ece 202 notes study economics yr1 prt2

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Table of ContentsTable of Contents....................................................................................................................1 :TO MAKE :SHORTENED NOTES OF TO STUDY LATER AFTER EXAM FOR FUTURE:& magazines/journals for economics-& questions for lecturers still to ask................................5 Questions & answers:.......................................................................................................5 Shortened notes to make:................................................................................................5 All Multipliers and index ratios:and Marginal propensty's to Consume................................6 Chapter 1:.........................................................................................................................6 Chapter 6..........................................................................................................................6 Chapter 7..........................................................................................................................6 All Formulas:........................................................................................................................6 Chapter 1:.........................................................................................................................6 Chapter 18:.......................................................................................................................6 Chapter 19:.......................................................................................................................6 IMPORTANT NOTES from LAST SEMESTER..........................................................................9 CHAPTER 1 ...........................................................................................................................10 : INTERDEPENDANCE OF MAJOR SECTORS, MARKETS AND FLOWS IN THE ECONOMY..........10 Important Boxes/concepts/graphs/pages:.........................................................................10 box 3.1 p48t Stocks and Flows.........................................................................................11 3.1 p46 THE 3 MAJOR FLOWS IN THE ECONOMY: Production ,Income and Spending........11 3.2 p47 The Interdependance between Households and Firms.........................................12 TYPES OF FIRMS:P50 BOX...............................................................................................13 Market Types;.................................................................................................................14 The Circular flow of Goods and Services Diagram.(NOT SPENDING+INCOME)...............14 The Circular flow of Income and Spending.(NOT GOODS & SERVICES).........................15 Abbreviations of major Terms:.......................................................................................15 3.3 pg 52 Introducing the Government:............................................................................16 3.4 Introducing the Foreign Sector....................................................................................17 Financial Institutions in the circular flow of income andspending.3.5t..............................18 Total Production,Income,Spending-Revisited....................................................................19 Abbreviations of major Terms:.......................................................................................19 CHAPTER 2 ...........................................................................................................................20 : MEASURING THE PERFORMANCE OF THE ECONOMY..........................................................20 Important Boxes/concepts/graphs/pages:.........................................................................20 1 . Macroeconomic Objectives-2.1p9s,p61t.......................................................................21 5 Macroeconomic Objectives used to Judge the Performance of the EcoEnomy............21 #1 Macroeconomic Objective :Econ.Growth : GDP-Gross Domestic Product-Measuring the Level of Economic Activity.4.2t,p63...................................................................................22 Aspects on the definition of GDP....................................................................................22 About GDP:.....................................................................................................................22 The 3 Methods of Calculating GDP:...............................................................................23 Difference between the 3 Methods of calculating GDP..................................................23 Measurement at Market Prices,Basic Prices and Factor Cost(or Income).......................24 GDP at Current prices & GDP at Constant Prices:...........................................................25 Other Measures of Production ,Income and Expenditure...............................................25 GNI (or GNP)- Gross National Income ............................................................................25 Expenditure on GDP.......................................................................................................26ECS102-8 economics Part2 Yr1 Page 1

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GDE: Gross Domestic Expenditure.................................................................................26 SUMMARY of national accounting totals.........................................................................26 #2 MACROECONOMIC OBJECTIVE : Full Employment :Measuring Employment and Unemployment..................................................................................................................27 #3MACROECONOMIC OBJECTIVE:STABLE PRICES:Measuring Prices,the Consumer Price Index..................................................................................................................................27 The Consumer Price Index. ............................................................................................27 #4 MACROECONOMIC OBJECTIVE: Balance of Payments...................................................28 #4 MACROECONOMIC OBJECTIVE:Equality in Distribution of Income: 3 Methods of Measuring Inequality. .......................................................................................................29 Method #1 of 3 : Lorenz Curve.......................................................................................29 #2Gini Coefficient:(or RATIO).........................................................................................29 #3Quantile Ratio............................................................................................................30 Extra Notes:....................................................................................................................30 CHAPTER 3 ...........................................................................................................................31 : THE MONETARY SECTOR.(MACROECONOMICS)ch ch15t,pg353.........................................31 Important Boxes/concepts/graphs/pages:.......................................................................31 INTRODUCTION:.................................................................................................................32 The Functions of Money:....................................................................................................32 1-Money as a meduium of exchange:.............................................................................32 2- Money as a unit of account:......................................................................................32 3-Money as a Store of Value:..........................................................................................32 4-What Money is Not:.....................................................................................................32 Different Kinds of Money...................................................................................................33 Money in RSA.....................................................................................................................33 TERM 1-Coventional measure:M1...................................................................................33 TERM 2-M2......................................................................................................................33 TERM 3-M3......................................................................................................................33 Financial Intermediaries....................................................................................................34 THE SOUTH AFRICAN RESERVE BANK................................................................................34 Issuing banknotes and coins...........................................................................................35 Acting as banker for other banks....................................................................................35 Acting as banker for the government.............................................................................35 Acting as custodian of countries gold and other foreign reserves..................................35 formulating and implementing monetary policy............................................................35 The Supply of Money.........................................................................................................35 Banks: in the money creation process.(role in supply)..................................................35 2-Reserve Asset position and Credit Multiplier:..............................................................36 3-Other Factors in Supply of Money...............................................................................36 EXTRA BOX:Bonds,the Bond market and Capital...............................................................36 The Demand for Money....................................................................................................37 Interest Rates:................................................................................................................38 Equilibrium in the Money Market.......................................................................................38 Simulaneous control over the supply of money andthe Interest Rate-Authority Controlling Supply .........................................................................................................39 The Instruments of Monetary Policy..................................................................................39 1-Accomodation policy...................................................................................................39 Open market policy........................................................................................................40 Public Debt management...............................................................................................40 Intervention in foreign exchange markets......................................................................40 CHAPTER 4 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: THE PUBLIC SECTOR.(MACROECONOMICS)........................................................................41 Important Boxes/concepts/graphs/pages:........................................................................42 1-Role of Government in the Economy : An Overview: 16.1p384......................................43 -2-Fiscal Policy and the Budget..........................................................................................43 -3-Government Spending-16.8p401..................................................................................44 -4-Financing of Government Spending 16.9,p403.............................................................44 -5-Taxation 16.10..............................................................................................................45 -1-Criteria for a good tax:...............................................................................................45 -2-Different Types of Tax:...............................................................................................45 -6-Taxation in RSA.............................................................................................................45 -7-Tax Incidence-ie: Who really Pays the Taxes?...............................................................46 The Impact of a Specific Excise Tax:..............................................................................46 CHAPTER 5 ...........................................................................................................................47 : THE FOREIGN SECTOR.(MACROECONOMICS)......................................................................47 Important Boxes/concepts/graphs/pages:........................................................................48 -1-WHY Countries Trade:...................................................................................................49 Intra industry trade:.......................................................................................................50 -2-Trade Policy...................................................................................................................50 TYPES OF GOVERNMENT CONTROLS FOR Int .Trade.....................................................50 -2-Arguments for the use of Trade Barriers:...................................................................52 Arguments against Trade barriers..................................................................................53 Trade Policy in RSA.........................................................................................................53 Gold in the Internationqal monetary system;.................................................................53 The GATT,The Uruguay round and WTO-world trade organisation.................................53 The Balance of Payments..................................................................................................53 The Balance of Payments and Economic activity and Policy in RSA. .............................54 Gold and other Foreign Reserves:..................................................................................54 The Int.M.Fund.+World Bank..........................................................................................54 Exchange Rates: ...............................................................................................................54 The foreign exchange market:.......................................................................................55 REASONS FOR THE DEMAND FOR DOLLARS:..................................................................55 REASONS FOR THE SUPPLY FOR DOLLARS:...................................................................55 THE EQUILIBRIUM EXCHANGE RATE:..............................................................................55 Intervention in the Foreign Exchange Market:................................................................56 Exchange Rate Policy.....................................................................................................57 The Terms of Trade:..........................................................................................................57 CHAPTER 6 ...........................................................................................................................59 : INCOME DETERMINATION IN A SIMPLE KEYNESIAN MACROECONOMIC MODEL(MACROECONOMICS).................................................................................................59 Important Boxes/concepts/graphs/pages:........................................................................60 -1- Production Income and Spending:................................................................................60 The Basic Assumptions of the Model:................................................................................61 Consumption Spending:-----------------------------------.............................................................61 The Consumption Function.............................................................................................61 The position of the consumption function ....................................................................63 The Equation for Consumption Function.........................................................................63 SAVING;..........................................................................................................................63 Investment Spending:........................................................................................................63 The Investment Decision:...............................................................................................64 Equation for Investment Function:.................................................................................65ECS102-8 economics Part2 Yr1 Page 3

