ECE 202 Notes Study Economics Yr1 Prt2

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Table of Contents
Table 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.......................................................................................................26
ECS102-8 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 ...........................................................................................................................41

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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
-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
-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:.................................................................................65

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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:....................................................................................................................98

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

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All Multipliers and index ratios:and Marginal propensty's to

Consume
Chapter 1:
Chapter 6
1) #@#=1/1-c : Multiplier for Keynesian macroeconomic model without foreign sector or
Government
Chapter 7
1) 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 SPENDING
1) 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)*********
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16) and :C=Cbar +cY (consumption curve equation)*******

18) Where Y0 is equilibrium of A and Y
19) .Where:#@#=multiplier , Abar = total autonomous spending
TAX
1) 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&Imports
1) The Formula for Imports/Exports is: A = C+I+G+(X –Z).
2) term Net Exports usually referred to as =(X-Z)
1) from A = C + I to A = C + I + G.+(X-Z)
2) Y=A (equil. condition)
3) A=C+ Ibar+Gbar +(Xbar-Zbar) (aggregate spending where I,G,X,Z, are autonomous)
4) C=Cbar +c(1-t)Y (consumption function)
5) 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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Page 9 of 106
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 Yr1

ECS102-8
CHAPTER 1
: INTERDEPENDANCE OF MAJOR SECTORS, MARKETS
AND FLOWS IN THE ECONOMY.
Important Boxes/concepts/graphs/pages:
1. Pg47-Produc/income/spending flows diagram
2. Pg52-circular flow of-1-goods/services diagram/-2-income /spending
3. pg 57/58-circu;lar flow of goods +services with Government+Foreign+Financial sector.
4. BOX3.1 pg48-Stocks&Flows
5. BOX3.2 pg50-Different types of firms

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box 3.1 p48t Stocks and Flows

1. 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 FLOWS
1-wealth 'increasing over period:income
wealth'
2-assets 'paying for over period:profit
assets'
3-liabilities (??not direct??) over period:loss
4-capital direct over period:investment
5-population direct over period:no.of births /deaths
6-balance in savings account direct over
period:Saving(differencespend/earn)
7-unemployment direct over period:demand for labour
8-gold reserves held by RSA reserve direct over period:gold sales /gold
bank production
10-stock inventory direct 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. In the mixed economy.

2. Production ,income and spending are flows.
3. Productions aim is to use/consume raw or other products to satisfy human wants.
4. the sole aim and purpose of production is consumption-adam smith.-
5. 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 from—not 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 economy-
2.1. 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 proprietorship
1.1. All decisions +ownership vested in single person
1.2. Main weakness unlimited liability-owner responsible all debts+liabitities of firm.
1.3. Relatively easy to form /dissolve
1.4. 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.
Partnerships:
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.
Companies
1.14.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.

Page 14 of 106
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
Other forms of Business enterprise :
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.
Market Types;
Goods Market.
1.1. market for goods and services-consumers mostly buy.
Factors market
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.
Page 15 of 106
4. Consumers /Households purchase Goods on Goods market.
LL
SE
to
P
BO HT
FO .
U
G
ne
bi D
FO :
m
FIRMS
N
P
: o
c : A
N e/ S S
O uc CE OD
od VI O
Pr ER G
S
GOODS
FACTOR
MARKET
MARKET
SA FO G
LE O P O
FF : SE A OD
ER R N S
(S VI D
FO
R
HOUSEHOLDS 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.
H
G
SP
EN E
D M
IN FIRMS IN CO
FACTOR GOODS
MARKET MARKET
IN
W CO
A
PR G M
O ES E HOUSEHOLD
FI /
T S
ng
di
en
Sp
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.

Page 16 of 106
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 re-
election-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).

Page 17 of 106
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 flows-
like "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) Firms
Foreign sector spending and spending and income

income
Households
payments
for exports
injection
1. 4th major sector-foreign sector-consists of rest of world +international fin.istitutions

governing flow of funds and goods & services between countries.
2. 2 broad categories:developing countries+industrial countries
A. industrial countries: europe mostly-germany,italy,france,USA,Australia

Page 18 of 106
B. developing countries:africa/asia etc-most south american +RSA=middle

income,most poorestafrica-worst-sierra leone,burundi,ethiopia
3. World bank classifies its members into 4 groups(levels of income):low income,lower
middleincome,upper middle income,high income.
4. Industrial=all high income,Developing=all re
5. 'Open Economy'-strong links with rest of world-exp/imp/multinationals.
6. '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.
7. A countries economic links with rest of world are often crucial determinants of level
and pace of economic activity in the domestic economy.
8. "Z" = Imports –rsa mainly capital &intermediate goods
9. "E"= Exports-rsa mainly gold & minerals
10. For exports the 'Spending ' originates in rest of world.-thus constitute an 'injection' into
circular flow of income =spending in domestic economy.
11. For imports 'spending' originates local, constitutes leakage from circ. flow inc.+spend.
12. Flow of income +spending is also in opposite direction to FOP and Goods +Services.
13. Most important international economic orgaisations:International Monetary Fund,World
Bank,World Trade Organisation.
14. Rsa most important trade partners =industrial countries=60%exports,66% imports----
Africa to rsa=3% imports,18% exports
Financial Institutions in the circular flow of income
andspending.3.5t
Diagram: FINANCIAL INSTITUTIONS IN THE CIRCULAR FLOW OF INCOME AND SPENDING.
(NOT goods & services /production---NOTE NB !!!!)
FIRMS
jjjjjjjjjjjjjjjjjjj saving Investment

j
. Spending and Income
Spending and Income FINANCIAL SECTOR
Saving
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 income

Page 19 of 106
ii. Deficit Units -those require funds spending more than income
5. "S" = Saving
6. "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.
7. Saving means a leakage/withdrawal from the circular flow of inc.+spend.
8. 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 :
9. :Investment : which is a addition or injection into circular flow of inc.+spend.
10. 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-Revisited
1. Aggregate /Total producton=all prod in economy
2. Aggregate /Total Income = Rent-nat.resources + Interest-Capital + wages-labour +
profit-entrepeneur
3. Aggregate/Total Spending= by 4 major sectors in economy=1-households-2-firms-3-
government-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
4. Total Expenditure = C+I+G+ (X-Z)
5. (T)Taxes and (S)Savings and (Z)Imports represent = Leakages or Withdrawals.
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=LEAKAGES and I,G,X=INJECTIONS
Z FIRMS
G
S I
Foreign Governmen
C C
Sector FINANCIAL SECTOR t
& &
Y Y
S
T
X HOUSEHOLDS

Page 20 of 106

ECS102-8
CHAPTER 2
: MEASURING THE PERFORMANCE OF THE ECONOMY.
pg 80 lorenz curve graph
BOXES:
changes in purchasing power:pg78
price index construction:pg76/75

Page 21 of 106
1 . Macroeconomic Objectives-2.1p9s,p61t
1. Economist must judge objectively-not own well being-1-which criteria to use? 2-
measure criteria?
2. For firms we use profit as crieria,? use for macroeconomy?
5 Macroeconomic Objectives used to Judge the Performance of the
EcoEnomy
i. 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 level-
A. psycological suffering
B. material suffering
2. macroeconomic level-
A. 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 rise

Page 22 of 106
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,p63
1. 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 GDP
1. 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.

Page 23 of 106
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
Producti
on
gg
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 use–eg: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:-ONLY-
1. RENT
2. INTEREST
3. SALARIES
4. PROFIT
Difference between the 3 Methods of calculating GDP
1. 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) /= Production

Page 24 of 106
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.(Tx-
Vat,imp+ exp.) (Subsidy-
Taxes on
exports/Domestic for bread ) products
b. Basic Prices Production Val. added OTHER taxes LESS this =
method(val.add) & subsidies Factor Prices
Other Tax&Subs NOT /Unit
goods/service
on products
eg:Tax-payroll,land tx,buldings,licence
firm.
:Subsidies-on employment or payroll
c. Factor Cost Income method(factor Factor cost +"Other"=ba
cost) fop s
3. Therefore different valuations of GDP yield different results ,so one should always check
prices used.

Page 25 of 106
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 Income
1. 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 GNI

Page 26 of 106
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 GDP
1. 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 totals
1. 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.

Page 27 of 106
(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-2-
No. of employees;BUT Quite difficult to measure in practice:;part-
time,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. 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
2. 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.
3. 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.
4. Price increases ie Inflation erodes the real value or purchasing power of a fixed
nominal amount.

Page 28 of 106
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 .)
6. 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
7. % *100
8. 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 retailers-
110 000 quotations per month and info. double checked.,Prices used are first 7
days of month.
9. CPI available 2nd half of following month.
10. Used to calculate inflation.
11. large base 1500goods means cpi is fairly accurate.
#4 MACROECONOMIC OBJECTIVE: Balance of Payments

1. Balance of payments :summarises between local& foreign-usually yearly.
2. 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 .
3. TERM :Surplus on Current account:Exports exceeded Imports
4. TERM :Deficit on Current account:Imports exceeded Exports.
5. TERM :Surplus on Financial account:(also –NET INFLOW of Capital):Inflows of
money exceeded Outflows of Money.
6. TERM :Deficit on Financial account:(also –NET OUTFLOW of Capital): Outflows
of money exceeded Inflows of Money.
7. 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.
8. Compiled by SA reserve bank in SA,from SARS info. mostly.

Page 29 of 106
9. Purchasing Power =year 1% / year 2 % .Also ,or nominal % /price level %=real value.
10. 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 Curve
1. 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 Cumulative
Population Income Population Income
Poorest 20% 3 % 20 % 3%
Next 20% 7% 40 % 10 %
Next 20% 15 % 60 % 25 %
Next 20% 25 % 80 % 50 %
Richest 20% 50 % 100 % 100 %
b. Plot Graph –
i. see graph pg80 in textbook
ii. (-1-)Horizontal axis =Cumulative %'s of Population.
iii. (-2-)Vertical axis =Cumulative %'s of Income.
iv. Axes are joined to form a square
v. 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.
vi. A Lorenz curve ALLWAYS starts at Origin and ends at B(opposite corner
= 100%).
vii. Greater distance between diagonal and Lorenz Curve – the greater the
inequality.
viii. Area (shaded) between diagonal and Lorenz curve = called- "Area of
inequality"
ix. Greatest possible inequality: where 1 person earns all money=curve O-A-
B(triangle)
#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.

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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 Ratio
1. 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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ECS102-8
CHAPTER 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

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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-Income

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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:M1
1) 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-M2
1) 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-M3
1) 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.

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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".

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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 banks
1) 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.
Acting as custodian of countries gold and other foreign reserves.
• holds gold and foreign exchange reserves-level is one of main indicators of state of
economy.
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 Money
1. 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.

