Download UNIT NINE Social Accounting and Global Trade Unit 9 Page 1

UNIT NINE
Social Accounting and Global Trade
Factors that determine standard of
living
Standard of living and quality of life
National income and its variants
Approaches used to measure national
income
Economic growth and development
The role of education in economic
growth and development
Reasons for international trade
Balance of trade and balance of
payment
Measures used to address balance of
payment problems
Standard of Living: is the level of well-being of the people in the country.
The amount and quality of goods and services exposed to the people of the country.
Quality of Life: the state or conditions under which persons are able to enjoy a particular
standard of living. E.g. level of crime within a country, the level of pollution within a
country
To ensure you understand the difference, differentiate between the two:
______________________________________________________________________
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Factors affecting Standard of Living:
1. Per capita income: income per person i.e. national income divided by the
population.
Things per capita income does not consider:
-
The distribution of income; it is only an average
-
The level of prices may vary from year to year and so will the quantity and quality
of what person consume
-
The cause/s of increase in per capita income may not relate directly to improved
standard of living
2. Gross Domestic Product (GDP): the total value of all goods and services produced
within the geographical confines of a country during a period of one (1) year without
deductions for capital consumption or depreciation.
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3. Gross National Product (GNP): the total value of all goods and services produced
in a country within a given year which also includes the earnings from investments
abroad less the payments made to foreigners for investment in the country.
4. Consumption patterns: goods consumed at present as compared to the past
Factors affecting the quality of life
1. Life Expectancy: number of years people are expected to live from birth.
2. Literacy Rate: ability to read and write and function generally.
3. Infant Mortality Rate: the number of infants that die per thousand of the
population.
4. Employment levels
5. Level of crime within the country
6. Level of Health Care
7. Level of pollution
8. Level of Environmental Awareness of the people.
National Income & its variants or levels of National Income
 GDP: Gross Domestic Product
 GNP: Gross National Product
 NNP: Net National Product
 NI: National Income
 PI: Personal Income
 DI: Disposable Income
National Income (NI): the total earnings of the factors of production during a period of one
(1) year at factor cost. (costs to produce)
Personal Income (PI): the earnings of individuals before tax deductions and national
insurance contribution
Disposable Income (DI): the earnings of persons after tax and national insurance
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contribution deductions are made
M
Meetthhooddss ooff m
meeaassuurriinngg N
Naattiioonnaall IInnccoom
mee
1) Income method
2) Output method
3) Expenditure method
Income method: measures the total income earned by the factors of production at factor
cost.
Output method: measures the total value of goods and services produced at market prices.
Expenditure method: measures the total expenditure of households, governments and firms
during the year.
Things making up an economy