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The Simple Keynesian Model of a Closed Economy without Gov.......................................65 Total Spending or (Aggregate Demand.)........................................................................65 The 45 0 Line..................................................................................................................66 The Equilibrium level of Income:....................................................................................67 The Algebraic Version of the simple Keynesian Model:..................................................68 -7-Impact of a Change in Investment Spending:The Multiplier..........................................69 -1-What the multiplier means:........................................................................................69 -2-How it can be calculated from the formula................................................................70 -3-Why it's size depends on the marginal propensity to consume.................................70 -4-How it can be represented graphically.......................................................................70 CHAPTER 7 ...........................................................................................................................72 :KEYNESIAN MACROECONOMIC MODELS INCLUDING THE GOVERNMENT and THE FOREIGN SECTOR.................................................................................................................................72 1-Introduction:...................................................................................................................73 2-Introducing The Government into our Model:.................................................................73 1-Government Spending:(G)...........................................................................................74 2-Taxes(T)......................................................................................................................76 Fiscal Policy:...................................................................................................................78 2 -Introducing The foreign Sector into the Model:The Open Economy..............................78 Introduction:...................................................................................................................78 Fiscal Policy inthe Open Economy:.................................................................................80 CHAPTER 8 ...........................................................................................................................81 : MORE ON MACROECONOMIC THEORY AND POLICY............................................................81 The Aggregate Demand Aggregate Supply Model 8.1sp511t............................................82 The Aggregate Demand Curve.......................................................................................83 Changes in Aggregate Demand:.....................................................................................84 The Aggregate Supply Curve..........................................................................................85 The Slope of the Aggregate Supply Curve:.....................................................................85 Changes in Aggregate Supply........................................................................................86 The Monetary Transmission Mechanism............................................................................87 Links between Interest Rates , Investment Spending and Rest of Economy .................87 ..........................................................................................................................................88 Monetary and Fiscal Policy in the AdAs Framework...........................................................88 Expansionary and Contractionary Monetary and Fiscal policy.......................................88 Monetary and Fiscal Policy lags......................................................................................88 The relative effectiveness of monetary and fiscal policies:............................................89 CHAPTER 9 ...........................................................................................................................90 : INFLATION:..........................................................................................................................90 Introduction.......................................................................................................................90 Definition of Inflation:........................................................................................................91 The Measurement of Inflation:...........................................................................................91 The Consumer Price Index. ............................................................................................91 The Effects of Inflation:......................................................................................................92 Hyperinflation-the Greatest Cost of Inflation..................................................................93 The Causes of Inflation:.....................................................................................................93 Demand- Pull and Cost-Push inflation.............................................................................93 CHAPTER 10 .........................................................................................................................97 : UNEMPLOYMENT:................................................................................................................97 Unemployment:....................................................................................................................98ECS102-8 economics 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The Employment Pool:.......................................................................................................98 Measuring Unemployment.................................................................................................98 The Costs of Unemployment:.............................................................................................98 Types of Unemployment:...................................................................................................99 Policies to Reduce Unemployment....................................................................................99 Unemployment in the Keynesian & AD-AS Models..........................................................100 CHAPTER 11 .......................................................................................................................102 : Economic Growth:.............................................................................................................102 Introduction:.......................................................................................................................102 Definition and Measurement of Economic Growth..............................................................103 Some problems associated with GDP as measure of economic growth:......................103 Calculating Economic Growth:......................................................................................103 The Business cycle:......................................................................................................104 Sources of Economic Growth:.............................................................................................104 Supply Factors:.............................................................................................................104 Demand Factors:..........................................................................................................105 -----------------------------------------------------------------------------------------------------------------------------

:TO MAKE :SHORTENED NOTES OF TO STUDY LATER AFTER EXAM FOR FUTURE:& magazines/journals for economics-& questions for lecturers still to ask.Questions & answers:1. Answer to which journals/magazines-Journals+ magazines: 'SEE'-"studies in economics and econometrics"(international journal),+ also "Journal of economics for RSA,financial mail + business day+ gauteng business etc. 2. still to ask-":whwere do you get the actual elasticity indexes, the investment multiplier from marginal propensity to consume in keynes theory,also the graphics for demand& supply curves with real info-also all other graphs with real info etc? 3. why do they call income from natural resources rent- where it should be profit from mines, forrests,fisheries etc., and how to calculate gdp using 'interest 'and 'rent' profit & wages one can understand- arnet there going to be other income fro FOP here somewhere( alot of it missed somewhere maybe?)

Shortened notes to make:1. 2. 3. 4. 5. ECONOMIES OF SCALE & SCOPE PAGE 56 OF NOTES-CH 6 SEE under consumption spending points 2&3 non-income determinants of consumption pg 466 t marginal production/maximum profit curves:of the production curves-profit ratios etc: semester 1

ECS102-8 economics Part2 Yr1

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All Multipliers and index ratios:and Marginal propensty's to ConsumeChapter 1: Chapter 61) #@#=1/1-c Government : Multiplier for Keynesian macroeconomic model without foreign sector or

Chapter 71) The old marginal propensity to consume is c with taxes included.The slope of this curve is c(1-t) which is allways smaller than c. 2) The new marginal propensity to consume is c(1-t) with taxes included.The slope of this curve is c(1-t) which is allways smaller than c. 3) The Multiplier without Taxes= #@#= 1/1-c 4) Multiplier with Taxes = #@#=1/1-c(1-t)

All Formulas:Chapter 1: Chapter 18:1)

Chapter 19: GOVERNMENT SPENDING1) Equilibrium position of Tot.Income-Production/Tot.Spending-Demand : Y0=Abar :Income equilibrium =Tot. Autonomous Spending 2) Consumption Function: c=C/Y : 3) Equilibrium Income=Y0 4) To calc: EQUILIBRIUM level we start with 5) Equilibrium condition : Y=A(where eqilibrium is) 6) so :Y=C+I+G because (A=C+Ibar+Gbar) 7) and C=Cbar +cY) 8) So: Y=(Cbar+cY)+I+G 9) Thus:to solve above equation: 10) Y-cY=Cbar+Ibar+Gbar 11) so: Y(1-c)=Cbar+Ibar+Gbar 12) THUS: Y0=1/1-c(Cbar+Ibar +Gbar) : (19.4) 13) General formula can still be written: Y0=#@# (Abar) :(19.5) 14) Y=A(the equilibrium 45 deg line)******** 15) so :Y=C+I+G because (A=C+Ibar+Gbar)*********ECS102-8 economics Part2 Yr1 Page 6

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16) and :C=Cbar +cY (consumption curve equation)******* 17) So: Y=(Cbar+cY)+I+G 18) Where Y0 is equilibrium of A and Y 19) .Where:#@#=multiplier , Abar = total autonomous spending

TAX1) Tax Rate: T=tY 2) Specific exercise:If the Gov. wishes to close the gap between full employment (=Yf as an example) and lower levels by incresing spending they must work pout how much with above formula.=^Y=@^G :so:^G=^Y/@. where multiplier will increase %income morethan %spending

Exports&Imports1) 2) 1) 2) 3) 4) 5)

The Formula for Imports/Exports is: A = C+I+G+(X Z). term Net Exports usually referred to as =(X-Z) from A = C + I to A = C + I + G.+(X-Z) Y=A (equil. condition) A=C+ Ibar+Gbar +(Xbar-Zbar) (aggregate spending where I,G,X,Z, are autonomous) C=Cbar +c(1-t)Y (consumption function) SUBSTITUTING: a) Y=A b) Y=C+Ibar +Gbar+(Xbar-Zbar) c) Y=(Cbar +cYd)+Ibar+Gbar+(Xbar-Zbar) d) Y=(Cbar +c(1-t)Y))+Ibar+Gbar+(Xbar-Zbar) e) Y-c(1-t)Y=(Cbar +Ibar+Gbar+(Xbar-Zbar)) f) Y=(1-c(1-t)) *(Cbar +Ibar +Gbar+(Xbar-Zbar)) g) Y0=1 /1-c(1-t) *****(Cbar+Ibar+Gbar+(Xbar-Zbar))


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IMPORTANT NOTES from LAST SEMESTER( +extra notes from class this semester=) Bull market-buying bonds bear market-selling bonds at lesser price with hope of buying them back at an lesser price. demand deposit =sight deposit repo rate replaced the financial rand Passive way of money supply=you deposit +withdrawing Active way of-bank relends see multiplier. 1. -The 4 Factors of Production +sometimes 5th identified =technology and their respective INCOMES 1.1. Natural resources or land=RENT 1.2. Entrepeneurship =Profit 1.3. Capital =Interest 1.4. Labour =wages/salaries 2. Law of demand +Supply=higher price/more supplied/less demanded cet par. 3.