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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/i-
Interest 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)

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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 Market
1. 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:

Page 39 of 106
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 Rate-

Authority Controlling Supply
1. 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 money-ie that there is an independant money supply curve.
2. But-if authority sets interest rate at certain level by adjusting REPO rate,then they
loose control of the money supply because it will now be determined by the Interest
rate only.
3. The traditional approach was:see diagram page 372 text if money supply curve
mm(vertical line) is increased it shifts right ,then interest rates will fall(see new
intercept).and visa versa.
The Instruments of Monetary Policy.
• In Rsa a high priority is currently given to market orientated policy instruments.
• The MARKET ORIENTATED Key Instruments of Monetary Policy are:
1. Accomodation policy.
2. Open market policy.
3. Public Debt management
4. Intervention in foreign exchange markets.
• Other NON-MARKET RELATED Instruments of Monetary policy are:
1. Credit ceilings
2. Deposit rate control(DISCONTINUED IN rsa)
• Other types unclassified;
1. Changes in terms of HP agreements.
2. Changes in exchange control regulations.
3. Also Moral suasion is used;SARB can influence banks by consulting with them.
1-Accomodation policy.
1. TERM:Accomodation policy of SARB :mainly comprises changes in repo rate and
other conditions on which cash is made available to banks.Changes in repo rate
cause changes in cost of credit to banking public,thus can control the supply of
money in economy.
2. If banks short cash-they can
a. Change other fin.assets to cash
b. borrow on interbank market.
c. If none above possible-can obtain funds from SARB as "lender of last resort" by
Repo agrmnts.
3. TERM:Repo Agreement or repurchase agreements:the sale of an existing
security (financial asset) at an agreed price,coupled with an agreement by the seller

Page 40 of 106
to purchase back the same security at the same price,and including an agreed
amount of interest as cost of obtaining funds also specified on agreement,on a
specified date(usually in 7 days time). .The underlying securities
which may be used for this purpose are :Gov.bonds,Land bank/treasury bills,reserve
bank debentures.(first leg is flow 1 way,second leg is flow other way)
4. Introduced 1998,repurchse agreement between SARB and it's banking clients, .
5. Repos are at present the main source of funds for banks as a measure of last resort-
thus control.
Open market policy.
1. TERM Open Market Policy is where the SARB sells or buys domestic financial
assets(mainly Gov. Bonds or Treasury bills) in order to exert a specific influence on
interest rates and the Quantity. of money.
a. SARB- buy from banks at low prices (to force 'buy') and debit /increase their
cash reserve in payment ,thus allowing banks to create more money by lending
out or ,visa versa SARB sells domestic financial assets to banks to in turn
decrease the amount of money they can use to create a supply of money by
lending out ...
b. There is an inverse relationship been prices of such securities and the
Yield/Interest that can be earned on them,so ,if high prices of purchase,then
yield is lower and visa versa etc,thus banks must sell low to be able to get
buyers or visa versa to get sellers. ...Thus if banks buy at high
prices,they will send interest rates up,and if sell at low prices they will send
interest rates down,sothis can also be used to support the accomodation policy
of the SARB,
c. ...in RSA this is used to :Sell cheap bonds ,to cause banks to use Repo
system,to make accomodation policy of SA more effective.
2. TERM domestic financial assets: treasury bills and government bonds ,or land
bank bills or municipal stock etc.
3.
Public Debt management
• Market-orientated
Intervention in foreign exchange markets.
• Market-orientated

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ECS102-8
CHAPTER 4
: THE PUBLIC SECTOR.(MACROECONOMICS)
The public sector
Description of public sector
Spending and income flows with government
Pure public goods versus private goods

Pure public goods and the market
Burden (impact) of an excise tax

Glossary
ability-to-pay external benefits
ad valorem tax external costs
allocation function of government externalities
asymmetric information financing of government spending
average tax rate fiscal policy
budget (government) government intervention
budget deficit government spending
budget surplus growth in government spending
benefit principle of taxation implementation lag
bracket creep indirect taxes
business cycle interest on public debt
capital gains tax marginal tax rate
commercialisation nationalisation
common property resources personal income tax
composition of government spending privatisation
contractionary (restrictive) policy progressive tax
criteria for a good tax proportional taxes
demand management public debt
decision lag public good
direct taxes public sector
effective incidence recognition lag
excludability regressive taxes
expansionary (or stimulatory) policy statutory (or legal) incidence
tax incidence
taxes
value-added tax (VAT)

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CHECKLIST
graph –17.1 pg 426 import tariffs effect on supply/prices etc.
graph pg 443 17.3 dollar /rand rate
table 17.4+17.5 pg 445

Page 43 of 106
1-Role of Government in the Economy : An Overview:

16.1p384
• The 'Public sector' in SA consists of:
o 'General Government'
 Central Gov.-defence,foreign affairs
 Provincial Gov-housing,health services,education(TEPD)
 Local Gov-muncipal-sewerage etc
o Public Corporations-escom,transnet,
1. TERM Market system :"invisible hand"coordinates millions-Efficient system-ie:"Free
market system' of economy type allocates resources in best possible way.But not
necessarily Equity
2. equity or fairness / and efficient -market system is money votes count only-problem.
3. Reasons for Gov. Intervention in Economy:
a. Non-efficiency-Market failure ,if system sometimes fails.
b. Non-equitable –(fairness eg: income ,poverty) outcomes.-but can be trade off with
efficiency.
c. Provide recognise property rights,contract law,law an order,services-water+lights
etc.
4. Reasons for Non-intervention- market forces are seen as being better
solvewhat,how,for whom
-2-Fiscal Policy and the Budget.
1. Term Fiscal Policy: Government policy on level and composition of government
spending,taxation and borrowing.(from fiscus-roman treasury)
2. Main Instrument OF gov policy :Budget
3. The Fiscal Variables are :
a. (G) = Gov. Spending and
b. (T) = Taxation.
4. Budget speech parliment,feb for april end yr.,one most important events in economic
calendar.
5. Fiscal policy/The Budget can be used to address influence:
a. The 5 Economic Major Objectives(where monetary policy only 3 of) :Economic Growth-
Total Prdctn
b. Distribution of Income
c. Balance of payment problems
d. Price level-Inflation
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e. Full Employment
i. AND ALSO BASICLY :Total Spending
ii. Income-(Y)
iii. Employment
6. .Term Demand management:an instrument of Fiscal policy is classified as an
instrument of Demand management because it is an effective means of influencing
Total Spending in the economy.Monetary policy is also such.(Definition: can be used
to manage/regulate the total demand for goods and services in the economy.)
7. TERM Expansionary Fiscal &monetary policies:If economy in Recession,to
stimulate economic activity-means -1-Reduce or Not increase Tax -2-Raise Spending.
8. TERM Contractionary or Retrictive Fiscal &monetary policies:If economy
expanding too rapidly and -1-Inflation -2-Balance of Payments problems
experienced:means Gov. must-1- Taxes Increase and/or Reduce Spending.
9. Term Lags/Delays-one of basic difficulties assosiated with attempts stabilise
economy.
10. Term Budget Deficit /Surplass:Difference between Gov. spending and
Income.
11. Fiscal policy can influence microeconomics as well:specific markets/products
tax,subsidy or town.
-3-Government Spending-16.8p401
1. Gov. involvemnt in economy often measured by level spending,but many other types
involvemnt too.
2. "Crowding out effect"-when Gov.spending increases and crowds out private sector.
3. Gov spending can be classified
a. economically
i. consumption spending :for final consumption = 3%
ii. investment spending :investment in capital goods = 19%
b. functionally:Changed from from War/Internal strife defense/policing type and
economic services (mining,agriculture,exporter support) spending to social
spending.
4. Gov, spending has increased form 12% to 22% from 1960 to now.This worrisome
because of how to finance this(Tax).Number other countries had similar
experience.REASONS:
a. Changing consumer preferences. :peoples Income went up ,then demand for Gov.
services rise so gov spend more on consumption as well. (Income elasticity of gov
services greater 1,so as income up ,greater % of income on service.)
b. Political and other shocks. :War spending and internal strife spending on law+order.,
c. Redistribution of income.: Shift in spending to uplift previously disadvantaged
peoples,majority
d. Misconceptions and Entitlement.People think gov.services cheap,expect more-if
politician listens then spending go up alot,not a little.
e. Population growth and Urbanisation.:housing,water+lights,sewerage,roads-
infrastructure+AIDS.
-4-Financing of Government Spending 16.9,p403
1) There are 3 ways of financing Gov.Spending-
a) Income from Property(2% totl.)– incl.Escom,+Profit fishing,agriculture+Rent-Mining
Licence fees.
b) Borrowing –Budget deficit. ,domesic/Intnl.capital market(gov.bonds) or Central bank.
(overdraft) ..-1-Incr. Public Debt.+-2-Inflationary Financing
c) Taxes

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2) Term Budget Deficit /Surplass:Difference between Gov. spending and Gov. Income .
80/90's >gov.Invstmt. Future generation must pay for todays borrowing,OK for
capital(=returns),not OK for consumption.
3) Term Inflationary Financing: gov.borrowing because increases money supply.
4) Term Public debt: 34%90's-45% gdp:from gov.borrowing-eg 1990,increases Interest
on gov debt.to 20c per R Tax today.
-5-Taxation 16.10
1) Largest source Gov revenue-97%
-1-Criteria for a good tax:
-Adam Smith-equitable,convenient,economic,certain
a) Neutrality :The cost(damage) of taxes must be kept as low as possible:but can also
be used to fix
i) -1-Distort Relative Prices:allocation of resources+welfare-make some things more
expensive than others.-Relative prices
ii) -2-Disincentive to owners-FOP:eg workers(work less)+factories not produce
certain.
b) Equity:People must be taxed equally :two principles to this
i) Ability to pay principle: Must pay according to ability
(1)Horizontal equity-same income taxpayers to pay equally
(2)Vertical equity -Richer must pay more than poorer people.
ii) Benefit principle:or User Charges-each user pay benefits they get from Gov.-eg
toll rd.,h20,
c) Administrative Simplicity:Keep costs low + easy admin (tax loopholes +complicated
taxes)
i) Costs:
(1)Compliance costs: user pay accountant to do tax return.
(2)Administration costs.: Gov.costs tax collector
2) Term Tax Avoidance: legal find loopholes-cause frustration those who cannot
3) Term Tax Evasion: illegal-make +sell t-shirts on flea market,not declare taxes.
4) term Relative Prices:price of one good relative to another
-2-Different Types of Tax:
1) term:Direct Tax (or "Taxes on Income +Wealth"):Personal+Company+Estate Duty.
2) term:Indirect tax (or "taxes on Goods and Services") :on transactions
:vat.,customs,excise.
3) term:General tax:on variety of things,not specific eg VAT.
4) term :Selective tax:on specific things eg: fuel or tobacco or alcohol.
5) term Specific Excise Tax:Per unit:eg R4 on each beer
6) term Ad Valorem tax:% of value eg 5%
7) based on ratio of tax to income
a) term :Progressive Tax:Rich pay higher "!! % !!" than poor.eg RSA
b) term :Proportional Tax:Rich pay same levels as Poor(in %) eg company tax
c) term :Regressive Tax: takes less as income levels increase eg VAT(% of income paid
out)
-6-Taxation in RSA.
1) 3 main types of tax in RSA:'
a) Personal Tax:Most important in SA today,on 'taxable income',from table with
minimum start/rate

