5bn 5 ( )= 𝑹 𝟏 𝒃𝒏 100 ( 5100 )× 100 = 𝑹𝟓 𝒃𝒏
5
20X3 9 𝑏𝑛
( )= 𝑹𝟏 𝒃𝒏 9 𝑏𝑛
( )× 100= 𝑹 𝟓 𝒃𝒏
R9bn 9 9 180 180
 Variables Value 20X5 (Rm)
Primary sector 382 120
Exports 1 106 253
Final consumption expenditure by households 2 187 998
Compensation of employees 1 686 483
Gross capital formation 715 520
4. the information in Secondary sector 586 246
the tables to calculate Final consumption expenditure by general government 781 531
and answer the
questions. Activity Imports 1 293 340
29 on page 27 – 28
Gross operating surplus 1 623 489
of the workbook.
Tertiary sector 2 382 087
Net primary income from the rest of the world -92 366
Additional information
Cpi2005 1.049
Cpi2004 0.984
Real GDP market prices2004 2 606 371
Size of population2005 52 million
Answer the following questions

Real GDP at market prices in 2005?

Answer: GDP at market prices = C + I +G +(X-Z) = 2 187 998
+ 715 520 + 781 531 + (1 106 253 – 1 293 340) = R3 497
962m
Real GDP: R3 497 962m ÷ 1.049 = R3 334 568m

Economic growth rate 2005 (according to expenditure

method)?
Answer: Growth rate: R3 334 568m – R2 606 371m ÷ R2
606 371m x % =3. 2794%
Inflation rate 2005?
Answer: 1.049 – 0.984 ÷ 0.984 x % = 6.61%

Nominal GDP (expenditure method) per capita 2005?

Answer: R3 497 962 000 000 ÷ 52 000 000 = R67 268.50

Balance on the current account of the balance of payments for 2005?

Answer: Exports – Imports = R1 106 253m – R1 293 340m = - R187
087m

Gross national income at market prices for 2005?

Answer: GDP + primary income from rest of the world – primary income
to rest of the world. It follows that net primary income = income from
rest of the world – income to the rest of the world)
= R3 497 962m – R92 366m = R3 405 596m
Nominal GDP 2004?
Answer: Remember it was calculated as :
nominal GDP ÷ Cpi20.4 = real income.
Thus nominal GDP20.4 = R2 606
371m x 0.984 = R2 564 669.06m
Unemploym
ent
calculations
 Total population: 20m people
Assume the
following
labour People of working age: 14m people

market
information Active labour force: 10m people
of country C.
Employed: 8m people
Activity 33 on p. 21 of the workbook.

Economically inactive population?

People of working age - Active labour force
Answer: 14m – 10m = 4m
Unemployed population?
Active labour force - Employed
Answer: 10m – 8m = 2m
Unemployment rate?
Unemployed population / Active labour force
Answer: 2 ÷ 10 x % = 20%
Labour force participation rate?
Active labour force / People of working age
Answer: 10 ÷ 14 x % = 71.43%