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ECONOMICS part 2 Yr1ECS102-8CHAPTER 1 : INTERDEPENDANCE OF MAJOR SECTORS, MARKETS AND FLOWS IN THE ECONOMY.Important Boxes/concepts/graphs/pages:1. 2. 3. 4. 5. Pg47-Produc/income/spending flows diagram Pg52-circular flow of-1-goods/services diagram/-2-income /spending pg 57/58-circu;lar flow of goods +services with Government+Foreign+Financial sector. BOX3.1 pg48-Stocks&Flows BOX3.2 pg50-Different types of firms


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box 3.1 p48t Stocks and Flows1. Whether economic variables either a STOCK or FLOW variable-important to allways consider when considering any economic variable-some variables not either of though. 2. a. A STOCK:Has no Time dimension: at a moment. can only be measured at a moment,no time period,-still picture of economy:eg water in a dam "the level of"-. b. A FLOW: Has a time dimension,over a period of time the period concerned must allways be specified. eg:water flowing out of a dam-"flowing in/out"3. RELATIONSHIP? between stocks and flows.:Stocks can only change as a result of flows. eg : Investment flow change capital stock. Population stock changes from birth/death flow. 4. There are other variables other than stocks and flows. 5. Prices are ratios between different flows(not stocks). 6. RATIO between two stocks or two flows have no time dimension. 7. RATIO between a stock and a flow or vis.versa do HAVE a time dimension 8. Failureto distinguish between stocks and flows can have faulty reasoning and analysis consequenses. 9.STOCKS 1-wealth 2-assets 3-liabilities 4-capital 5-population 6-balance in savings account 7-unemployment 8-gold reserves held by RSA reserve bank 10-stock inventory 'increasing wealth' 'paying for assets' (??not direct??) direct direct direct direct direct direct FLOWS over period:income over period:profit over period:loss over period:investment over period:no.of births /deaths over period:Saving(differencespend/earn) over period:demand for labour over period:gold sales /gold production production

3.1 p46 THE 3 MAJOR FLOWS IN THE ECONOMY: Production ,Income and Spending.-IN ECONOMICS EVERYTHING IS RELATED TO EVERYTHING ELSE ,OFTEN IN MORE THAN ONE WAY. ( the basis of this chapter)quote:anonymous. IN MIXED ECONOMY: FOR THE DIAGRAM: "The 3 Major Flows in the Economy" -Production generates- Income(from various FOP only) generates (used to(partly) spend on)- Spending-Buys/pays for Production


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gg gg

Producti on

Spendi ng

Income

1. 2. 3. 4. 5.

In the mixed economy. Production ,income and spending are flows. Productions aim is to use/consume raw or other products to satisfy human wants. the sole aim and purpose of production is consumption-adam smith.Production creates income earned in production process by the various factors of production.ie:distribution of income. 6. Total spending in economy is the total spending of 4 major(or 5) major participants in economy. 7. VARIOUS sectors of economy: 4+1=5 major types : 7.1. Households,Firms,Government,Foreign sector, + is 5th (if include to 5)Financial sector: all participate in the sequence of production /income /spending and all also contribute to each of the major flows of economy:(incl.towards production) 8. The other important economic activity that links the various sectors of economy is : Exchange (apart fromnot incl. production/income/ spending ,exchange is another link between ie relations in economic/between the economic sectors. 8.1. usually occours in markets 8.2. The fundamental markets in the economy are: 8.2.1. Goods and services market 8.2.2. Factors of production market.(fop market)labour/raw materials/entrepeneurial/capital. 9. The ultimate aim of production is to satisfy human wants and needs.(byusing/cosume raw materials or other products) 10. Income is actually the remuneration/reward for application of the factors of production.

3.2 p47 The Interdependance between Households and Firms.1. 2 Major sectors of economy are :Households and Firms, of: 2. 5 Major Sectors of economy2.1. households 2.2. firms 2.3. government 2.4. foreign sector 2.5. financial sector HOUSEHOLDS 1. Households:all the individuals who live together and make joint economic decisions,or others make for them./individuals,consumers/interchangably used terms. 1.1. joint income+1.2. primitive times no Gov,foreign sector,firms etc 1.3. members are consumers-consumption 1.4. Are the basic units in an economic system


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1.5. Own the FOP and sell these factors to Firms,receive income and buy consumer goods +services,consumed to satisfy human wants/needs. 2. In mixed economy-Households own most FOP/own labour/own capital goods/eg;anglo american-owned by shareholders. CONSUMERS: 3. Total consumption Expenditure(or aggregate C.E)=total consumption /spending in economy(on consumer goods and services by households). 3.1. Symbol="C" 4. In market economy consumers determine what should be produced. 5. In economic analysis we assume consumers are rational-Max satisfaction for means at their disposal. 6. FOP cannot satisfy human wants directly-thus sell to firms to convert.-Income from fop flows from. FIRMS 1. Definition of firms:The unit that employs FOP to produce goods and services that are sold in the goods market. 2. Characteristics of firms: 2.1. basic productive unit in the economy 2.2. are actually artificial units 2.3. ultimately owned /operated by individuals/households-eg shareholders 2.4. Assumption is that rational-aim to max profit. 2.5. Profit=total revenue-explicit cost 2.6. "I"=capital formation or investment. (in capital goods) 2.7. purchase fop on the 'factor markets' 2.8. Decide what+/how+/+to whom distribute from 3-central questions in economics.

TYPES OF FIRMS:P50 BOX Individual /Sole proprietorship1.1. 1.2. 1.3. 1.4. All decisions +ownership vested in single person Main weakness unlimited liability-owner responsible all debts+liabitities of firm. Relatively easy to form /dissolve Suited activities require personal supervision,where: scale of operations,and financing requirements not large. 1.5. Has no separate existence from owner-assets of firm are assets of owner. 1.6. Limited liability to raise funds for expansion 1.7. eg : shops,hairdressers,farms,plumbing services. 1.8. Suited to all activities needing specialised abilities-benefit from specialisation. 1.9. Differs little from sole proprietorship. 1.10.Action of partners binding on other partners including unlimited liability. 1.11.Partners are joint owners of firm. 1.12.Exept for a bit better financing possibilities ,same liability +other of sole proprietorship. 1.13.eg:attorneys ,accountants,doctors,etc.

Partnerships:

Companies1.14.Identity in eyes of law separate from owner. 1.15.Least risky form because liability usually limited to value of shares owned. 1.16.Attract better financing through eg: shares ,bonds,bank credit. 1.17.Separation of owner /mangement can create problems. 1.18.Specialists can be employed to manage firm.ECS102-8 economics Part2 Yr1 Page 13

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1.19.Can be sometimes abused by unscrupulous people. 1.20.Significant red tape to establish. 1.20.1. TWO TYPES: PRIVATE company: a. Max 50 members b. Right to transfer shares restricted c. Only must have 1 member d. (Pty)Ltd in RSA:Proprietry limited. e. eg:Alusaf (Pty Ltd),Clicks stores(Pty Ltd),Johnson tiles(Pty Ltd) 1.20.2. PUBLIC company. a. Not fewer than 50 shareholders b. Any max shareholders c. Company that wishes to raise finance through the issuing of shares thus shares easily transferable. d. Shares easily transferable e. Many listed on JSE f. eg:Anglo american,Remgro,Old Mutual,Sappi 1.21.many foreign owned or multinational companies operate in RSA eg:siemens,microsoft,shell,ibm.

Close Corporations.1.22.Since 1985 RSA new type. 1.23.Display cc after name ,must by law. 1.24.Easier to establish than private or public companies. 1.25.max 10 min 1 members. 1.26.Each member "% Specified interest in close corporation." 1.27.Can only dispose of interest with permission of other members. 1.28.Created to afford advantages of companies without having to register as a fully fledged company under the companies act. 1.29.By 1990 more CC's than companies in RSA 1.30.Co-operatives(eg agriculture) 1.31.Trusts 1.32.Public enterprise (Gov.eg eskom,sabc) 1.33.Informal sector:spaza,hawker,shebeen,subsistence farmers.

Other forms of Business enterprise :

Market Types; Goods Market. Factors market1.1. market for goods and services-consumers mostly buy. 1.2. all factors of production markets 1.3. production /producers/firms mostly buy. 1.4. include labour market+capital goods market. Aggregation:lump all different markets into one heading,ie:in macro economics.

The Circular flow of Goods and Services Diagram.(NOT SPENDING+INCOME)1. Diagram which illustrates the interaction between markets and firms. 2. Households offer FOP for sale on factor market 3. Firms buy FOP on factor market and combine FOP and offer for sale on Goods market.ECS102-8 economics Part2 Yr1 Page 14

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4. Consumers /Households purchase Goods on Goods market.