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i) term Marginal Tax Rate:rate each additional rand (rate for each level is
taxed(=on tax table
ii) term Average/Effective Tax Rate:ratio between rate and income
iii) last years SA less tax brackets(15to 6)+base broadened(More fringe benefits
taxed)
iv) term Capital Gains Tax:sales of fixed property-to compensate nominal/real gains
only above 10 000-difficult to administer,+increases horizontal equity+integrity
Personal .Tax Base.(per inc.level)
b) Company Tax:-was Proportional tax:at 30% flat rate
i) term Secondary tax :on shares dividends to shareholders.7.5%
c) VAT: 'regressive tax', thus some goods zero rated for vat.
d) Today: personal=#1,vat=2,companies=3,excise =4,customs =5 from before
companies 2,
-7-Tax Incidence-ie: Who really Pays the Taxes?
1) Fly –paper theory:taxes stick where Gov. puts them-but not exactly true
2) term Incidence-not who pays the tax,who is burdened by it actually.
3) term Statutory or Legal Incidence of Taxes: Gov. can specify who must hand tax
over to them.
4) term Effective Incidence of Tax :who actually pays cannot be determined by who
hands Rands over to Gov.1-because everyone shifts tax forward/backward to customers
etc+ 2-changdecision
5) The degree to which a tax can be shifted depends on the price elasticities of the
goods/services-high=not easy,low=easy
The Impact of a Specific Excise Tax:
1) Two types of Excise Tax:
a) term Specific Excise Tax:Per unit:eg R4 on each beer
b) term Ad Valorem tax:% of value eg 5%
2) Example:A specific Excise tax on cigarretes will have a burden on :
a) Companies:they must pay Gov. extra (egR4.00) per cigarette packet.
i) They willtry to pass the full tax on to the consumer but may not be able to
because it depends on price elasticity of goods And also general supply in
market.,so they might have to pay some of tax themselves as price decrease.
ii) less demand from high prices will cause a loss of {qty2*price1} –
minus{qty1*price2) because companies only pass on maybe half of tax to the
consumer,they bear some too ,plus also supply drops.
b) Employees:less sales=less employees needed or must accept lower wages(can also
shift supply right again cause cheaper to make smokes+can sell cheaper
then=more demand new 'E')
c) Customers loose:must pay more for cigarettes (exept what companies bear of tax
burden on tax..,maybe 40% etc.)
Example: Effect of a Specific Excise Tax on Cigarettes:Burden -1-Consumer/

-2Company/-3-Employees

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The supply curve ss will shift to left(per qty. higher price).:causing all 3
parties to bear burden of excise tax.(see number /point 2 above)
PS:Try read 16.2 as per study guide extra reading-also check economies of
scale etc.

ECS102-8
CHAPTER 5
: THE FOREIGN SECTOR.(MACROECONOMICS)
absolute advantage financial account deficit
ad valorem tariffs financial account surplus
appreciation floating exchange rates
balance of payments foreign exchange market
current account foreign reserves
current account deficit gold and other foreign reserves
current account surplus import tariffs
demand for foreign exchange (eg open economy
dollars) portfolio investment
depreciation relative (comparative) advantage
direct investment specific tariffs
equilibrium exchange rate supply of foreign exchange (eg dollars)

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exchange rate terms of trade

exports trade balance
export promotion
financial account
CHECKLIST

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-1-WHY Countries Trade:

1) NOTES ON INTRO: Rsa recent yrs bad balance payments,globalisation today,large
countries trade less than small-more diverse resources,Adam.Smith-says 'can be
prudent to trade intnly'.
2) most successful countries are strongly open economy+can compete successfully.
3) The more open a country is the more vulnerable to changes in econ.conditions of other
countries.
4) Term a Open Economy:If a significant part GDP 'exported':,And significant domestic
spending is on 'imports' or:"degree of integration";the more integrated,the more open.
5) gains from trade:low price +wider product choice.
6) Self-sufficiency-or autarky used to be popular amoungst politicians.
7) Countries trade because they have different Natural resource wealth(minerals),need
others+=some do industrial goods production(high skills etc,others do import)
8) Reasons for trade , 2 main reasons:
i) term Equal Advantage:Eg france+germany-Diff. in taste :-price+demand higher-
so trade goes toward there.
ii) term Absolute Advantage:
.If one worker: in Japan can produce 10 cameras or 50 kg wool,and in Australia 5
cameras or 100kg wool,japan has absolute advantage in cameras,australia in
wool,and visa versa. . .The Advantage of trade +specialization here:
if countries specialize and trade they can each consume 50 kg wool +5
cameras,which is impossible if they did not trade+specialise.
iii) term Comparative Advantage:
Law of Comparative (or Relative) Advantage:two countries can gain from trade
if the opportunity costs of production or the relative prices differ between the two
countries.
{You must,for each type, to find out who has comp.advantage,divide other product
by that ones 'number of'.This gives the 'cost' of that one
.Now compare 'costs' to check which has less-that one has comp.advantage. }
Example:(1)IF

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Opportunity costs different,even if one can produce more of all goods using fewer
resources(eg labour)
Both countries will benefit from trade if the opportunity costs of production (or relative
prices)differ between the two countries
Eg:If japan foregoes(opportunity cost )Wine it costs them 7500DVD players,but in RSA
2000 DVD players must be sacrificed ,so it costs relatively less to produce wine in RSA.So
japan is in "absolute" terms 2.75 times more efficient than RSA in making dvds but only
marginally more efficient in making wine,So RSA is relatively(not absolutely) more
efficient(or less inefficient)in producing wine.
But they will only effect such specialisation and trade if
each can trade at a higher ratio than their opportunity cost: ie It is in the interest of Japan
to exchange DVD players for wine with South Africa where it will get a liter of wine for
only 2 DVD players. It is also in the interest of South Africa to exchange wine for DVD
players with Japan since it can get 5 DVD players instead of only 2 DVD players
1) SOURCES OF COMPARATIVE ADVANTAGE:
a) Technology: "Product life cycle of international trade theory" ;korea cheap
labour copies germany technology now exporter instead of importer as before.
b) Abundant Resources:Not all countries posess same'FOP' "Hecksher-Ohlin
theory":Countries will tend to export those goods that most intensively use the
countries relatively more abundant resouces.eg:Capital/Labour.
c) Differences in taste and demand: If tastes for fish in A are more than in
B,then A could be more expensive(greater demand) than in B,and more
bigger/market for.Eg;social,religious,climatic,cultural. :ALSO:poor-
necessities;less luxury.will trade with poor;rich(developed) will trade with rich
-all make luxuries.
Intra industry trade:
-most international trade can be explained by comparative advantage principle or product
life cycle theory.-BUT lots of trade is inter-industry trade rg:both export/import watches to
each other.
-inter is mostly in differentiated goods(toyota+mercedes) but also in homogenous(seasonal
AGRICULTURE –costs)
-,imperfect competition +demand side factors(increases choice to consumer)+economies
of scale(specialisation).+market overlap(to wealthy in other country)-
-gains from trade:low price +wider product choice.
-2-Trade Policy
1. Inter.Trade causes greater prod.of trade goods+greater welfare+low price +more
variety BUT:
2. term:Trade policy: Governments (1)PROTECT domestic firms against imports+(2)
CONTROL volume of imports by means of trade barriers eg:import tariffs.(3)Also
encouraging exports by assist with marketing,giving subsidies etc. for expert etc.
TYPES OF GOVERNMENT CONTROLS FOR Int .Trade.
1. Import Tariff
2. Import Quotas(Quantitative Restrictions.)
3. Subsidies
4. Other Non-tariff bariers:
a. Exchange controls
b. Exchange rate policy.
1-Import Tariff:
1. term:Protective tariff: to protect local industry

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2. term Revenue tariff : To earn revenue for government only.(eg goods not made
here-computer)
3. Two categories of tariffs:
a. term Ad-Valorem -% of value of item
b. term Specific tariffs-Specific amount:eg R5 on each unit of wine.
4. THE ECONOMIC IMPACT OF AN IMPORT TARIFF
SEE GRAPH PAGE 426 TEXTBOOK.:
Explanation of graph:
1. q1= domestic supply.at price Pw
2. Number of Imports=difference q5 minus q1 (q1 = domestic supply possible at lower
word rate.)
3. horizontal line Sw-Pw is world supply at price Pw.
4. Here: Imports Cause lower
a. -1-Employment
b. -2-Decrease Domestic Production
c. -3-Weaken Balance Payments
5. Here imports cause better:
a. Cheaper prices consumers
b. If textiles imported-Clothing producers can raise their production.
c. THUS NET RESULT OF 'these textile' IMPORTS UNCERTAIN(some production also
raised)
6. IF GOV. imposes an Import tariff at Pt- will cause
a. increase domestic production +supply to Q2(help employment)
b. decrease imports to Q4
c. Better position Balance of Payments.
d. Brings Revenue for Gov.
e. HOWEVER-COULD BE UNWISE MOVE-because with lowering effect on 'raised
clothing production' and all factors taken into consideration="NET RESULT
UNCERTAIN"
-2-Import Quotas(Restrictions):
1. Form of DIRECT INTERVENTION.
2. Will have basicly same effect as tariff-Pt in graph above.!!
3. Seller benefit by higher prices(less supply) , Gov does not benefit from revenue
tariffs.
4. Gov can -1-auction licences -2-sell licences -3-issue licences
5. Most quotas in RSA abolished as required WordTradeOrganisation.
-3-Subsidies:
1. Does not raise prices of eg:maize by a tariff to poor consumers-mostly the wealthy
pay tax and will thus pay bear burden more than the poor.
-4-Admin. Barriers:
1. eg:extra red tape,special licences,give gov.contracts to local only,special technical
conditions.
2. Will probably remain hinderence to word trade for long still.
-5-Exchange Controls:
• Eg: only so much froreign exchange allowed for the E.U. /america etc.(frequently
done Dev.Cnty)

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-6- Exchange Rate policy

• Gov. influences exchange rate in other ways-some argue this is most effective
method available today where the rate is the ruling factor for imports.
-2-Arguments for the use of Trade Barriers:
• Can benefit SOME employees,producers ALOT –BUT can benefit LOTS of consumers A
LITTLE.
• Labour +Capital Immobile-opening free trade can cause bankruptcy
-1-Balance of Payments
• TO fix SHORT TERM Bal.of Pay. problems-But in LONG TERM other countries will
retaliate impose-cause doubtful benefits then.
• Depends on Price elasticity of demand whether tariffs will work or not to restrict
trade.
-2-Dumping
1) Firm sells at lower price overseas than in domestic markets-
a) If price elasticity overseas is different to domestic
b) term Predatory Dumping :firm uses high local prices to subsidise exports and
undercut competitors—can be difficult to prove,can be relative/comparative
advantage or local politiking
c) term Countervailing Duties:used to counteract dumping.
d) Or low prices are charged only overseas to expand production and realise economies
of scale,high local to manage.
-3-Export Subsidies to promote Export
• If one country subsidises-then other country will impose countervailing
duties/measures.to equal
• if A subsidises-Taxpayers A pay for :consumers B win+producers B loose +
• eg iscor /america says they are subsidised.
-4-Infant Industries
• best known +oldest argument
• To allow fledgling local industries with possible 'comparative advantage' to grow
strong to compete with overseas established industry
• can cause inefficiency,esp. in developed countries not allways helped,difficult pick
winners,
-5-Employment
• trade barriers neede to protect jobs foreign competition
• BUT-high unit labour cost for low overseas wages should equal out,and exploit to Int
Labour.Org
• fiscal/monetary policy argued more efficient job creators-not loose competitive egde-
inefficiency.
-6-Government REVENUE.
1) Esp.for developing countries-critical revenue.20%-25%-DEVELOPED- ONLY 2%
-7-National Security
• Not get too dependant-ie for times of war.