Firms

Government

Households

Foreign trade
Open Economy: where all of the above are involved
Closed Economy: where no foreign trade exists but everything else does
Illustration of the Circular Flow of Income
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Uses of National Income data
1. To provide the basic information for economic policy-making and for making
economic predictions
2. To indicate the overall standard of living in a country and any changes
3. To determine the rate at which a country’s economy is growing
4. To indicate changes in the distribution of income
5. To calculate the per capita income of the country
6. To facilitate comparisons with other countries
National Income accounting problems:
 Money terms________
 Double-counting_______
 The ‘informal’ economy_________
Pitfalls to avoid in calculating National Income:
1. Double counting: counting the same item twice e.g. cars & tyres
2. Price changes: changing income to real income. Current income or money income
should be converted to real or constant income.
To correct this: Use the Consumer Price Index (CPI) which is the percentage change in the
prices of a sample of goods over a period of time
CPI = current year’s price divided by the base year’s price multiplied by 100.
Uses of the CPI:
1. Trade Unions use it when arguing increased wages
2. To deflate money income to real income - Real GNP is equaled to current GNP
divided by the price index multiplied by 100.
Growth and Development
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Economic growth: is defined as a quantitative increase in output of goods and services over
time.
Factors that contribute to Economic Growth:
The availability of natural resources both the quantity and quality
Technological progress: increase in one’s ability to make more effective use of capital
equipment
Increase/improvement in human development via training, health, education
Ways to promote Growth:
 Increase investments via:
-
Tax breaks/holidays for investors
-
Infrastructural development
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Political stability
-
Good labour relations
 Increase the markets for goods via advertisements, exhibitions
 Expenditure on health and education
Economic Development
This is a qualitative process of economic change characterized by high per capita real income,
high standard of living, reduction in unemployment and poverty as well as transformation in
the distribution of wealth. Economic growth and economic development is not the same.
Development is a qualitative concept and is more concerned with the pattern of economic
change. Development refers to the provision of facilities that enable growth to take place.
Often, development takes place in just some sectors of the economy, but provides thrust for
tother sectors.
N.B. When there is development, there must be growth but when there is growth, there is not always
development.
An underdeveloped country tends to have the following features:
o High rate of population growth
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o Poor economic performanc
o Low standard of living
o Relatively short life expectancy
o High unemployment
o Considerable dependency upon agricultural employment
o Poor educational opportunities
THE ROLE OF EDUCATION
Education plays an important role in the economic growth and development of all countries.
1) It helps to improve the knowledge and skills of the workforce.
2) Better educated people are more able to adapt to changes that are necessary in a
developing country.
3) Education makes people more literate, thereby increasing communication skills in a
modern world.
4) Entrepreneurs are an essential factor in economic development and they tend to come
from the better educated sectors of society.
International Trade
This is the trading of goods and services between different countries.
A
Addvvaannttaaggeess ooff IInntteerrnnaattiioonnaall TTrraaddee::
 A wider variety of goods is made available
 A wider market is now created
 Increase in the efficiency in production
 Elimination of monopolies
 World resources are more efficiently allocated
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D
Diissaaddvvaannttaaggeess ooff IInntteerrnnaattiioonnaall TTrraaddee::
 Over-dependence on other countries
 Unfair competition
Reasons for International Trade:
1) Because of differences in natural resources due to:
o Climate
o Geology
2) Differences in productivity:
o Output per man-hour
o Specialization in certain skills and training
3) Comparative advantage:
The Law of Comparative Advantage states: ‘If one nation can produce each of two (2)
products more efficiently than another nation and can more one (1) of these products more
efficiently than the other, it should specialize in the production of the item for which it is
most efficient and leave the production of the alternative product to the other country.’
Balance of Trade: the difference between the visible imports and exports.
Deficit: occurs when the imports are greater than the exports
Surplus: occurs when the exports are greater than the imports
Balance of Payments: is the record of a country’s financial statement of money receipt
from abroad and the payments made abroad.
N.B. B.O.P must always balance.
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As an accounting statement the Balance of Payment account must following the double
entry system of keeping records. Therefore, the total debits must be equal to the total
credits. In reality, a country may in some years, earn a surplus or incur a deficit.
Reasons for keeping Balance of Payment:

It provides signals as to how the economy in performing

As a member of the World Bank (IBRD) it is mandatory to keep it.
Sections of the Balance of Payment statement:
1. Current A/c
a) Visible e.g. Goods (BOT)
b) Invisible e.g. Banking, Tourism, Shipping Airline (services)
2. Capital A/c: shows capital movement for investment purposes
3. Official Financing: records transactions with overseas monetary institutions including
the IMF and government borrowing.
Causes of Balance of Payment deficit:
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Excessive domestic credit creation
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Excessive government expenditure
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Excessive wage increases
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Reduced export earnings because of:
i.
Natural disasters
ii.
Fall in export prices
iii.
Loss of export market
(Internal) Measures to address an adverse B.O.P.
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-
-
The country can depreciate its currency

Exports become cheaper and therefore, earnings will rise

Imports become expensive and therefore import bill should drop
Import restriction measures:

Trade is reduced because of restrictions:
Tariff: a tax placed on imports
Quota: a quantitative restriction on goods
Ban: a complete restriction on items
License: a permit granted to import goods
Exchange control: restriction on country’s foreign exchange reserve
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Provide incentives for businesses that are export-oriented
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Seek to improve local production to substitute for imports
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Employ a contractionary monetary policy which will affect incomes negatively and reduce
effective demand
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Encourage persons to eat what you grow and grow what you eat
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Introduce an incomes policy which seeks to control prices and income
(External) Measures to address an adverse B.O.P
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Accepting gifts from other countries
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Importing goods on credit
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Draw from the IMF
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Borrow from another country
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Enhance export promotion
Effects on the economy of an adverse B.O.P
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Overseas borrowing will increase, debt will rise
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Reduction in export earnings
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Merchandise export less than merchandise import
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Invisible earnings less than invisible payments
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Reduction in foreign exchange reserve
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Country may experience economic bankruptcy
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