FIRMS

FACTOR MARKETSA LE O FO P FF : ER FO

R

HOUSEHOLDS

G O SE A OD R N S (S VI D O C TO LD ES )

The Circular flow of Income and Spending.(NOT GOODS & SERVICES)1. It's direction is OPPOSITE to Goods and Service flow. 2. Usually a MONETARY flow. 3. INCOME types from FACTORS OF PRODUCTION: 3.1. Labour =Wages and Salaries 3.2. Natural resources=Rent 3.3. Capital =Interest 3.4. Entrepeneur =Profit 3.5. Profit from fop also to households income,also rent,+interest+wages. HEN SP

FIRMS

FACTOR MARKETIN W CO AG M PR O ES E FI / T

GOODS MARKET

Abbreviations of major Terms:I=Investment in capital goods(machines,bridges,robots etc). C=Households spending on consumer goods and services. G=Government spending on goods and services. E=foreign spending on RSA goods and services.ECS102-8 economics Part2 Yr1 Page 15

Sp en di ng

HOUSEHOLD S

S Pr ER G od VI O uc CE OD O N e/ S S : c A om : N D bi ne FO . P

FO : P

U BO HT G

to

SE LL

GOODS MARKET

I NC OM

E

G

IN D

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Z=RSA spending on foreign goods and services. S = Saving S= Total Expediture= Total Expenditure on SA Goods&Services=(less imports) ANSWERS FROM LECTURER: 1. "G" represends both spending by the government and income received by those who are selling the goods. 2. Likewise, "C" represends both like you put it.(.spending flow or goods flow or income origin flow for sellers) 3. For Investment (I) It is the same as above.(spending flow or goods flow or income origin flow for sellers of capilal goods) 4. It is once again the same,(for both,"T" for People Spending tax or Government receiving tax or both ) 5. They are for both."E" and "Z" are for 'spending' and 'goods flowing"

3.3 pg 52 Introducing the Government:

Central gov. all gov. depts also CSIR,SABS, universties

general government: incl.provincial gov.=9 provinces admin+local gov=muncipalities+district councils

Public sector= pubic corporations-eskom,transnet,sabc,rand water,post office,armscor, (can be regarded as firms for purposes of our flow diagrams) +all of other government parts=ALL OF

1. Government :includes local,regional or provincial,+national gov.////Incl:polititians ,civil servants,muncipal,mayors,etc, also public corporations eg:Escom/Transnet/SA Reserve Bank. 2. Gov. employees are only Gov. in official capacities,privately they are households. 3. Public Sector :in economics refer to public sector- means government +everything owned by, as representative of the people. 4. Government is not assumed to ,DOES NOT ACT RATIONALY,like firms,1-political party strategies vary and -2- individual politicians can be biased by personal factors(eg reelection-short term benefit bias) 5. Primary function of government in economy-establish framework within which economy operates. 6. Secondary functions of Gov.:INVOLVES 3 important FLOWS: a. "G" =government spending on Goods and services &Factors of production(mostly labour).ECS102-8 economics Part2 Yr1 Page 16

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b. "T' =Taxes levied on households+firms,-used to finance services eg roads,defense. c. Transfer payments :from wealthy to poor eg:pensions.(DOES NOT AFFECT OVERALL SIZE OF INCOME/EXPENDITURE/PRODUCTION FLOWS-like taxes and "G" do so no "abbreviation" given for 'economic workings outs'. 7. Gov. provides services eg:defense,roads,dams,health services in return for Goods+ services &FOP purchased ,financed mainly by taxes. 8. Transfer payments :Do not affect overall size of income/expenditure/production flowslike "T"taxes and "G" do so no "abbreviation" given for 'economic workings outs'. 9. Government Spending on FOP and Goods +Services = injection into the flow of spending +income 10. Taxes are a leakage/withdrawal from circular flow of income between households + firms.

NOTE : BELOW-INCOME & SPENDING and GOODS & SERVICES(HERE CALLED PRODUCTION)Figure 1 Government in the circular flow of production,income +spending

(goods and services)

(goods and services)

3.4 Introducing the Foreign Sector.THE FORIEIGN SECTOR IN THE CIRCULAR FLOW OF iNCOME AND SPENDING-NOT goods & services!Payment for imports

(leakage)

Firmsspending and income spending and income

Foreign sectorpayments for exports injection

Households

1. 2.

4th major sector-foreign sector-consists of rest of world +international fin.istitutions governing flow of funds and goods & services between countries. 2 broad categories:developing countries+industrial countries A. industrial countries: europe mostly-germany,italy,france,USA,AustraliaPage 17


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3. 4. 5. 6.

7. 8. 9. 10. 11. 12. 13. 14.

developing countries:africa/asia etc-most south american +RSA=middle income,most poorestafrica-worst-sierra leone,burundi,ethiopia World bank classifies its members into 4 groups(levels of income):low income,lower middleincome,upper middle income,high income. Industrial=all high income,Developing=all re 'Open Economy'-strong links with rest of world-exp/imp/multinationals. 'globalisation'-recent yearst middle/lows economic links between countries grown stronger. i. economic/or political development can result in massive flows of funds between countries. ii. many firms tend to look at whole world as market for their goods iii. become very easy to shift funds between countries iv. global village where firms from different parts of world must compete with each other. A countries economic links with rest of world are often crucial determinants of level and pace of economic activity in the domestic economy. "Z" = Imports rsa mainly capital &intermediate goods "E"= Exports-rsa mainly gold & minerals For exports the 'Spending ' originates in rest of world.-thus constitute an 'injection' into circular flow of income =spending in domestic economy. For imports 'spending' originates local, constitutes leakage from circ. flow inc.+spend. Flow of income +spending is also in opposite direction to FOP and Goods +Services. Most important international economic orgaisations:International Monetary Fund,World Bank,World Trade Organisation. Rsa most important trade partners =industrial countries=60%exports,66% imports---Africa to rsa=3% imports,18% exports

B.

Financial Institutions in the circular flow of income andspending.3.5tDiagram: FINANCIAL INSTITUTIONS IN THE CIRCULAR FLOW OF INCOME AND SPENDING. (NOT goods & services /production---NOTE NB !!!!) FIRMS jjjjjjjjjjjjjjjjjjj jsaving Investment Spending and Income

. Spending and Income

FINANCIAL SECTORSaving

HOUSEHOLDS 1. Financial Institutions:include Banks,insurance companies,pension funds(Iscor/Mine employees pe..)JSE securites exchange. 2. Financial Institutions act as links between households +firms with surplus funds and households and firms which require funds. 3. Main function of financial sector:channel /act as funnel for savings to flow to investment spending. 4. Units(firms/or households) can be classified as; i. Surplus Units-those in a position to save because spending less than incomeECS102-8 economics Part2 Yr1 Page 18

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5. 6. 7. 8. 9. 10.

ii. Deficit Units -those require funds spending more than income "S" = Saving "S" =To Save:means decision not to consume for households (defined as the act of not consuming)firms can also save by not spending all their income. Saving means a leakage/withdrawal from the circular flow of inc.+spend. Savings channeled to financial instituions-households do save some of income-, (savings deposits)become available to deficit units to expand production capacity. (capital goods) called : :Investment : which is a addition or injection into circular flow of inc.+spend. Linkage in economics between expansion of the production capacity(investment) and the decision to refrain from spending on consumer goods(saving)

Total Production,Income,Spending-Revisited1. 2. 3. Aggregate /Total producton=all prod in economy Aggregate /Total Income = Rent-nat.resources + Interest-Capital + wages-labour + profit-entrepeneur Aggregate/Total Spending= by 4 major sectors in economy=1-households-2-firms-3government-4-foreigners where(if one is trying to work out spending on (SA GOODS AND SERVICES) = spending on {SA GOODS AND SERVICES Only}= E-Z = (spending by foreigners on rsa (E)Exports MINUS spending by rsa consumers on (Z)Imports Total Expenditure = C+I+G+ (X-Z) (T)Taxes and (S)Savings and (Z)Imports represent = Leakages or Withdrawals.

4. 5.

Abbreviations of major Terms:I=Investment in capital goods(machines,bridges,robots etc). C=Households spending on consumer goods and services. G=Government spending on goods and services. E=foreign spending on RSA goods and services. Z=RSA spending on foreign goods and services. S = Saving S= Total Expediture= Total Expenditure on SA Goods&Services=(less imports)

THE MAJOR ELEMENTS OF THE CIRCULAR FLOW OF INCOME AND SPENDING (Note Well NOT goods & services/production here-ONLY income&spending!!) C,S,T,Z=LEAKAGESZ S Foreign Sector C & Y

andFIRMS I

I,G,X=INJECTIONSG

FINANCIAL SECTOR S HOUSEHOLDS

C & Y T

Governmen t

XECS102-8 economics Part2 Yr1

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ECONOMICS part 2 Yr1ECS102-8CHAPTER 2 : MEASURING THE PERFORMANCE OF THE ECONOMY.Important Boxes/concepts/graphs/pages:pg 80 lorenz curve graph BOXES: changes in purchasing power:pg78 price index construction:pg76/75


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1 . Macroeconomic Objectives-2.1p9s,p61t1. Economist must judge objectively-not own well being-1-which criteria to use? 2measure criteria? 2. For firms we use profit as crieria,? use for macroeconomy?