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Arguments against Trade barriers.

-generally final result is unpredictable on the whole with all reasons for or against
included..-
-1-Retaliation by Trade Partners:
• gains from could be offset by losses in tit for tat war
-2-Welfare Cost to Society:
• higher prices for consumers-
-3-Inefficiency of producers:
Trade Policy in RSA

2) 1920-1970 –import substitution infant industry protection+bal.of payments -quotas+imp
tariffs
3) 1970-1994-export drive –reduce import costs of intermediate products+export
subsidies.
4) 1994-97 subsidies +other barriers (tarriffs etc)fased out for GATT/ WTradeOrg.
agreements
5) free Trade areas-EU2000 and SADC 1996
Gold in the Internationqal monetary system;
• First before 1914 –all currencies backed by gold(to * 4 )+payments in gold other
countries
• 1944-new system-'Bretton Woods'ofgold not backing currenciesbut as common
denominator for valuing currenciessystem; and goldsettlebetween countries-
• 1971 –new system-floating exchange rate determined by demand/supply of
currencies.
The GATT,The Uruguay round and WTO-world trade organisation.
-from gatt to wto 1994-more details/items eg agricultue+clothing and
-non-discrimination(most favoured nation status-equal)+national treatment(Imp.same
asdomesticgoods)
The Balance of Payments.
1) Term Bal. of Paym. is a summary record of a countries transactions with rest of world
over a period oftime
2) The balancing Item in bal.of paym.='change in countries gold+other foreign reserves'
inTHEORY, but in practice='Unrecorded transactions' account
3) 4 different types of Balance of Payments account:
a) term Current account.-(or called Trade balance) [ primary income
receipts+exports{-}primary income payments+imports ]+plus current transfers(no
'quid pro quo' in return donations, taxes,immigrate)
i) consists of merchandise both ways/services both ways /gold RSA /Primary income
both ways–(prim. Income =1 employee+2 investment incl interest from loans both
ways)./curr.transfers
ii) Current account deficit OK if it can be financedby financial account surplass,or if
not then confidence from other countries–debt on capital goods better than
consumer, so surplass not necessarily a 'must have'
b) term Capital transfer account.
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c) term Financial account. –International transactions in Fin.Assets and liabilities

incl.borrowing and lending ofmoney eg-loans,shares
i) before 1999-called capital account.
ii) outflows called 'capital outflows'
iii) Consists of
(1)term Direct investment-with controlling share
(2)term Portfolio investment-not with controlling share
(3)other investment-eg:loans,currency,deposits,short term trade credit
d) term Unrecorded transactions.-all omissions and unrecorded transactions-serves
to balance double entry system.
The Balance of Payments and Economic activity and Policy in RSA.
1) RSA export important –strong thus led to major development here.
2) To boost exports:
a) Keep costs of domestic production down
b) Subsidise process of marketing and help find markets
c) keep Rand at low level to other currencies.(can cause bad inflation from higher
import prices)
3) Our exports good when other economies not in recession.
4) If reserves too low-import tariffs and quotas for stop imports./or reduce domestic
demand in other ways which also reduce employment,production etc in country.(RSA
often does+must the latter or other countries retaliate.)
5) RSA 1985-1993 financial account deficit forced Gov. to reduce domestic demand.(no
loans IMF then)
6) TODAY better because of sanctions gone , but bal.pay+domestic econ.activity
+economic policy most important aspects of RSAeconomic life and will remain so.
Gold and other Foreign Reserves:
• If not enough foreign currency-gold must be sold by Gov. to buy some currencyto pay
for imports
• portion of RSA gold production retained by Gov. each year.
• Gold and other foreign reserves are the most important total in the balance of
payments:
o 1-reflect overall balance of payments position
o smooth ups and downs in pay/receipts all the time.
o stop fluctuations of exchange rate
o show authorities ability to stimulate economy without getting payment
difficulties .
• Gross reserve include borrowings from International M Fund for Reserves to pay but
net isexclude
The Int.M.Fund.+World Bank.
-makes loans for foreign exchange payment problems.
-extracts IMF conditionality-what Gov.must change in relationship to its economy every
time.
Voting rights by quota-eg usa-18%
-World Bank-economies buy shares in it to join.-Only lends to developing countries eg
dams.+privatesec
Exchange Rates:
1) Exports get paid (ultimately) for in Rand from abroad etc and imports in yen/dollar etc.

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2) term Exchange rate is a Ratio- represents price of one currency in terms of another.
3) term Foreign exchange market : international market where currencies can be
exchanged.Include in SA all authorised foreign currency dealers;RSA major Banks and
others. RSA 8.4billion$/day
4) term Appreciation:price of one currency goes up in relation to another one.
5) term Depreciation:price of one currency goes down in relation to another one
6) Methods of quoting exchange rates:
a) term Direct method:most countries(RSA too)-shows ? much local for 1 foreign eg
R10 to $1(ie:price of a commodity since foreign exchange is just a commodity like
bread)
b) term Indirect method:some –shows ? much foreign for 1local eg R1 to $0.1
The foreign exchange market:
1) The Rand –Yen/Pound etc rate is derived from the R-$ exchange rate,and worked out
from there.
REASONS FOR THE DEMAND FOR DOLLARS:
2) Demand Curve has Inverse/negative slope :the lower the price, the more is demanded.
3) term Derived demand the lower the price ,the more demand is derived from this price
change.
i) RSA IMPORTERS
ii) RSA tourists for overseas
iii) RSA Investors buying overseas assets eg shares
iv) Overseas investors selling local investments eg:shares and convert proceeds to US
Dollars.
v) Speculators in currency wanting to buy other currencies.
4) The Rule is : the higher price of dollars,the less will be demanded+ visa versa.-also the
more american goods will be demanded if price of $ low-thus causeing more demand for
$
5) On graph pg 443 if above price of equilibrium-excess supply/ if below E excess demand
for Dollars.
REASONS FOR THE SUPPLY FOR DOLLARS:
6) Supply curve has a positive slope:more price =more supply
7) term Derived supply the higher the price ,the more supply is derived from this price
change.
i) SA exporters exporting
ii) Foreign buyers of Stocks and Gov.Stocks.
iii) SA investors selling foreign assets.
iv) Foreign tourists.
v) Speculators.
8) The rule for supply is higher prices-more supply.
THE EQUILIBRIUM EXCHANGE RATE:
NOTE:Label the price and quantity with dotted line as p1/q1 etc-for points as per
studyguide alsoE1/E2.
: ALSO remenber to WRITE an EXPLANATION for each diagram explaining :RAND
'APPRECIATES . or DEPRECIATES'

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----if just the price above e = excess supply of $ then–if price changeMOVEMENTon
both curve
----if just the price below e = excess demand of $ then –if price changeMOVEMENTon
both curve
Change Graph change RAND DOLLAR
Demand for Qty $ increases(at each Demand curve SHIFT Depreciat Appreciat
price) right es es
Supply of Qty $ Increases (at each Supply curve SHIFT Appreciat Depreciat
price) right es es
Demand for Qty Dollars falls(at each Demand SHIFT left Depreciat Appreciat
price) es es
Supply of Qty $ falls(at each price) Supply SHIFT left Appreciat Depreciat
es es
Table of effect on domestic prices and current account and export/import from
Rand/Dollar Appreciation/Depreciation.
ChangeinR$ exchange Export Import Current Domestic
rate prices in $ prices R account prices
rand depreciate decrease increase improves rise
rand appreciate Increase decrease worsens fall
Intervention in the Foreign Exchange Market:

1) If Gov. does not control exchange rate-can be very volatile from -1-other central bank
manipulation for policy reasons and since -2-demand and supply are not syncronised on
a daily basis.
2) term:Managed Floating:Central bank manipulation of exchange rates.A central bank
can only intervene to stabilise a depreciating currency if it has sufficient foreign
exchange reserves to do so.:Ie:Central bank supplies a extra demand for $(eg importers
want) to stop right shift of curve.Or SARB buys extra supply of $(eg tourists want for
world cup)to stop shift in supply curve.This is to keep the currency stable and protect
vulnerable exporters etc.
3) term Expectations or Market sentiment: if everyone believes $ price going up-
exporters delay,foreign tourists and investors delay (demand rands down,supply $
down)and speculators buy $(demand $ up) cause immediate shift in curves and

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immediate price change.To stop speculators SARB sometimes makes high interest rates
to stop them lending to buy $ .
Exchange Rate Policy

1) Exchange rates are amoung most impotant of prices affecting:economic
growth,employment,inflation,balance of payments.
2) term Floating currency Some countries have pegged currencies to $,others employ
managed floating-(floating currency).
3) With floating currency-3 options:-1-do nothing-market forces do -2-managed ffloating -3-
use interest rates-if SARB cause interest rates up-then foreign capital flows in for lending
out and speculators have high interest rates to stop them lending to buy $ .
4) term:PPP-purchasing power parity:if currencies have same purchasing power in
different countries.eg:if basket goods cost 1$ in USA and R10 HERE,PPP=1 to 10.Got to
do with currencies being undervalued/overval.. against others eg people say rand is
overvalued to dollar etc.
The Terms of Trade:
1) termTerms of Trade : Index of ratio between weighted average of export price and
weighted average of import price =export price index/import price index*100
..if exports prices decrease and imports prices increase ,then country must produce
much more to be able to afford to pay for the imports,or wont be able to .Also visa
versa.The terms of trade index shows the relationship between the two.
2) If the Terms of trade lower=bad /higher =favourable if =1 equal
3)

