1. Measuring domestic output and national income
Lecture 1

2. Botswana’s economic performance
Botswana GDP (Millions of Pula)
Year
GDP_Current Prices
GDP_Constant (2006) Prices
1994
11435
33120
1995
13114
35449
1996
16115
37515
1997
18328
40527
1998
20244
40819
1999
25361
44765
2000
29531
45655
2001
32066
45770
2002
34416
48548
2003
37182
50793
2004
42037
52168
2005
50752
54545
2006
59107
58886
2007
67153
63999
2008
75867
66496
2009
72316
61282
2010
93390
66549
2011
104573
70610
2012
110511
73560

3. Botswana’s economic performance

4. Botswana’s economic performance
Year
GDP growth (Current Prices)
GDP growth (Constant Prices)
1994
1995
14.7
7.0
1996
22.9
5.8
1997
13.7
8.0
1998
10.5
0.7
1999
25.3
9.7
2000
16.4
2.0
2001
8.6
0.3
2002
7.3
6.1
2003
4.6
2004
13.1
2.7
2005
20.7
2006
16.5
2007
13.6
8.7
2008
13.0
3.9
2009
-4.7
-7.8
2010
29.1
2011
12.0
2012
5.7
4.2
Annual Average

5. Botswana’s economic performance

6. Economic Growth
Botswana has been one of the fastest-growing economies over the past five decades
Source: World Bank. World Development Indicators 2012.

7. SADC’s macroeconomic performance
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
AVG
Angola
3.0
3.1
14.5
3.3
11.2
20.6
20.7
22.6
13.8
2.4
3.4
10.2
Botswana
5.9
3.5
9.0
6.3
6.0
1.6
5.1
4.8
-4.9
7.2
4.6
4.3
DRC
-6.9
-2.1
5.8
6.6
7.8
5.6
6.2
2.8
7.0
6.9
4.1
Lesotho
5.7
4.4
4.9
4.7
3.6
4.2
4.0
Madagascar
4.5
-12.4
9.8
5.3
5.0
7.1
-4.1
0.5
Malawi
0.8
1.7
5.5
2.6
2.1
9.5
8.3
6.5
Mauritius
1.9
1.5
Mozambique
12.3
9.2
7.9
8.4
8.7
7.3
6.8
7.4
Namibia
1.2
2.5
5.4
-0.4
Seychelles
-2.3
-5.9
-2.9
6.7
6.4
9.9
-1.0
South Africa
2.7
3.7
2.9
-1.5
Swaziland
2.0
0.9
1.8
3.9
2.3
2.2
0.3
Tanzania
Zambia
7.6
Zimbabwe
n/a
0.7
-9.3
-17.0
-5.7
-3.5
-3.6
-17.6
8.1
9.3

8. Learning objectives
How gross domestic product (GDP) is defined and measured.
The relationships among GDP, net domestic product (NDP), national income (NI), personal income (PI), and disposable income (DI).
The difference between nominal GDP and real GDP.
Some limitations of the GDP measure.

9. Assessing Economy’s Performance
National Income Accounting (NIA)- measures the economy’s performance by measuring the flows of income and expenditures over a period of time.
NIA helps
Assess the health of the economy by comparing the levels of production at regular intervals
Track the long-run course of the economy to see whether it has grown, stagnated or declined
provide a basis for appropriate public policies to improve economic performance.
Gross Domestic product (GDP) a monetary measure of the total market value of all final goods and services produced within a country in a given year – it is location based.
Final goods are consumption goods, capital goods & services that are bought by their final users, rather than for resale or further processing or manufacturing
GDP includes only final products (G) and services (S); it avoids double/multiple counting, by eliminating any intermediate goods used in production of these final G & S.
Intermediate goods are goods & services that are bought for resale or for further processing or manufacturing.
Multiple counting could also be avoided by cumulating only the value added at each stage
Value added is the market value of a firm’s product minus the value of the inputs the firm has bought from others (used in the production approach to measurement of GDP)

10. Example (agrarian economy)
Output (bags)
Price per bag (P)
Market value (GDP)
Year
Oranges
Tomatoes 1 4 3 75
100 2
110

11. Example: industrialized economy
Suppose the economy becomes more sophisticated and
The 4 bags are sold to a processor who in turn use them to produce 100 litres of orange juice, which he sells to at per litre. The retailer re-sells the per litre
The 3 bags of tomatoes are sold to a per bag, who in turn produces 90 bottles of tomato source and sells it for P8.00 per bottle to a retailer. The retailer re-sells the source at P10.00 per bottle.
Calculate GDP for this country

12. GDP Oranges side Tomatoes side Stage Sales value Value added (P)
Farmer
300
Processor
900
600
Retailer
1000
100
GDP1
Stage
Sales value (P)
Value added (P)
Farmer
300
Processor
720
Retailer
900
GDP2
Total GDP
GDP1
GDP2
Total GDP (P)