5 Macroeconomic Objectives used to Judge the Performance of the EcoEnomyi. Economic Growth>most important one,to grow empl.&liveStandards,econ. must grow,eg:pop.incr ii. Full Employment >need econ.growth to fill up, iii. Price Stability >inflation-not prices-see normalo supply&demand iv. Balance of Payments Stability (or External Stability)>&foreign exchange rate v. Equitable Distribution of Income. more normative less positive,social +political threat security 3. i. Economic Growth : a. First and arguably most important of criterion b. If population grows economy must also grow or 1. unemployment 2. living standards cannot increase c. requires yardstick-use GDP-therefore GDP also central concept in national accounts. ii.Full Employment a. Problems from unemployment: 1. personal levelA. psycological suffering B. material suffering 2. macroeconomic levelA. serious threat to Social and Political Stability b. Must have economic growth to get more employment,but you can get economic growth without extra employment: eg technological advances cause less labour ,and more production. iii. Price Stability a. Since WW2 and 1973 prices only riseECS102-8 economics Part2 Yr1 Page 21

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b. Price stability Refers to keeping inflation as low as possible,not no change(refer to demand/supply problem in a market based economy). c. Yardstick used to measure inflation =CPI-consumer price index. iv. Balance of Payments(or External stability) a. 2 aspects : in technical terms we say: 1. balance of payments itself 2. Exchange rates b. South Africa must export goods/services to earn foreign currency to pay for imports. v.Equitable Distribution of Income(or Socially Acceptable Dist.....) a. Partly a Normative/subjective/value judgement issue-NOT positive. b. Assigning priority to the different objectives.-esp. this one ,some say unequal distribution of the above is way of causing savings +investmnet which will in turn benefit poor. c. Highly unequal generates social + political conflict. d. Can also have important efects on the structure and development of economy.

#1 Macroeconomic Objective :Econ.Growth : GDP-Gross Domestic Product-Measuring the Level of Economic Activity.4.2t,p631. Definition: GDP (or GVA-value added)(gross domestic product) is :The total value of all final goods and services produced within the borders of a specific country in a particular period.

Aspects on the definition of GDP1. 3 /4 further aspects on definitition of GDP: a. GDP means :Within boundry of country=geographic term, MEANS: 'within border' if ever referred to as "in economy" for GDP b. "over a period(year) :GDP is a FLOW(measured over period)+ concerns only new goods and services produced in relevant period:also called "Current Production"Goods produced in a former period and sold in current period are not included in calculation. Goods eg:Houses/cars resold again are not included either. c. Gross-("G"DP) : GROSS in 'gross domestic product' means :without subtracting DEPRECIATION from GDP total ,if we subtract GDP then =NET total.

About GDP:2. GDP is a FLOW 3. We refer to gross domestic INCOME as : "GDP" and NOT GDI if referring to it.(even though same) 4. TERM "NDP" : Net Domestic Production :is GDP minus Depreciation of machinary etc,it is more correct measure of economic performance,since it adjusts gross production for the decrease in value of capital goods. But GDP not NDP is mostly used because depreciation is difficult to calculate. 5. TERM "Consumption of fixed capital" is Depreciation of eg machinary.this is very important/significant shows what proportion of total output must be saved to maintain economys capacity(ie. :re-invested in capital goods)in 2002 was 13% of SA GDP! 6. TERM GDP is also called GVA-Gross Value Added. 7. Stats RSA and reserve bank calculate this.-GDP is a central concept in their national accounts.ECS102-8 economics Part2 Yr1 Page 22

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8. GDP one most important barometers of performance of economy,(Macro. Growth obj. most impotant 9. Prices ,not quantity ,(5 chickens +4 apples??)used to determine GDP ,and only value added used or double counting results. 10. Term :"Current Production" means only thatyeargoodsand services produced use tocalculateGDP.

The 3 Methods of Calculating GDP:gg ggProducti on

Spendi ng

Income

BY:The Production or Income or Spending method. i. THE PRODUCTION METHOD:(or VALUE ADDED METHOD) Value method - Add value added part of all prices -not quantities sold- of all goods&services. VALUE OF SALES VALUE ADDED VALUE intermediate goods Farmer 10000 10000 -(assuming) Miller 12500 2500 10 000 Baker 18000 5500 12 500 Shopkeeper 21000 3000 18 000 TOTA 61500 21000 40 500` L ii. EXPENDITURE METHOD(FINAL GOODS and SERVICES method) a. Only Final goods added,not Intermediatry goods or you get double counting ie:ultimate useeg:flour for consumer is final good ,but flour for baker is'nt. b. If flour of baker not sold in period it gets counted as "inventories",in national accounts iii. INCOME METHOD(incomes of the factors of production) a. Income earned =Gross income,not net income.Rent,salaries not subtracted. b. Income is earned by producing- that is adding value to goods and services,thus income for whole economy can only be increased if 'production' increases. c. Refers to income from 4 Factors of Production:-ONLY1. RENT 2. INTEREST 3. SALARIES 4. PROFIT

Difference between the 3 Methods of calculating GDP1. National Accounts use all 3 methods to calculate GDP and these must balance like normal accounts. 2. The 3 methods essentially measure the same thing but at different points in the circular flow of Production/Income /Spending. 3. Reward from FOP-Income /=Spending (used to purchase) /= ProductionECS102-8 economics Part2 Yr1 Page 23

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4. Income from FOP = Rent(Land NR) , Interest(Capital) , Profit(Entrepeneurship) , Salaries(labour) Income from FOP = Total Value of Production in Economy. 5. remember that Primaryinputs are= FOP and secondary inputs are eg flour for baker etc. 6. SEE TABLE ABOVE IN :Income type : for next workings out as well.: 7. If :Baker uses : PRIMARY INPUTS: SECONDARY INPUTS from farmer Wages and Salaries 2500 Intermediate goods& 12 500 services Rentals 1000 Interest 500 Profit 1500 He sells for 18 000 He buys flour for 12500 FINAL GOODS TOTAL 18000 :cost=18000 If the same is applied for all those before him:miller/farmer (the 12500 he spent on flour also gets . subdivided like this),then we see that total income from FOP=value final goods were sold for. 8. Thus :Value of TOTAL SALES = Total Primary income + Value of intermediate goods and services. or :Total sales intermediate goods etc. =total primary income(FOP) 9. Since value of total sales in this sequence= value of "Final goods and services" (all "Intermediate g&s" automaticly included). :THEN value of final goods and services =Total income 10. Therefore OUTPUT expressed in monetary terms should = total primary income derived from it. 11. Income=Spending(expenditure 'final goods only')=Production METHODS.

Measurement at Market Prices,Basic Prices and Factor Cost(or Income)1. The 3 methods of measuring GDP will only yield equal results if used with same set of prices.

2. 3 SETS of PRICES that can be used to calculate GDP = PRICES TYPE USED USED FOR CALCULATING : CALC. FROM SUBTRACT a. Market Prices Expenditure method(Final Final goods Subsidies & LESS this = goods ) Indirect Basic Prices Tax&Subs./Unit good or service.(TxTaxes on Vat,imp+ exp.) (Subsidyproducts exports/Domestic for bread ) b. Basic Prices Production Val. added OTHER taxes LESS this = method(val.add) & subsidies Factor Prices Other Tax&Subs NOT /Unit on products goods/serviceeg:Tax-payroll,land tx,buldings,licence firm. :Subsidies-on employment or payroll

c.

Factor Cost Income method(factor cost)

Factor cost fop

+"Other"=ba s

3. Therefore different valuations of GDP yield different results ,so one should always check prices used.ECS102-8 economics Part2 Yr1 Page 24

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4. Different prices are only from different types of taxes and subsidies on goods and services. 5. TERM: 'Indirect' taxes = taxes on products eg VAT 6. Taxes And Subsidies fall into 2 categories at national accountants a. TERM Taxes and Subsidies on Products i. Taxes on products =tax payable /unit :VAT & Duties on Imports & Taxes on Exports ii. Subsidies on products=subsidies linked to goods/service=per unit to encourage export & domestic product subsidy eg:bread below cost b. TERM OTHER Taxes and Subsidies (NOT per unit goods or service) i. OTHER taxes =NOT /unit goods&service eg:payroll,land,buildings,business licence. ii. OTHER subsidies=NOT /unit goods&service eg:employment or payroll. 7. GDP @market prices Taxes& subsidies on products=GDP@ basic prices 8. GDP @basic prices OTHER Taxes& subsidies on products=GDP@ factor cost/FOP /Factor Income 9. GDP @factor cost(FOP)(income) + OTHER Taxes& subsidies on products=GDP@ basic prices

GDP at Current prices & GDP at Constant Prices:1. TERM GDP at Current prices = Nominal GDP:expressed at current years price levels/not converted 2. TERM GDP at Constant prices = Real GDP :use a BASE years prices,convert others to that years : inflation eg1995 3. TERM Nominal GDP-gdp at current prices 4. TERM Real GDP-GDP at constant prices 5. TERM Nominal value-also called :'Monetary value' means in "terms of the name" ie at face value , 5000 = 5000 or less/more 6. TERM Real value-means actual or essential,refers to purchasing power ,what? money can buy. 7. Inflation :causes monetary values of goods/pricesto change per year-thus cannot compare different years GDP's 8. In world of inflation,All values,not just GDP,must be expressed in nominal and real terms tocompare 9. TERM Purchasing power-what a certain amount of money can buy.To calculate:The % of the first/base years price over the % of currrent years price .(how much this years go in last years=?70%)EG: 2000=100%=base year,this year 2003 = 115% of that:answer =100%/divided by 115%= 0.87: so to work out a answer you say 0.87 * 5 baskets in 2000 will give purchasing power of 4.35 baskets at current years prices. 10.TERM Base year:year used as guideline for coverting other years prices to, to find Real value/Constant Prices

Other Measures of Production ,Income and Expenditure. GNI (or GNP)- Gross National Income1. TERM GNI=Gross National Income= :(IS NOT GDI,but GNI) derived by: a. SUBTRACT from GDP: all FOP-income earned in borders of SA by FOREIGN NATIONALS. b. ADD to GDP :all FOP-income earned outside borders of SA by RSA NATIONALS. i. include in FOP-Interest from money lenders,dividends(profit) etc. 2. TERM GNP=Gross National Product=same as GNIECS102-8 economics Part2 Yr1 Page 25

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3. TERM:Primary Income Payments&Receipts:Payments=to foreigners ; Receipts=from foreigners. The FOP add/subtract in calculation can also be called this instead. 4. TERM :NET primary income pay.OR rec.=to rsa- to rest of world : the result is the answer. 5. GDP: best to measure level+rate change of Economic Activity+job creation in SA. 6. GNP :best to measure level+ rate change of Income and Standard of living 0f RSA citizens. 7. In RSA GNI has allways been a bit smaller than GDP.