Page 58 of 106

Page 59 of 106
ECS102-8
CHAPTER 6
: INCOME DETERMINATION IN A SIMPLE KEYNESIAN
MACROECONOMIC MODEL(MACROECONOMICS)
CHECKLIST

Page 60 of 106
-1- Production Income and Spending:

1. term "A" = Spending :Tot./Aggregate Demand,Spending,Expenditure.
2. term "Y" = Production. :(also GDP and even GNI) Tot./Aggregate/ + National
Output,Income,Production,Supply.
3. term "Yf" = Full Employment level of Production
4. In National Accounts -1-Total-inc.,spend. and prod. measuredEx-Post(after occured)-
2-(+A =Y)-3-GDP not = GNI like in macr.theory.
5. In Macroeconomic theory -1-They are measured To Predict policy-Not EX post-2-(+
A not=Y)-3-GDP=GNI=Y
6. Total FOP Income considered= TOTAL Production in Macroeconomic theory
+ national accounts: BUT:
7. Total Spending NOT equal to tot Prod & tot Income in Macro.Theory because if all
income NOT spent(if some saved).
8. term Production Equilibrium: situation where no tendency to change,none
participants have any incentive to change behaviour,things will remain same. if
total prod=income=spending then if all spent no incentive for extra production
because spending is just sufficient to purchase the current product.
9. 3 possibilities for Spending <=> Production : Equilibrium. +Results of the 3.
a. A>Y --Spending > Production =Production & Income will increase
b. A<Y --Spending < Production =Production & Income will decrease
c. A=Y --Spending = Production =Production & income at 'Equilibrium' -no
tendency to change.
10. Reasons for spending> production:

a. savings (from last year used to buy now)
b. credit
11. Reasons for spending < production.
a. saving
12. term Says Law : Y –causes- A old school belief of some economists,:SUPPLY
WILL CREATE IT'S OWN DEMAND.(JEAN-BABTISTE SAY) –there are automatic
mechanisms which keep the economy at full-employment level of income or

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that restore this balance.+allsave/leakback .Advocates:Gov.

Intervention in Economy to stimulate Tot demand unneeded.
. .Equilibrium at: Yf = full employment level of income-where all FOP
are employed fully. .Direction of Causality:Y –to –A
13. term Keynesian Model :A –causes- Y Demand Demand or Spending various
happenings,incl. great depression caused belief to change:John Maynard Keynes in
"general theory of employment,interest &money" wrote
.Advocates: Gov. must intervene at times to stimulate 'Aggregate Demand'.
.Equilibrium at: A=Y or:C+I =Y Aggregate (spending)demand must =
Total income.,can occour at any level iof income,will not necessarily tend towards
full employment by itself,could need Gov. intervention for under employment or
over employment(overtime) . Direction of Causality:A –to –Y
The Basic Assumptions of the Model:
Economy consists of : Only Consumption
HOUSEHOLDS & FIRMS Spending &Investment
only Spending
No Gov No Gov. Spending or Taxes
No Foreign Sector No
Exports,Imports,Exchange
rates,Exchange Rate
Policy,Trade policy,
Prices,Wages,Interest Model cannot be used to
Rates,Money Supply given study the financial markets
or monetary policy
1. term Exogenous variables :variables outside an economic model.not included in

models determining but do influence the model from outside.
2. A=C+I =Y (Consumption is by -only Households +Investment is by -only Firms)
3. Supply is plans of firms,demand is plans or decisions of households(but in
MACROECONOMICS not only PLANS but ALSO actual things bought are counted.
4. Important point:Macroeconomic Theory are devices to Explain(sectors economy)
,Predict(sectors) ,Policy(analyse effects), of various sectors of economy Ex Ante . It
deals with 'Plans and Intentions',not Ex Poste events in past like the national
accounts.
Consumption Spending:-----------------------------------
1. term 4 major types of Consumer goods&services: durable,non-durable,semi-
durable,services.
2. Non-durable- 50% of consumption, Most stable of all ,.Semi-du...+durable–much more
erratic-influenced by change in income and credit
3. households final consumption=60% GDP,98% disposable income85% current income
of househ..
4. term Current income –total income accruing to households
5. term Disposable Income - Income–minus Tax.
6. If plotted on diagram - strong correlation between income &consumption spending.
The Consumption Function
1. term Consumption Function :relationship between TOTAL Households Consumption
Income &TOTAL Spending.Has 3 important characteristics:
a. Consumption increases/decreases as Income increases/decreases(direct
relationship)

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b. Consumption Positive even if Income Zero(shows influence non-income

determinants on spending)
c. Consumption increases Less than an Income increase. (part Saved)
1 GRAPH OF The consumption function.:SHOWS ALL 3
CHARACTERISTICS
• The Line C is called :the Consumption function
• C-BAR is the autonomous consumption.Bar
above C indicates it isautonomous/independant
fromY
• (1)SHOWS CONSUMPTION INCREASE FOR

INCOME INCREASE.Note:Put dotted lines and
p1/P2 c1/C2to show a change in C(consumption)
.. versus a change in Y(income,production or
output).Because C changes less than Y it shows
some increase in income is usually saved ,not
all is spent
• (2)SHOWS term Automomous
Consumption is If Income = 0 then the
intercept Cbar- (with bar on top-autonomous Y)
is the spending /consumption independant of Y-
Income.(eg savings or credit)Regarded as a
MINIMUM level of consumption.
• (3)SHOWS term Induced Consumption is
shown by the slopeC. Because C changes less than Y it shows some increase in
income is usually saved ,not all is spent .
• term Marginal Propensity to Consume:= "c"=change Y(income) over change
C (consumption) Shows the proportion of EXTRA income that will be used for
Consumption ratio
• between change in consumption and change in income-one of most important ratios
in macroeconomics.It is equal to the Slope of the consumption function curve.Lies
between 0<c<1 because Y cannot larger C.
GRAPH OF AUTONOMOUS AND INDUCED CONSUMPTION.
• just show :
• 1-a box shaded for the autonomous consumption from C intercept to right and
explain.
• 2-the triangle below curveand above box for induced consumption.
• 3-The equation of the curve:=C=Cbar +cY
• 4-the slope by a triangle /box with 'c' as slope and' 1 ' at bottom
• SEE page 465 fig 18.2

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The position of the consumption function .

1. Position determined by level of autonomous consumption.If Consumption function shifts-
intercept changes.
2. position determined by-all non income factors=general age population,holdings of
fin.assets,credit cost +availability.
The Equation for Consumption Function.
1. Autonomous consumption: "C-BAR" is the autonomous consumption.Bar above C
indicates it is autonomous/independant from Y.Value of Cbar determines the position of
curve from intercept on the vertical axis.
2. Induced consumption: depends on 2 things:
a. marginal propensity to consume(which gives the slope)
b. level of income(Y)
c=change(C2-C1) in C / change(Y2-Y1) in Y
SAVING;
1. TERM "S"= SAVING
2. Because Y=C+S(income = consumption plus saving) thus NOT
SPENDING=auto=SAVING.
3. marginal propensity toconsume+marginal propensity to savemust=1:so if
mpc=0.75,then mps=0,25
4. if above is true then anything influening one will influence other-and thus -Cbar
=Sbar :why?pg469t
Investment Spending:
1. Investment spending is smaller than consumption spend and most volatile of all
spending types.
2. term capital formation:investment spending called this in 'national accounts'.
3. Investmnt spending is NOT a function of Income. –(show this by a horizontal line on
graph T.Income down T.Investment top ) BUT investment spending does determine
income

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In the simple Keynesian model investment is regarded as

autonomous, in other words, it is independent from the
level of income and output.
It is influenced by factors such as business expectations
and confidence, the interest rate and the expected returns
from investment projects.
An improvement in profit expectations or business
sentiment causes an increase in autonomous investment.
In the diagram the investment schedule shifts upwards and
the vertical intercept of the investment schedule is higher.
THE Equation for the investment function above(income) is I=I'bar'

The Investment Decision:
1. Firms invest in Capital goods to:ONLY earn a profit.-the greater profit-the greater
investment.
2. Profit depends on Cost of obtaining capital Goods,+ and Revenue goods expected to
yield .
3. Money for capital 'That is Not Borrowed' could be invested-so profit from capital allways
competes with interest rates.,whether credit or not.
4. investment is related to the Interest rate,not Income : There is an INVERSE
relationship between RETURN on Investment Spending and Interest Rate. SEE
GRAPH:page 470 18.3—Right shift if better business
expectations/sentiment,left shift if worse.----movement if interest rates
change.
5. factors which promote investment:expectations ,confidence ,interest rates,returns
6. Investment risky :because price goods may fall,insufficient demand goods,tech.
obsolete,wear.
7. term Real Investment=capital goods for production purposes only no shares
etc
8. term Financial Investment =eg shares,bonds,deposits
9. Keynes believed that changes in desired investment by businesses were one of the major factors
that caused changes in the level of output. Investment spending is an inherently risky affair. The
level of investment spending thus depends on the willingness of firms or entrepreneurs to take
chances. Their willingness, in turn, depends on their expectations about future economic and
business conditions.
10. Investment spending, through its impact on aggregate demand, is an important determinant of the
level of income and output
Figure 2 The Investment Function Graph:The level of investment I is inversely proportional
to the interest rate' i ', cet.par.(this is not =equation I=Ibar,but just I : see next graph)

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11.
Interest Rate
=I
Investment Spending
Equation for Investment Function:

1. I="Ibar" represents the investment function :bar to show investment is autonomous to
income(Y).
2. See Income/investmnt graph above for this equation=------------horizontal line---------------
The Simple Keynesian Model of a Closed Economy without
Gov.
Total Spending or (Aggregate Demand.)

This is one of the key
Term Aggregate spending
concepts introduced by John
is the total demand for
Maynard Keynes in The
goods and services in the
general theory of
economy and is given by
employment, interest and
the following equation:
money.
A = C + I + G + (X - Z)
It is still today the core of
most macroeconomic theories
C - consumption
about the determination of the
expenditure
overall level of employment
I - investment expenditure
(and thus the level of national
G - government expenditure
income produced) in a
X - exports
country's economy during a
Z - imports
given year.
1. In the simple Keynesian (more) and IS-LM models aggregate spending is the main
determinant of the level of output and producers of goods and services change their
production plans according to changes in the existing and expected aggregate
spending.
2. Total production =Total Income But not equal to Tot Spend.in macroeconomics(in
Nat. Acc. it is=
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3. term IN THE 3 GRAPHS BELOW "THE CONSUMPTION FUNCTION GRAPH " IS ADDED
TO THE INVESTMENT FUNCTION GRAPH TO GET Aggregate SPENDING FUNCTION
GRAPH.
4. the cons.funct. will increase by cY as consumption increases,:+ the Cbar intercept.
5. Once graphs are added:The vertical intercept is now equal to Cbar + Ibar = Abar .
6. Now-At each level of income and output, aggregate spending A = Abar +cY.
(A=Cbar+Ibar)
7.
0
The 45 Line
1. According to Keynes theory:Equilibrium is where Y=A or where Tot Demand =Tot
Production
2. According to Says theory :Equilibrium is where all FOP are at 'Full Employment
level.'
3. If a line is drawn at 45deg through Origin A/Ygraph and both axes same scale:it
must=Keynes Equilibrium where Y=A :
4. ABOVE 45deg line = A> Y (axes scale same) so Excess DEMAND --Inventories
will FALL=
5. Below Y0 OR A0 = above 45 BUT below Aggregate Spending Function =Excess
DEMAND
6. BELOW 45deg line = A< Y (axes scale same) so Excess SUPPLY ----Inventories
will RISE
7. Above Y0 ORA0 = below 45 BUT above Aggregate Spending Function = Excess
SUPPLY
8. Point 1 :Equal demand production =equilibrium.(see the below graph.)
9. Point 2:demand > supply =excess demand
10. Etc.