13. Assessing Economy’s Performance
Gross National Product (GNP)- ) the monetary measure of the total market value of all final goods and services produced by a country’s owned resources within in a given year irrespective of where production takes place – it is ownership based
GDP & GNP are flow variables, not stock variables
Since GNP is harder to measure, economists tend to favor the use of GDP
GDP can be measured at factor cost, basic prices and market prices
GDP at factor cost is normally linked with the income approach of measuring GDP.
The expenditure approach is associated with GDP at market prices
GDP at basic prices is associated with the production approach

14. Nonproduction Transactions excluded
GDP is the value of what has been produced in the economy over the year, not what was actually sold.
Excludes Nonproduction Transactions – 2 types
Purely financial transactions
Public transfer payments, like social security or cash welfare benefits
Private transfer payments, like student allowances or child maintenance payments, remittances to parents
Stock market transactions, sale of stocks and bonds represent a transfer of existing assets. (However, the brokers’ fees are included for services rendered.)
Secondhand sales since they do not represent current output (However, any value added between purchase and resale is included, e.g. used car dealers).

15. Two Approaches to GDP
Income Approach – incomes created producing the goods and services
Wages
Rental Incomes
Interest Incomes
Profits
Expenditure Approach - sum of all the money spent on buying output
Final-Product or Value-Added
The Sum of the Money Spent to Buy the Output
Illustrate with circular flow diagram
Important identity – what is spent on a product is the income to those who helped to produce and sell it
What is spent on a product is income to those who helped to produce and sell it.
This is an important identity and the foundation of the national accounting process

16. The Simple Circular Flow Model
The black arrows represent flow of real objects and the red arrows represent flow of financial objects

17. Two Approaches to GDP Income Approach Wages + Rents Interest Profits
Expenditure
Approach
Income
Approach
Consumption by
Households +
Investment by
Businesses
Government
Purchases
Expenditures
By Foreigners
Wages +
Rents
Interest
Profits
Statistical
Adjustments

18. Expenditure Approach
We add up all the spending on final goods and services that has taken place through the year
GDP is divided into the categories of buyers in the market; household consumers, businesses, government, and foreign buyers
Personal Consumption Expenditures (C )
Durable Consumer Goods (cars, stoves, beds, etc)
Nondurable Consumer Goods (bread, sugar, movies, etc)
Consumer Expenditures for Services (doctors, lawyers, etc
Gross Private Domestic Investment (Ig)
Machinery, Equipment, and Tools by business enterprises
All Construction (includes residential because they can be rented out to earn income)
Changes in Inventories (if output exceeds current sales, inventories build up).

19. Expenditure Approach Government Purchases (G)
Expenditures on Goods and Services (labor & other services)
Expenditures for Social Capital (schools, roads
Net Exports
Xn = Exports (X) – Imports (M)
Putting It All Together:
GDP = C + I + G + Xn

20. Income Approach to GDP
Demonstrates how the expenditures on final products are allocated to resource suppliers
Compensation of employees includes wages, salaries, fringe benefits, etc
Rents: payments for supplying property resources
Interest: payments from private business to suppliers of money capital
Corporate profits: earnings of owners of corporations, sole proprietorships, partnerships & cooperatives. It includes
Corporate income taxes – taxes levied on corporations’ net earnings & it flows to the government
Dividends – part of profits that are paid to corporate stockholders & thus flow to households
Undistributed corporate profits – monies saved by corporations to be invested later in equipment

21. GDP Approaches Compared
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C)
$ 8746
Compensation $
Gross Private Domestic Investment (Ig)
2105
Rents 73
Government Purchases (G)
2363
Interest
498
Net Exports (Xn)
-727
Proprietor’s Income
939
Corporate Profits
1352
Taxes on Production and Imports
917
National Income
$10904
Net Foreign Factor Income
-34
Statistical Discrepancy 43
Consumption of Fixed Capital
1574
Gross Domestic Product
$ 12,487
$12,487

22. Relationships between measures
From National Income to GDP - some definitions
Net Foreign Factor Income
Income earned by nationals abroad less income earned by foreigners locally (can be positive or negative)
Statistical Discrepancy
Added to national income to equalize the two approaches
Consumption of Fixed Capital
Depreciation allowance (set aside to replace machinery & equipment used up). We need to know how much output was available for consumption and for additions to the stock of capital
Net Investment = gross investment – consumption of fixed capital
Net domestic product – measures the total annual output that the entire economy can consume without impairing its capacity to produce in the future
National income – income earned by a nation’s owned resources
Personal income – includes all income received, whether earned or unearned