Expenditure on GDP1. Expenditure-spending method (final/intermediate consumption) approach to calc.GDP by C,G,I,XZ consumption method-and is allways at Market prices,not basic or factor cost. 2. GDP=C+I+G+X-Z a. C-largest amount,in Nat.Accounts subdivided into Non-durable,semi durable,durable. b. I-Most volatile.Called Gross capital formation in national accounts,includes Government capital goods investment in nat.acc.,Subdivided into : i. TERM:Gross Fixed capital formation :(purchases of capital in current year) ii. TERM:Changes in Inventories :Goods made past years purchased in current year,and goods made this year unsold.-can be positive or negative number.(ii)Added to (i)=gross capital formation. c. G-final consumption exp. by Gov.-does not include Investment /capital. d. X-exports added to GDP e. Z-imports subtracted from GDP 3. TERM Residual value in national Accounts for aqbove calculayin means-where 3 different methods of calculating GDP conflict-ie Production method,Expenditure method,Income method. 4. TERM Gross Capital Formation:In national accounts Investment spending called capital formation,Note includes Gov. spend on Investment.,and Gross means not less depreciation.

GDE: Gross Domestic Expenditure.1. TERM GDE =gross domestic expenditure-only money spent in the borders :incl.imp./excl.exp 2. Measured at Market prices,not basic prices or factor cost. 3. GDE=C+I+G -NOT include (x) exports BUT DOES include imports 4. GDP=C+I+G+X-Z 5. TERM Net Exports=(used for common GDP calculation) =X-Z 6. If GDP>GDE then exports must be more than imports (net exports must be positive)and Visa Ver

SUMMARY of national accounting totals1. GDE=C+I+G a. C-largest amount,in Nat.Accounts subdivided into Non-durable,semi durable,durable. b. I-Most volatile.Called Gross capital formation incl. Gov. capital goods invest. i. consists of:Gross Fixed capital formation-'I' buy+Changes in Inventories-last years+,not sold c. G-final consumption exp. by Gov.-does not include Investment /capital.ECS102-8 economics Part2 Yr1 Page 26

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(TERM Residual value difference 3 methods calc GDP) = GDE -------------------------------a. X-exports added b. Z-imports subtracted =GDP at market prices --------------------------------- primary income payments +primary income receipts =GNI (GNIncome) at market prices (TERM:NET primary income pay.OR rec.=larger minus smaller (name =larger))

#2 MACROECONOMIC OBJECTIVE : Full Employment :Measuring Employment and Unemployment.1. TERM Unemployment:of those willing and able to work ,the rate/index/% etc of those not employed. 2. Employment&Unemployment :In principle easy to measure:1-No. of able workers-2No. of employees;BUT Quite difficult to measure in practice:;parttime,seasonal;criminal prostitutes,drugseller,Hawkers/informal,+Those not seeking work etc.

#3MACROECONOMIC OBJECTIVE:STABLE PRICES:Measuring Prices,the Consumer Price Index.The Consumer Price Index.1. 2. Economists are interested in :1-what is happening to prices of goods&services in general-2-inflation-3-info on price movements for nominal&real(ratio to other prices)3-purchasing power TERM INDEX NUMBER:expresses value of some series over given period as % of it's value in a base period.eg the CPI-consumer price index is an INDEX NUMBER. a. Specific Indices :for relative changes:-for only one good-not weighted average of lots -Convert all of different years prices to percentages of one of the years prices ,to compare these %'s to each other ie:price/base price*100/1=% of base price.,thus the answer is egYear B is 127 % of base year A price,BUT an increase of 27% and the new price is 127% of the old price-but increase is only 27%!!!!!!!!NOTE!!!! b. General or Composite Indices :for combine different series:CPI is a composite index where a lot of different indexes are compiled(eg % change in bread price is one in series,% for meat another) and this series of prices are combined AGAIN BY according to a weighted average(how much bread eaten to meat)to get final composite or general index. TERM Purchasing power- first year/last year = eg 0.87= the 'Real' value of or what a certain amount of money can buy.To calculate:The % of the first/base years price over the % of currrent years price .(how much this years go in last years=?70%)EG: 2000=100%=base year,this year 2003 = 115% of that:answer =100%/divided by 115%= 0.87: so to work out a answer you say 0.87 * 5 baskets in 2000 will give purchasing power of 4.35 baskets at current years prices. Price increases ie Inflation erodes the real value or purchasing power of a fixed nominal amount.Page 27

3.

4.


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5.

TERM CPI Consumer Price Index:=115 % or 120% is an index of the prices of a representative "basket " of consumer goods and services: it thus represents the cost of the shopping basket of goods & services of a typical RSA household.CPI is normally =115% or 132% or so (not 6.2% like inflation:ie the change from one years to the next .) term Inflation RATE: If you subtract Last years CPI from this years cpi ,AND divide the quotient by last years cpi * 100 (the percentage %)you get the inflation rate ie:127%-105% / 105 % *100 TO construct the CPI ,Stats SA must : a. Select the "goods and services" to be included in the "Shopping Basket." : ..To select-Stats SA does survey of household every 5 years. b. TERM Determine Weight of each good/sevice: ..Stats SA does a survey 5 yrly to determine relative importance in Av. Consumers Basket. c. TERM Decide on a BASE YEAR for calculating CPI : ..Base year is year in which the Survey(5 yearly) is done d. Decide on FORMULA for calculating CPI ..Standard price index formula used,Weight of item decides it's effect on CPI, e. Collect prices each month to calculate CPI. A_....RSA 1500 different goods&services,in -1- 40 groups/subgroups,for which a CPI is calculated for each one -2- 5 expenditure groups,pensioners,9 provinces+14 major urban areas.+metro+other urban areas+rural B_Prices are collected by questionaire sent to 2200 retailers110 000 quotations per month and info. double checked.,Prices used are first 7 days of month. CPI available 2nd half of following month. Used to calculate inflation. large base 1500goods means cpi is fairly accurate.

6.

7. 8.

9. 10. 11.

#4 MACROECONOMIC OBJECTIVE: Balance of Payments1. 2. Balance of payments :summarises between local& foreign-usually yearly. TERM: Balance of payments consists of 2 major accounts: a. Current account:Part of "balance of payments" account,Account of a country of all:Sales:Exports,Purchases:Imports+Primary Income Pay&Rec. b. Financial account:Account of country of all flows of financial products only into and out of country like sales +purchases of -bonds,shares also loans etc . TERM :Surplus on Current account:Exports exceeded Imports TERM :Deficit on Current account:Imports exceeded Exports. TERM :Surplus on Financial account:(also NET INFLOW of Capital):Inflows of money exceeded Outflows of Money. TERM :Deficit on Financial account:(also NET OUTFLOW of Capital): Outflows of money exceeded Inflows of Money. TERM :Change in the Countries Gold and Foreign Exchange Reserves:Add current &financial accounts.-the result serves as the balancing item on the balance of payments. Compiled by SA reserve bank in SA,from SARS info. mostly.Page 28

3. 4. 5. 6. 7. 8.


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9. 10.

Purchasing Power =year 1% / year 2 % .Also ,or nominal % /price level %=real value. eg:between 1920-1930 purchsing power increased by 40 % in SA ie :there was negativeinflation.

#4 MACROECONOMIC OBJECTIVE:Equality in Distribution of Income: 3 Methods of Measuring Inequality.1. a-measuring performance of economy in general no easy task ,-b- but measuring this one type is most difficult of all.-data from tax returns/census etc.-then applying measures to estimate degree 2. TERM Personal distribution of Income:to people/races/levels,all fop included. 3. TERM Functional distribution of Income:Between FOP only.