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The Equilibrium level of Income:

• Equilibrium –A0 or Y0 occours when demand=supply or PLANNED
spending=PLANNED production or Aggregate spending =Aggregate production.
• If the Investment function increases or the Level of Autonomous Consumption
(intercept up axis)increases then the equilibrium intercept with the 45 deg will
increase( for Production/Income.AXIS And Aggregate Spending/Demand AXIS).
USING GRAPHS
see graph pg 476
1. term "Aggregate Spending Function" A = C+I or ( A=Abar cY )
2. If we combine "Aggregate Spending Function"graph (1) with 45 deg graph (2) we find
the 45deg intercept:All points above/between =excess demand | All points below
/between = excess supply
3. term Y0 = INCOME equilibrium 45 deg intercept . –see dotted line indicating on
graph.
4. term A0 = DEMAND/ equilibrium 45 deg intercept . –see dotted line indicating on
graph.
5. In the diagram it is shown as income level where the { "Aggregate Spending
Function" A = C+I or ( A=Abar cY ) } intercepts the 45 deg line.(0A0=0Y0) At any
other level income it is either excess demand or excess supply and thus an -unplanned
change in inventories:rise/fall
6. IF : Excess DEMAND :FIRMS REACT by expanding their production.
7. IF : Excess SUPPLY :FIRMS REACT by contracting their production.
AGGREGATE SPENDING on vertical axis / and AGGREGATE INCOME
/PRODUCTION on horizontal. for GRAPH;
USING WORDS
1. Where aggregate spending(A) = aggregate income(or production) there is
equilibrium between 2.
2. Where aggregate spending(A) > aggregate income(or production) there is
a. 1-excess demand
b. 2-firms inventories will fall
c. 3-firms will thus raise production
3. Where aggregate spending(A)< aggregate income(or production)....Visa Versa.
USING SYMBOLS/EQUATIONS
1. A=C+I
2. C=Cbar +cY
3. Thus A =I + Cbar + cY
4. BUT Y=A SO : Y=I + Cbar + cY
5. SO : Y-cY=I+Cbar

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6. : work out both sides separately

7. :you get: Y0=ANSWER or the 45 deg intercept(is also A0)
USING NUMBERS:
The formula for equilibrium output: An example
Assuming the following values, the equilibrium level of income can be calculated as follows:
C = 200
I = 300
c = 0,8
The Algebraic Version of the simple Keynesian Model:
EXAMPLE WITH NUMBERS ADDED:
The formula for equilibrium output: An example

Assuming the following values, the equilibrium level of income can be calculated as follows:
C = 200
I = 300
c = 0,8

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Aggregate demand is equal to consumption C +

investment I. Consumption C is equal to
autonomous consumption + the marginal
propensity to consume times c the level of output
Y. Using the values provided C = 200 + 0,8Y.
Investment I is equal to autonomous investment I
= 300.
Aggregate demand is therefore equal to
autonomous consumption + the marginal
propensity to consume times c the level of output Y
+ autonomous investment. Substituting C, c and I
with the values provided, A = 200 + 0,8Y + 300.
By combining the autonomous components and
calling it autonomous demand A, the aggregate
demand function A is equal to 500 + 0,8Y.
Substituting A with 500 + 0,8Y, the equilibrium
condition is Y = 500 + 0,8Y.
Rearranging terms so that Y is on the left side, the
equilibrium level of income Y0 can be solved.
According to this formula the equilibrium level of
income is determined by the marginal
propensity to consume c and the level of
autonomous spending A.
• For equilibrium of Y and A ,we can also write

in special characters: Y0 =#@# Abar
orY0 =1/1-c(Cbar
+Ibar)
• THE FORMULA FOR THE EQUILIBRIUM LEVEL
OF INCOME CONTAINS TWO ELEMENTS:
• -1- {A bar or =C bar+I bar}
• -2- { 1/(1-c)}
• IMPORTANT:These two elements are used
later in calculations.
-7-Impact of a Change in Investment Spending:The Multiplier

1. Only Need to understand for Exams:
a. What the multiplier means
b. How it can be calculated from the formula
c. Why it's size depends on the marginal propensity to consume
d. How it can be represented graphically.
-1-What the multiplier means:
1. This Multiplier is one of central concepts in macroeconomics:#@#*Change in I
=change in Y
2. term The Multiplier : =#@# SPECIAL letter see Pg 483-#@#=1/1-c = change in Y /
over change in A :the Ratio between the eventual change in income and the initial
investment is called the Multiplier . The size of the multiplier depends on the fraction of
the additional income generated in each round that is spent in the next round ,that is

Page 70 of 106
,on the marginal propensity to consume.(c) . ....{For AN investment of R100,if the

R100 is multiplied by the ('marginal propensity to consume' or 'c=C/Y' or c = a change
in consumption /a change in Income) ,that is what part/portion of the original amount
that will statisticly ,be re-spent by the receivers of the income((((in form of FOP
payments))))Then of that % re-spent on "C-consumption" , 're-spent amount'* c is again
re-spent.Eventually process works itself out. }
3. Remember Intercept A bar =C bar +I bar
4. For equilibrium of Y and A ,we can also write in special characters: Y0 =#@# Abar
or =1/1-c(Cbar
+Ibar)
5. The "marginal propensity to consume" is only c because we deal with households
+firms ONLY.
6. Saving,Tax,Imported goods make multiplier less.
7. 'Paradox of Thrift'-if all households save,less will be spent(less demand) and thus less
produced(supply).
-2-How it can be calculated from the formula
1. Formula for multiplier is: change Y = 1/1-c (change I)
2. Thus multiplier is 1/1-c
-3-Why it's size depends on the marginal propensity to consume
• The greater c the greater the multiplier because the greater c the more of each
phase of income is again spent-less is saved.
-4-How it can be represented graphically
GRAPHIC REPRESENTATION of MULTIPLIER PROCESS: page 480 t
• First step to UP is the actual investment itself causing a demand for : the goods
&serv. the investment was initially aimed at(eg the soccer stadium)
• Second step to RIGHT is producers producing the goods for the step 1
demand+getting paid
• 3 step is marginal propensity to consume to UP is eg 4/5 * 'got paid amount
from stadium' to go up +create new demand waiting for producers to fulfill.
• 4 step is producers produce for demand +get paid...to RIGHT then carries on
and on
Change in autonomous spending
An increase in autonomous spending, for instance
investment spending, causes a parallel upward shift,
equal to the increase in investment of the aggregate
demand schedule. The vertical intercept changes to
A1and the aggregate demand function is A = A1 + cY.
At the initial level of income, aggregate demand now
exceeds the level of output by the change in
investment spending. This is represented by point
a. Due to this excess demand, inventories decrease
and producers increase their production and
consequently the income of households increases.
This is indicated by the increase in income and
production on the horizontal axis. The increase in
production and income is equal to the increase in
investment.
Out of this increase in income households increase
their consumption spending and aggregate demand
increases by the marginal propensity to consume,

Page 71 of 106
times the change in income. This is indicated by

point b. At point b aggregate demand still exceeds
income and output but the gap between aggregate
demand and output is smaller as indicated by the
vertical distance between point b and the 450-line.
The process continues

As long as aggregate demand exceeds the level of
output, inventories decline, producers increase their
production, income of households increases,
consumption spending rises, causing a further
increase in aggregate demand.
Note that the gap between aggregate demand and
the level of income and output is smaller after every
round of an increase in output.
This process continues until a new equilibrium is
reached where aggregate demand is equal to the
level of output. This occurs at point E1 with an
equilibrium level of income and output Y3 .
The multiplier effect

Comparing point E1 with point E2, it is clear that the
increase in investment spending causes an increase
in the equilibrium level of income and that the
increase in the equilibrium level of income and output
is greater than the increase in the initial investment
spending.
This is due to the multiplier which is equal to1/1-c.
The change in income, due to the increase in
investment spending, is equal to the multiplier times
the change in autonomous investment.
(more)
Put a section with all this at beginning of the notes after contents::::
All Multipliers and index ratios:
Chapter 1:

Page 72 of 106
ECS102-8
CHAPTER 7
:KEYNESIAN MACROECONOMIC MODELS INCLUDING
THE GOVERNMENT and THE FOREIGN SECTOR.
CHECKLIST

Page 73 of 106
1-Introduction:
1) As the leakages increase so multiplier becomes smaller.
2) Extra FLOWS added to model:
a) G=Gov. Spending
b) T=Taxes
c) X=Exports
d) Z=Imports
3) ASSUMPTIONS WHICH STILL APPLY:
a) (A) Interest rates given(exogenous):(cannot analyse changes in fin. markets)
b) (B)Prices Exogenous.(cannot analyse inflation ie:CPI)
c) (C)Wages Exogenous.
4) Economic theory has 3 purposes:
a) 1-to explain -2-to predict ?happen if something changes 3-analyse economic
policy.
2-Introducing The Government into our Model:
1) We must consider impact of Gov.Spending (G) and Taxes (T) on
a) The level of Aggregate Spending (A) :=(+Gbar)
b) The Multiplier (#@#) :=(T decreases it) =1/1-c(1-t)
c) Equilibrium Income(Y)
2) term Determinants : We must consider how determinants(G)Gov. spending & (T)Taxes
can be used as policy instruments to influence (Y) =Income. : T &G are main
ingredients of BUDGET and main instruments of FISCAL POLICY.
3) We are Mainly interested in influence on INCOME :Y.

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1-Government Spending:(G)
Government Spending VS Income: G vs I
1) During 70-90' Gov spending increased-
housing,defence,education,health,safety &security.
2) term Gov.Spending is a Political Issue-causes
SHIFT in curve and thus is Autonomous to Income(Y):Thus
G=G bar (ie:autonomous.)
3) horizontal line,independant ,political
issue,autonomous,upward shift,vertical intercept.
4) Summary:addition of (G )
a) raises level of Aggregate Spending
b) leaves multiplier unchanged
c) raise equilibrium level income Y0 cet.par.