23. Relationships between measures
From National Income to GDP to
Other National Accounts
Net Domestic Product (NDP)
GDP – depreciation allowance (consumption of fixed capital)
National Income (NI) : NDP +(-) net foreign factor income
Income earned by nationals domestically & abroad.
Personal Income (PI): NI + transfer payments – (payroll taxes, corporate profit taxes, undistributed corporate profits)
Income received by households
Disposable Income (DI) : PI – personal taxes
DI = C + S (allocated to consumption and saving)

24. The Income Approach Gross Domestic Product (GDP)
Consumption of Fixed Capital
Net Domestic Profit (NDP)
Statistical Discrepancy
Net Foreign Factor Income
National Income (NI)
Taxes on Production and Imports
Social Security Contributions
Corporate Income Taxes
Undistributed Corporate Profits
Transfer Payments
Personal Income (PI)
Personal Taxes
Disposable Income (DI)
$ 12,487
-1,574
$ 10,913
-43 34
$ 10,904
-917
-871
-378
-460
+1,970
$ 10,248
-1,210
$ 9,038

25. Circular flow of income – open economy (links to be discussed in class)
Domestic households
Financial system
Abroad
Government
Domestic producers

26. Detailed circular flow model

27. Botswana’s National Accounts 2012 current prices
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C)
P m
Compensation
Gross Private Domestic Investment (Ig)
P m
Rents
Government Purchases (G)
P m
Interest
Net Exports (Xn)
-P6090.5m
Proprietor’s Income
Net errors & omissions
-P1734.2m
Corporate Profits
Taxes on Production and Imports
National Income
Net Foreign Factor Income
Statistical Discrepancy
CFC
Gross Domestic Product
P m

28. Nominal Versus Real GDP
Go back to slides 2-5
Nominal GDP – market value of all final goods and services produced in a year measured at the prices that prevailed when the output was produced (PxQ).
Real GDP – is market value of all final goods and services measured at base year’s prices
Allows comparison of physical output between years
Nominal GDP is calculated using the current prices prevailing when output was produced but real GDP is a figure that has been adjusted for price level changes
One method to adjust GDP is to first determine a price index and then adjust the nominal GDP by dividing by the price index (in hundredths, i.e., in decimal form)
Price Index- a measure of the price of a market basket in a given year compared to the price of a similar basket in reference year (base year).

29. Nominal Versus Real GDP
Price index in a given year = (Price of market basket in specific year/Price of same basket in base year)x100
This also known as consumer price index (CPI)
E.g., from table next slide, in year 1 price of a basket containing pizza is P10.00
If yr 1 is base yr then Price Index is 100
In year 2 Price Index is (20/10)x100 = 200
The price of pizza rose from yr1 to yr 2 by 100% [( )/100]*100
Real GDP = Nominal GDP/Price Index (in hundredths, i.e., price index/100)
Real GDP (yr 2) = [140/(200/100)]=70
Real GDP (yr 4) = [300/(300/100)]=100

30. Calculating Real GDP (Base Year = Year 1)
Units of output
Price of pizza (P)
Price Index (Year 1 = 100)
Unadjusted or Nominal GDP (P)
Adjusted or real GDP (P)
Real GDP (column 1 x P10) 1 5 10
100 50 2 7 20
200
140 70 3 8 25
250 80 4 30 11 28 6 13 32

31. Real GDP alternative method
Gather data on physical outputs & their prices
Determine market value of output in successive yrs as if base yr price had prevailed (see column 7) previous slide
To get Price index for a given year divide nominal GDP by the real GDP for that year
Price Index (in hundredths)= Nominal GDP/ Real GDP . This is also called GDP deflator
You can the multiply it by 100 to get the index similar to in the previous method.

32. Botswana’s National Accounts 2012- 2006 prices
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C)
P m
Compensation
Gross Private Domestic Investment (Ig)
P m
Rents
Government Purchases (G)
P m
Interest
Net Exports (Xn)
-P8178.6m
Proprietor’s Income
Net errors & omissions
P1753.3m
Corporate Profits
Taxes on Production and Imports
National Income
Net Foreign Factor Income
Statistical Discrepancy
CFC
Gross Domestic Product
P m

33. Shortcomings of GDP Nonmarket Activities – home makers’ services,
Leisure – improves living conditions, but is not included
Improved Product Quality
The Underground Economy
GDP and the Environment – harmful effects of pollution not subtracted from GDP
Composition and Distribution of the Output – makes no difference between guns or tractors
Noneconomic Sources of Well-Being – crime prevention not covered in GDP

34. Expenditures Approach
Tute question
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C)
P 245
Compensation
223
Gross Private Domestic Investment (Ig) 60
Rents 14
Government Purchases (G)
P72
Interest 13
Net Exports (Xn) 11
Proprietor’s Income 33
Corporate Profits 56
Taxes on Production and Imports 18
National Income
357
Net Foreign Factor Income 4
Statistical Discrepancy
CFC 27
Gross Domestic Product
P 388
P388