Method #1 of 3 : Lorenz Curve1. Term A Lorenz Curve is a simple graphic device which illustrates the degree of inequality in dist. of income.(or any other variable)-named after american statistician developed it 1905. 2. To construct: a. Make Chart with -1-Population % poorest to richest -2- Income -3- Cumulative Population -4- Cumulative Income %Number of Each Population Income Poorest 20% 3 % Next 20% 7% Next 20% 15 % Next 20% 25 % Richest 20% 50 % Cumulative Population Income 20 % 3% 40 % 10 % 60 % 25 % 80 % 50 % 100 % 100 %

b. Plot Graph

i. see graph pg80 in textbookii. iii. iv. v. (-1-)Horizontal axis =Cumulative %'s of Population. (-2-)Vertical axis =Cumulative %'s of Income. Axes are joined to form a square Diagonal drawn from Origin A to point B corner:Diagonal indicates a perfectly equal distribution of income-Serves as a reference point. ie: perfectly equal distribution occours along line :first 20% population would earn 20% of income and so on etc. A Lorenz curve ALLWAYS starts at Origin and ends at B(opposite corner = 100%). Greater distance between diagonal and Lorenz Curve the greater the inequality. Area (shaded) between diagonal and Lorenz curve = called- "Area of inequality" Greatest possible inequality: where 1 person earns all money=curve O-AB(triangle)

vi. vii. viii. ix.

#2Gini Coefficient:(or RATIO)1. TERM Gini coefficient or ratio =area of inequality /divided by/ area of triangle [axes-diagonal]. 2. Divide (AREA of INEQUALITY) :by: (AREA of DIAGONAL and AXES(right corner=A)0 3. Varies between 0-1. If perfectly equal then =0 (lorenz curve=diagonal) or If utterly unequal = 1.ECS102-8 economics Part2 Yr1 Page 29

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4. In practice between 0.3(highly equal) and 0.7(highly unequal). 5. TERM Gini Index = Gini coefficient multiply*100 (ie between 0-100 then,not 0-1) 6. By Italian demographer Corrodo Gini 1912

#3Quantile Ratio1. TERM Quantile Ratio is [the % income of Highest 20%] divided by [% income of Lowest 20%] 2. The Higher the ratio ,the Higher the inequality. 3. We use each groups % percentage of Countrys Total Income to work it out ,not actual income Rands. 4. Economists also often compare : top 20% to bottom 40% and top 20% to bottom 20%.

Extra Notes:RSA: best known for ;precious metals,fruit,wine Services sector largest. muanufacturing sector 15% of GDP maize most important crop,mined=mang,gold,chrome,platinum ,coal,diamonds. export production nurtured in eg:ostridge meat,high value fruit,wine Gauteng 33% of GDP,western cape15% unemployment 29.4%=4.7million=SA ranked as on of most unequal disb.of Income in word,where accurately measurable.


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ECONOMICS part 2 Yr1ECS102-8CHAPTER 3 : THE MONETARY SECTOR.(MACROECONOMICS)ch ch15t,pg353

Explain what money is and explain its functions Define M1, M2 and M3 Discuss the functions of the SARB Explain and illustrate with the aid of a diagram the interaction between the interest rate and the demand for money Discuss the instruments of monetary policy Study unit outcomes and activities

Important Boxes/concepts/graphs/pages:


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M

INTRODUCTION: Money important -double coincidence of wants,etc Years 'neutrality of money '(print 2*more money ,cause 2*higher prices )y , was economic cornerstone,today different thinking slightly. a bank is a place that will lend you money if you can prove you dont need it.-bob hope money is a good servant but a bad master-proverb english money like muck,not good exept it be spread around-francis bacon.

The Functions of Money:1-Money as a meduium of exchange:1. TERM Barter economy :is characterised by numerous unneccessary exchange transactions. causes problem of double coincidence of wants.2. TERM Double coincidence of wants=is if both parties DO want opposite persons goods-not where one must first exchange for something else at another person,ie:you want others shoes,you got shirts,but shoe guy wants pants.so you go look for pants to change for your shirts first.,then go get the shoes with that. 3. TERM Monetary Economy:money used as a intermediatry or lubricant. 4. TERM medium of exchange ONLY function of money unique to money&most basic function of 5. TERM:Definition of Money:Money is any thing that is generally accepted for payment for goods and services or in settlement of debt.

2- Money as a unit of account:1. An agreed/common unit of comparison of the cost of goods,anything can be a unit of account. 2. 2nd in importance to no1 -exchange med- above. 3. Inflation can cause it to loose usefulness as unit of comparison a bit in terms of 'Real' values.

3-Money as a Store of Value:1. The most Liquid form in which wealth can be kept (derived from can be medium of exchange) 2. Money can be disadvantagous as a store with Inflation,other maybe better eg:land,works of art,shares,post stamps. 3. Many people with great wealth do not own much money,they use assets for in times of inflation. 4. Standard of deferred payment(and interest),and means whereby credit is granted.

4-What Money is Not:1. Money is NOT : 1-Wealth(=assets,+ money) or 2-IncomeECS102-8 economics Part2 Yr1 Page 32

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2. Is not a Flow,money is a Stock which can finance a much larger flow of income during a period.

Different Kinds of Money.2. eg:cocoa beans,cigarettes,tea,seashells,cattle,silver:earliest forms were commodities value intrinsic. 3. Uniformity,durability,divisability,ability to be carried. i. Coins,too heavy, ii. Paper money.1st paper money was certificates of deposit at goldsmith. iii. TERM Fiduciary/credit money(gov. issued partly covered by gold in reserve) iv. Today-no gold deposits ,based on confidence in Gov.to control supply of notes. v. Cheque accounts-next development-Constitutes largest part of money stock indeveloped lands 4. debit +credit cards&electronic payment make difficult pinpoint exactly what money is esp.infin Markt 5. A cheque ,debit or credit cards or electronic transfers ARE Transfer methods NOT MONEY-the deposit is,and a credit card is in addition1 a means of getting short term loan AND 2method transfer. 6. Credit card means of deferring/postponing payment. 7. Credit card :Also people 'economise' on holding money,hold less on avg,buy on credit pay end mnth.

Money in RSA.1) Not easy to measure money,ie:assets/differnt means of payment/ 2) Economists interested in store of value function of money:3 measures of money by SARB:M1,2,3

TERM 1-Coventional measure:M11) M=C+D (Money quantity =Cash(all coins ,notes)+demand deposits with monetary sector.) 2) TERM THE Money Supply =C ,not D of M=C+D only cash in circulation outside banking sector can be regarded as the money supply. 3) monetary sector incl. in SA :land bank,public finance corporation,private banks,post bank, SARB 4) Solely on basis as medium of exchange (Incl. M1A=cash notes+coins only) 5) TERM :Demand deposits =91% of money in SA,refer to deposits can be withdrawn immediately.

TERM 2-M21) M2 =M1+all other short term and medium term deposits of the domestic private sector with monetary institutions(more than 1.5 times m1 in SA) 2) Short term=less than 30 days ,Medium term=less than 6 months.can only withdraw sooner at a cost 3) Quasi money =nearly money : short and medium term deposits,since maturity not very long.

TERM 3-M31) M3 =M2 + all long term deposits of the domestic private sector with monetary institutions. 2) Long term deposits-maturity value longer than 6 months. 3) Most comprehensive measure of money.,also regarded as most reliable indicator.ECS102-8 economics Part2 Yr1 Page 33

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4) Emphasis is more on store of value function as we move from m1-m2-m3,m3 most store function.

Financial Intermediaries.1) Financial intermediaries main function is : to act as an intermediary between surplus units and deficit units in the monetary economy. 2) TERMIndirect/Direct Financing:Indirect-through financial intermediatry/Direct person to person 3) TERM Financial Transactions :Distinguished from real transactions by fact no goods/other services involved.(distinction between 2 divides economy into real and financial sector) 4) TERM Real transactions :All transactions where goods and services are involved. (divides fin/real) 5) The institutions in the financial sector have one main function, namely to act as an intermediary between surplus units and the deficit units in the monetary economy.

6) 7) When the government borrows money, it uses treasury bills and government stock or bonds as security. 8) TERM Security or Credit instrument issued. In exchange for funds, a piece of paper issued,this document stipulates the interest rate at which funds are loaned as well as when and how the loan is to be repaid. Examples of credit instruments are bills of exchange, promissory notes, and bankers' acceptances. Government uses treasury bills and gov.stocks and bonds. 9) Financial intermediatries includes:Insurers,pension funds,banks,unit trusts,finance companies,SARB. 10) TERM Interest is amount borrower must pay lender for use of funds concerned. 11) Banks can create money by granting overdrafts which is M1 money class.=D (of C=D=M1),and banks can do this because need only keep % of deposits in reserve bank ,so can lend rest out. 12) TERM monetary baseAlso known as high-powered money. It usually refers to the stock of cash (notes and coins) and includes the cash in the hands of the non-banking public, vault cash of banks and cash deposits with the Reserve Bank

THE SOUTH AFRICAN RESERVE BANK.1) SARB established 1920 by act,primary goal in the South African economic system as "The achievement and maintenance of financial stability".ECS102-8 economics Part2 Yr1 Page 34

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2) Cannot be dictated to by parliment how use instruments of monetary policy-guaranteed operational independance.by Constitution 3) TERM Monetary Policy-Definition:the measures taken by the monetary authorities to influence the 1--1-Quantity of money or -2- Rate of interest to : ..To achieve:-1- Stable prices -2- Full employment -3- Economic growth.(mis 1diff.earnings/2For.ex. 4) 5 main functions of SARB a) Issuing banknotes and coins b) Acting as banker for other banks c) Acting as banker for the government. d) Acting as custodian of countries gold and other foreign reserves. e) formulating and implementing monetary policy.