Page 75 of 106
Equilibrium level of government spending:

Gov.Spending added to (A)Total Spending VS Income: A vs I
1) Adding government spending G, which is independent
of Y, causes an upward shift, equal to G, of the
aggregate spending curve. The equilibrium level of
income increases from Y1 to Y2.
2) Government spending is part of aggregate spending (A = C +
I + G) and has a direct impact on the equilibrium level of
income and output.
3) Government spending G is the purchasing of goods and
services by the government and is an instrument of fiscal
policy that can be used to influence the level of output and
income in the economy.
4) The aggregate spending function without government spending is:
A = C + I = A + cY. Autonomous spending is A = C + I and is
represented by the vertical intercept A1
5)
Equilibrium level of Gov.Spending;

Gov. Spending influences the multiplier effect.
1) The addition of G will increase income(Y) by G * Multiplier
2) To calc: EQUILIBRIUM CONDITION: we start with
3) Y=A(where eqilibrium is)
4) so :Y=C+I+G because (A=C+Ibar+Gbar)

8) so:Y(1-c)=Cbar+Ibar+Gbar
9) THUS: Y0=1/1-c(Cbar+Ibar +Gbar)
10) General formula can still be written: Y0=#@# (Abar)
12) .Where:#@#=multiplier , Abar = total
autonomous spending
13) Gov. Spending is a powerful tool to raise level of production and income
and increase employment. However addition of prices,wages ,interest
rates and the foreign sector makes tool less powerful from other influences.
All the Formulas from Sub-Heading:

14) Y=A(the equilibrium 45 deg line)********
15) so :Y=C+I+G because (A=C+Ibar+Gbar)*********
16) and :C=Cbar +cY (consumption curve equation)*******

20) so:Y(1-c)=Cbar+Ibar+Gbar
21) THUS: Y0=1/1-c(Cbar+Ibar +Gbar)********

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22) General formula can still be written: Y0=#@# (Abar)******

24) .Where:#@#=multiplier , Abar = total autonomous spending
25)
2-Taxes(T)
1) To Spend Gov. must levy taxes.
2) Taxes are a Leakage and Gov.Spending is an injection into circular flow of goods and
services in the economy.
3) term Disposable Income :(or after tax income)-taxes reduce disposable income-and
reduce 'C'
4) term Direct/Indirect Influence- Income &Spending:Taxes reduce C
indirect,spending=Sdirect
5) personal income Tax and Vat are the 2 most important Max sources of tax in rsa for gov.
6) term A Proportional tax rate for the entire economy per year is realistic-Only
Progressive/regressive per bracket.
7) term extrogenous variable :Tax rate is politicly determined ,also tax REVENUE
=extrogenous.
1) Graphicly the introduction of a tax rate

SWIVELS the CURVE downward,or upward for a
lesser tax rate.
2) In the simple Keynesian model taxes T are
a certain proportion t of income Y. The proportion
is called the tax rate t. The slope of the curve is
determined by the tax rate
Disposable income/Tax Calculation for Formula.

a) term Tax Rate: T=tY (where t=tax rate%-proportional !!!!!)******
b) Yd =Y-T (Disposable income = Tot. Income –Tot. Tax subtracted)********
c) So: Yd=Y-tY (because T=tY)
d) So: Yd=Y(1-t) *******
e) NOW WE MUST MODIFY 'Consumption function' to leave out taxed part of Y- so for
disposable income :C=Cbar +cYd (Y(d) is disposable income)*********
f) So: C=Cbar +cYd
g) so:C=Cbar+c(Y-Yt) (because Yd=Y-tY from point(c)above)
h) so:C=Cbar+c(1-t)Y *****
i) term:The new marginal propensity to consume is c(1-t) with taxes included.
j) term The slope of this curve is c(1-t) which is allways smaller than c,slope was "c"
originally without introduction of taxes.
Multiplier with Taxes:
Multiplier without Taxes= #@#= 1/1-c

1) Multiplier with Taxes = #@#=1/1-c(1-t) (Tax Reduces size of Multiplier through
reducing size of Marginal Propensity to Consume.)

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2) Graph Consumption function or & Aggregate

Spending function 'SWIVELS' downwards from
extra tax/gets flatter.,or up from less
3) The introduction of a proportional tax thus:

a) LEAVES AUTONOMOUS spending unchanged.
b) REDUCES THE MULTIPLIER #@#
c) REDUCES THE EQUILIBRIUM LEVEL OF INCOME Y0, Cet.Par.
The Equilibrium level of Income in an Economy with a Government
Sector.
1) increases the level of Vertical Intercept :All the
completely Autonomous spending: from Abar
= Cbar + Ibar to Abar = Cbar + Ibar + Gbar
2) The original aggregate spending curve without a
government sector is indicated by A1 with an
equilibrium income of Y1. With the introduction
of government spending, the aggregate spending
curve shifts parallel upwards to A2. With the
introduction of a proportional income tax, the
aggregate spending curve becomes flatter, as
indicated by A3. The eventual equilibrium level of
income is indicated by Y3.
Formulas: for sub-heading:

1) from A = C + I to A = C + I + G.
3) A=C+ Ibar+Gbar (aggregate spending)
5) SUBSTITUTING:
a) Y=A
b) Y=C+Ibar +Gbar
c) Y=(Cbar +cYd)+Ibar+Gbar
d) Y=(Cbar +c(1-t)Y))+Ibar+Gbar
e) Y-c(1-t)Y=Cbar =Ibar+Gbar
f) Y=(1-c(1-t))=Cbar +Ibar +Gbar
g) Y0=1 /1-c(1-t) *****(Cbar+Ibar+Gbar).
h) The equilibrium level of income can also allways be obtained by : #@# multiplied by
Abar (P.S. Abar is also vertical intercept or Autonomous spending.)

Page 78 of 106
6) term Induced Consumption= induced by an increase in income :induced to spend so

much more.
Fiscal Policy:
Yf=(Y full)= Income equilibrium level at which full employment is reached.
1) term FISCAL POLICY : We must consider how determinants(G)Gov. spending &
(T)Taxes can be used as policy instruments to influence important economic
variables such as (Y) =Income or Production : T & G are main ingredients of
BUDGET and main instruments of FISCAL POLICY.
2) The Gov. can Increase /Decrease Equilibrium level of Income or Production. BY:
a) Direct:Increase /Decrease Gov.Spending and multiplier will effect large change.
b) Indirect:Increase /decrease taxes and raising induced consumption spending and
multiplier.
3) The formula for How much Gov.must spend to make a certain change=
a) ....^ Y =@ ^ G (like prev.example but now with 'G':^Y=@Î)(where ^='change'and
@=#@#)
b) so:^G=^Y/@ --work out from there...
4) 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.
5)
1) The Formula is : formula.=^Y=@^G

:so:^G=^Y/@.
2) The level of full employment is presented by the
YF line. The economy is in equilibrium at point E1 which
is point of less than full employment and unemployment
is experienced
3) Using fiscal policy, that is the use of government
spending G and taxes T, it is possible to increase aggregate
demand in order to reach full employment.
4) An increase in government spending increases
autonomous spending and via the multiplier it increases
aggregate demand and the level of output. In the diagram the
aggregate demand curve shifts upwards and a new equilibrium
is reached at the level of full employment.
5)
2 -Introducing The foreign Sector into the Model:The Open

Economy.
Introduction:
1) Matters kept simple by assume X&Z are autonomous(unaffected by change in Income)
2) The change in Imports (Z) Exports (X)

a) level aggregate will affect positively (+)
spending:A
b) multiplier : Will NOT affect this

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@
c) Equilibrium level income Will affect by multiplier
:Y effect+
Exports &Imports:
3) Exports &Imports Autonomous to INCOME(Y)=horizontal line=expressed
X=Xbar /or/Z=Zbar
4) BUT imports can be induced-ie they can be affected by (Y)income
5) The positive relation between imports and economic activity in sa is one of stongest
macroeconomic relationships in the country.
6) EXPORTS are an Injection into economy & IMPORTS are a leakage.
7) The Formula for Imports/Exports is: A +C + Ibar+Gbar+(Xbar –Zbar)
8) term Net Exports usually referred to as =(X-Z)
Graphs of the horizontal line of import/export function against tot.income or
production.
9) If Net IMPORTS greater-Net Spending/demand less(from multiplier local re-spending)/////

if Net Exports greater net Spending more. (THIS IS TOPSY TURVY----WATCH OUT HERE
ALL VISA VERSA)
10) --Multiplier * Net exports-- give change in income equilibrium for any one spot
calculation-either-or+
Formulas for expots/imports.
6) Net Exports usually referred to as =(X-Z)
7) from A = C + I to A = C + I + G.+(X-Z)
9) A=C+ Ibar+Gbar +(Xbar-Zbar) (aggregate spending)
11) 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))
1) In diagram a the autonomous net export function is given. In

diagram b the impact of autonomous net exports on aggregate
spending and equilibrium income will be illustrated

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2) In diagram b the aggregate spending curve A0 represents aggregate spending C + I + G and the
corresponding equilibrium level of income Y0 without a foreign sector.
3) When the foreign sector is added, the vertical intercept
changes.
4) If net exports are negative, as indicated by
(X-Z)1, autonomous aggregate spending A declines and the aggregate spending curve
shifts downwards and the equilibrium level of income decreases
5) It can also be visa versa depending on which way 'Net exports' leans to positive or
negative.
Fiscal Policy inthe Open Economy:

• Once understnd imports not Autonomous-Gov.spending gets less powerful.(&multiplier
gets smaller.)
• Also-bal . of payments account:expansionary fiscal policy should raise income and
imports and reduce net exports.This can adversely affect current account.
• 'Net exports'(inp-exp) is basicaly the Current Account in Gov. accounts.