Issuing banknotes and coins Sole right in SA to issue banknotes+coins.Bank purchases assets to get cash in general circulation

Acting as banker for other banks1) SARB holds minimum cash reserves for banks that they are required to hold. 2) TERM clearing bank :Acts as for banks by meeting the claims and obligations of banks by using their reserves. 3) TERM lender of last resort :to banks.(if banks need funds over and above that from surplas depositors to finance deficit lenders/ or other things. 4) financing of fin.inst. changed alot since 1990's-first redisdounting of assets+overnight loans,then: 5) TERM :(REPO)Repurchase tender system-Interest rate of SARB to Banks,(also how much is lent per time can be controlled) 6)

Acting as banker for the government. grants credit,advise gov.,issue treasury bills ,administer exchange control. holds gold and foreign exchange reserves-level is one of main indicators of state of economy.

Acting as custodian of countries gold and other foreign reserves.

formulating and implementing monetary policy.eg currently price stability main one in SA

The Supply of Money. For this we assume:M1=m=c+d,only banks hold demand deposits& a central bank controls banks.

Banks: in the money creation process.(role in supply)1- Money is created by banks and not printing presses because accept surplas,lend to deficit 2- Difference lend /deposit rates is income banks receive. 3- Only institutions allowed accept deposit from public, Banks activities regulated by Act,Monitored by SARBank.


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4- The most notable feature of banks is able write a cheque to draw against account,or transfer on demand,therefore it they be treated as money.-very convenient so little interest paid. 5- Demand deposits can be created in tho ways: a. Deposit=(^='change in') ^M=^C+^D so = -C1000+D1000=M0 b. Overdraft facilities. ^M=^C+^D so = C0 +D1000=M1000 -bank created credit

2-Reserve Asset position and Credit Multiplier:1. TERM :Cash reserves : IN SA 2.5% of Total Liabilities WITH RESERVE BANK at 0 interest ;amount banks know have to pay for withdrawals/transfers to other banks-eg confidence run on bank- eg saambou 2002 run on bank. 2. TERM CREDIT multiplier:=formula is 1/b^(change)R=D(deposit M=C+D) (In RSA 1/b is 40) : If someone deposits money in a bank,by multiplying that ammount by the Cred. Multipl. you get the eventual amount of bank deposits,including the original one ,that can be created by that deposit eventually.This works like that because only a certain percentage of each deposit can be lent out to someone ,the rest must be banked by law in the reserve bank.Now if a bank lends a % out of every deposit they receive ,those who lent this money pay others who re-deposit that amount with other banks,which continues the cycle until no more bank deposits can be created from one original deposit. 3. TERM:Classical cash reserve system :where gov. does control economy by changing the rate to be held in reserve bank.Today it is not an essential part of monetary control system in SA,we use cost of additional reserves 4. BUT Under the present system the money supply process in SA is a function of demand for credit ,and this is determined by the level of the interest rate of banks lending out money,and not by the amount of credit banks are able and willing to extend. This reduces gov.control over size of money supply(reserve rate wont affect)

3-Other Factors in Supply of Money1. Foreign trade exports/ BRINGs money into/increases supply of money in country,and imports reduce it a. A countries money supply increase when gold & foreign reserves increase and decrease visa versa. 2. Gov. spending increases supply of money by reducing amount of taxes,which take money out of suppy,being kept in the SARB(today gov. keeps some of tax in normal banks to incr. supply of moneyin circulation 3. TERM inflationary financing:Gov. lending from reserve bank can cause inflation to rise.

EXTRA BOX:Bonds,the Bond market and Capital.1. TERM A BOND is a Financial Instrument that promises the issuer (the borrower)will regularly pay the holder(lender) Interest and will repay the capital amount on a certain date.eg:Gov. issues bonds to finance its expenditure.The features in a bond are. a. The Principle:The amount the issuer will repay the bondholder when bond expires. b. The Maturity Date:the expiry date-must pay all date. c. The Coupon rate:Interest at annual rate.-usually fixed rate,and dates the interest must be paid are also specified. 2. Bonds can be traded/sold : eg. on Bond exchange of JSE called Bond Exchange of SA. Bond market forms part of capital market which is a market for long term financial instruments.ECS102-8 economics Part2 Yr1 Page 36

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3. On capital Market 4 main types of long term financial instruments are traded. a. Fixed-Interest-Bearing Securities (or bonds). b. Variable Interest Securities c. Shares d. Negotiable Documents. 4. Interest rates determined in capital market (eg on gov. bonds with different maturities) are long term rates and determined by market forces of supply and demand. 5. TERM Perpetuity:a special kind of bond where no maturity date is set-only a fixed amount of money is set to be paid each year as interest and buyer makes no promise to buy it back. 6. The most important relationship in the market for interest bearing securities is the inverse relationship between the price of bonds and the interest rates on them.bond prices high when interst rates low and visa versa-is inverse reationship.

The Demand for Money.1. Holders of wealth must decide in which form to keep:eg financial assets,land ,art,antiques 2. TERM demand for money is: the amount holders of wealth decide to hold as money balances. 3. TERM Financial assets: there are 2 types a. Bonds(interest bearing assets) b. money 4. TERM Fixed property:Means real estate. 5. :The Opportunity Cost of holding any money balance is the actual interest that could have been earned had the money been used to purchase bonds instead. 6. TERM Liquidity Preference :The Reasons for holding money instead of bonds are :ByKeynes in30's a. TERM Transactions motive:for paying for goods,wages weekly so hold money between,the more money you earn,more need to pay for so transactions need for money is function of national income. b. TERM Precautionary Motive:for emergencies,also function of national income. c. TERM Speculative Motive:-keynes most important add to monetary economics.If Interest rates high then opportunity cost is high for money so people invest in bonds.Also there is a negative /inverse relationship between qty money Demanded for speculation and interest rates. 7. TERM Active Balance: for 1-transactions or 2-precautionary motive.-main determinant-Income 8. TERM Passive(or idle) Balance : for speculative motive. main determinant-Interest rate 9. Equation for demand for money: L=f(Yi) L-Liquidity preference/Y-National Income/iInterest Rate 10. Graph of DEMAND FOR MONEY: a. Active balance Curve:=f(Y) Income controlling factor:Vertical line,shift right income increase/visaversa. b. Passive balance Curve:=f(i) negative slope reflects inverse relationship between interest rate and Qty demanded of money. ie:cash held with purpose of investing if rates are high enough will=0.At certain interest (i1)rate no funds will be demanded for spec.purposes.(i1)(this should be on diagram where curve meets vertical line and interest is highest . c. The Joint or total money demand curve or Total Liquidity Preference graph(same as passive graph but label curve "L= L1+L2" ( is merely the horizontal addition of the two other graphs/is made up of the other two graphs)ECS102-8 economics Part2 Yr1 Page 37

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i. The negative slope reflects inverse relationship between interest rate and Qty Demanded- for speculation purposes ie:cash held with purpose of investing if rates are high enough will=0 ii. The position of curve:affected mainly by demand for active balances.-from income level.Increase in Income levels will shift LL curve to right,decrease LL to left. iii. See pg 370 textbook for diagrams.

For the Horizontal axis:label is "Qty. of money demanded"/For vertical:Interest rate.

Interest Rates: When referring to interest rate means:all interest reates tend to move in harmony with each other up or down.(another typeof simplification is income also could be GNI or GDP.) different types eg:mortgage rates,rate on government stock,interbank lending rate,prime rate of banks,repo rates,various rates on deposits etc.

Equilibrium in the Money Market1. TERM:Demand-Determined money supply.: That there is no independant money supply curve,but the money supply(or Qty. of money) is determined by the demand for money(due to 'transaction' and 'precaution' reasons) and the interest rate(cost of credit). 2. This approach differs from traditional explanantion of equilibrium in money market,which was based on assumption that authorities can control the supply of money-ie that there is an independant money supply curve. 3. According to this approach, the money supply is determined by the interaction of the demand for money and the interest rate,because it is not possible to determine a suooly curve for money due to the miney creation process being too complex. 4. The interest rate in return is determined mainly by the monetary authorities,by means of the Repo rate . 5. LL represents the demand for money curve which indicates the quantity of money demanded at various interest rate levels. If the monetary authorities set the interest rate (for instance through accommodation policies) at i2 the quantity of money demand is L1. Since the supply of money is determined by the demand for it, the money supply is M1 which is equal to L1. At a lower interest rate of i1, both the quantity of money demanded and supplied increases to L2 and M2. There is no independent money supply curve since the money supply depends on the demand for money and the cost of credit THE MONEY MARKET:


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The supply of money is determined by the interaction of interest rate and demand for money.see up(5)

Simulaneous control over the supply of money andthe Interest RateAuthority Controlling Supply1. The above/todays approach differs from traditional explanantion of equilibrium in money market,which was based on assumption that authorities can control the supply of