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ECS102-8
CHAPTER 8
: MORE ON MACROECONOMIC THEORY AND POLICY
CHECKLIST

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The Aggregate Demand Aggregate Supply Model 8.1sp511t
1. REMEMBER ALL GRAPHS HEADINGS FOR AXIS's ARE ONLY:TOTAL

PRODUCTION/INCOME AND TOTAL PRICE LEVEL and (ie MACRO economic=!!!!!!
TOTAL!!!!! NOT MICRO) all Curves MUST be Labeled :AS0-AS0 ////AS1-AS1 and
AD1-AD1 etc(NOT S1-S1 or D1-D1!!!!!!!!!!!)
2. .When you go further than "Keynesian models" you must include:Interest(monetary
sector),Wages +variable prices. THEN the most popular model today for this is the
:AdAs model.
3. "Ad-As"=Aggregate demand & Aggregate Supply models.=Macroecon.-NOT
Microecon.---Demand /Supply curves
4. AdAs-deals with:
a. General level of PRICES : eg From :C.P.I. ----NOT single goods prices
b. Total Prod. goods& serviceseg:From :GDP.-----NOT single goods production
5. BUT Macroeconomy cannot just be seen as SuM of all Micro-econ. part,dosnt work.
6. Production still assumed =Income same as keynesian model. but prices
=spending here
l
Differences Keynesian Differences AdAs model Implications for AdAs
Prices given Prices Variable can study inflation
Wages given Wages Variable supply can change separate to
demand-wage change impact on
production,income
,employment/unempl. ,&inflation
be studied
interest rates &money supply Interest rates Variable +money can used study monetary sector
Given supply can change &monetary policy
Spending (/-Demand) is driving level econ. activity determined Changes from supply side can
Force determines economic by Demand +Supply are also taken into
activity account(maybe prices low or no
raw materials available)
Production is only Nominal production is REAL production PY =nominal production
because price level cannot P= REAL production
change-any spending + means
prod +,(eg :not maybe prod less
because price maybe also less )

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7. This is Law of demand&supply:Price Increase= Demand DOWN &Supply UP and

Visa Versa
8. NON-PRICE DETERMINANTS= cause Shifts in curves//PRICE Determinants causes
Movements on
THE DIAGRAM OF ADAS CURVE:.
9. The AD-AS model is the most popular model in
macroeconomics.
10. The aggregate demand curve (AD) slopes downwards from left
to right, indicating an inverse relationship between price level
/and total expenditure (or aggregate demand). (more)
11. The aggregate supply curve (AS) is primarily governed by the
cost of production and normally slopes upwards from left to right.
(more)
The Aggregate Demand Curve.

1. Determined by anything that influences Aggregate spending in economy:
a. Same as in Keynesian model:BY:i (=interest rate)+C,I,G,T,X,Z
(householdconsumptionetc)
b. Also by anything that influences these factors.
i. (i)=interest rate
ii. (C) =Household consumption
iii. (I)= Investment
iv. (G)
v. (T)
vi. (X)
vii. (Z)
2. MOST IMPORTANT factor =(i)= interest rate:influences (C)consumption
&(I)investment spending
3. NON-PRICE DETERMINANTS= cause Shifts in curves//PRICE Determinants causes
Movements on
4. FISCAL POLICY=
a. Taxes +
b. Gov. Spending
5. MONETARY POLICY=Interest rates
6. Contractionary Gov. Policy = A Demand curve SHIFT LEFT (less D for any one
price)
7. Expansionary =Gov. Policy= A Demand curve SHIFT RIGHT(more D for any one
price)

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Change in non-price factors Shift of the AD curve

PRICE CHANGES Movement on curve
EXPANSIONARY POLICY Shift Right/Upward
CONTRACTIONARY POLICY Shift Left/Downward

Autonomous consumption C
R
increases
Investment spending I increases R
Government spending G
R
increases
Taxes T decrease R
Interest rate i decreases (which
causes an increase in investment R
spending)
Net exports (X-Z) increase R
Autonomous consumption C
L
decreases
Investment spending I decreases L
Government spending G
L
decreases
Taxes T increase L
Interest rate i increases (which L
causes a decrease in investment
spending)
Net exports (X-Z) decrease Shift Left
Changes in Aggregate Demand:

1. 3 different types of slopes of Supply curve cause;
a. In recession:=where Aggregate SUPPLY curve is very Flat=+ demand causes
+production but same PRICE,
b. In Very good times= of Full Employment +demand causes same (or little)
production but –PRICE(production cannot expand=full capacity)
c. In medium times =normal sloping supply curve BUT THE PROBLEM is;
i. + Increase in Demand: will cause a +in production (and +
Employment) +increase in price (and + Inflation)
ii. – Decrease in Demand: will cause the opposite.
2. Thus if Gov. tries a contractionary policy-cause unemployment///BUT if Gov. tries
Expansionary policy-cause inflation +price increase.
a. THUS gov. must choose which is worst-unemployment or
price/inflation to make a choice.
3. term Demand Management: the management of 'demand' by the Gov. using
Monetary and Fiscal policy.
4. term Trade off:the Government plays with DEMAND by using : (i) / (G) / (T) . by
using Monetary & Fiscal policy: trade off between Demand + or – for Gov .Either price
/inflation UP & Employment UP OR price/inflation DOWN & EmploymentDown

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The Aggregate Supply Curve

1. Supply Curve primarily Governed by COSTS of PRODUCTION=Price FOP +Productivity
2. The AS curve derived for given set factor prices (rent, wages and salaries, interest
and profit) and prices of imported capital and intermediate goods, and for a given
level of productivity,change in any of these factors causes shift of the AS curve
3. Supply Curve NOT usually affected by Expansionary +Contractionary Policies
of Gov or the SUPPLY curve.(exept for interest rate does affect costs of
production.)
4. PRICE factors cause : MOVEMENT on SUPPLY CURVE
5. NON-PRICE factors cause :SHIFT of SUPPLY CURVE.
Changes Shift of the AS curve
Prices of factors of production
left(or Upward)
increase
Prices of imported capital and
intermediate goods (eg OIL) L
increase
Productivity decreases L
Weather conditions deteriorate L
Prices of factors of production
R(or Downward)
decrease
Prices of imported capital and
intermediate goods(eg OIL) R
decrease
Productivity increases R
Weather conditions improve R
The Slope of the Aggregate Supply Curve:

1. keynes not concerned about Inflation when consider fix Great Depression –because
curve flat at beginning –can have NO PRICE INCREASE for MUCH production increase
in supply curve.
2. The AS curve can also be depicted as having a flat part, a rising part and a vertical part.

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The level of full employment( of all FOP) is represented by

YF.,Y1 = point to which no price increase/prod.incr.
The flat part AS curve represents economic conditions that

very depressed –there is a substantial excess production
capacity. This implies that production can be expanded
without putting significant pressure on the price level. In other
words, expanding production from the origin to Y1 does not
require an increase in the price level.
The rising part of the AS curve indicates that there is little or no

excess capacity in the economy, that is when most factors of
production are almost fully employed. In this part of the curve,
an increase in production is associated with an increase in the
price level.
The vertical part of the AS curve indicates that full employment

has been reached and production cannot be expanded beyond
this level.
Changes in Aggregate Supply

1. term:Stagflation: Stagnation +Inflation :{{{{ Stagflation occurs when an increase in
the cost of production not only results in higher prices but also in lower production,
income and employment and higher unemployment. This was a term coined in the
1970s for the twin economic problems of stagnation and inflation}}} From an
upward SHIFT in Supply curve specificly due to :is caused by any increase in
production costs of TOTAL PRODUCT ie GDP etc. eg:{price of oil/other inputs/etc}
or {wages without corresponding production increase},or {profit margins}---causes
(1) LESS Employment,(2) LESS Production =STAGNATION and HIGHER PRICES =
INFLATION.
2.
3. term :Supply Shocks:Where A SUPPLY curve SHIFTS UPWARD:ie could cause
stagflation—presents Gov. difficult decision—If expansionary Policy used to increase
Demand to in turn increase employment(stop stagnation part of stagflation)-then
Inflation will go even more up because higher demand curve SHIFT Up =Higher
Equilibrium.BUT if Contractionary policy is used then opposite (eg oil crisis of 73's-
expan.=worst since 50's war korea inflation //then of 79's –contr.-worst unemp.
=recession since ww2) SOLUTION= TO: lower wages+production costs ,including an
Anti-inflationary "INCOMES POLICY"(very difficult-keep wages growth balanced with
productivity growth.)-this will cause OPPOSSITE SHIFT(right /downward) of Supply
curve.

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The Monetary Transmission Mechanism

1. term:Monetary Transmission Mechanism.:it is the way or mechanism in which
changes the Monetary sector are transmitted to the restof the economy:escpecially
changes in the interest rate=(i) Affected:aggregate
demand,supply,production,income,price level.
2. In countries where money supply undeveloped-old 'Gov.money-supply' not interest
reasons used.
3. In TODAY we say Changes in the Monetary sector are triggered by changes in the
Interest Rate=(i) which is for all practical purposes seen as controled by Gov. policys.
Links between Interest Rates , Investment Spending and Rest of
Economy .
1. when reserve bank adjusts repo rate-all othershort term interest rates eg;prime
overdraft rates ,of banks change in same direction.Our models represent all these
with a single interest rate=(i)
THE MONETARY TRANSMISSION MECHANISM DIAGRAMS (3 OF)

• From Diagram 1 TOP LEFT- It goes to diagram 2 bottom=KEYNES Method and
also to Diagram 2 bottom right =AdAs Method.
• A change in the interest rate leads to a change in investment spending, which in return
causes a change in aggregate spending (demand) and consequently total production
and income change.
• The impact a change in the interest rate has on the level of output, will depend
on the kind of model that is used.
1. Diagram top left illustrates a change in investment spending due to a change in
interest rates.FROM THIS DIAGRAM WE GO TO EITHER ONE OR BOTH OF THE OTHER
Following two:
2. In the simple Keynesian model, where prices and wages are given, it has
the full multiplier effect; ie {:#@# * Î = change in Y }( change in (i)- causes
change in (I) - causes change in (A) - causes change in (Y) or in words :a
change in interest rates causes a..^.in Investment causes a.. ^..Aggregate Spending
causes..^.in Aggregate Income/ or Production.
3. In the AD-AS model, where prices and wages are flexible, the multiplier effect
is smaller because part of change in production/income is here taken up by a change
in Price.Here in Symbols which we must know how to write out: ^ i –(arrow)-^ I--Â--
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^ AD--^Y and-- ^P or in words :a change in interest rates causes a ^ in Investment

spending AND a ^ in Aggregate spending which both then causes a^ in Aggregate
Demand causes a ^ in Both (1) Production / Income and (2)a change in Prices.(split in
P or Y depends on Slope of demand curve)
EXEPTIONS TO THE RULE:
1. If investment demand curve(Diag.1 ) is ---vertical,or completely inelastic---then it will
not affect the Investment spending or any of the rest at all.
2. If the slope of Demand curve is flatter-more effect will happen to QTY than to PRICE
thus a Expansionary policy will have more effect on stimulating economy(not
inflation) BUT:Steeper=Contractionary more effective-more Price/(inflation down
quick) less QTY/Jobs-
1left
2left bottom
3right
Monetary and Fiscal Policy in

the AdAs Framework.
Expansionary and Contractionary Monetary and Fiscal policy.

1. term Demand management:Fiscal +Monetary policy together is called this
sometimes.
2. term Neutral Monetary &Fiscal Policy:wher Gov. does none of Expans. or
Contractio. Policy.
3. If the slope of Demand curve is flatter-more effect will happen to QTY than to PRICE
thus a Expansionary policy will have more effect on stimulating economy(not
inflation) BUT:Steeper=Contractionary more effective-more Price/(inflation down
quick) less QTY/Jobs-
Monetary and Fiscal Policy lags
1. Four types of delays/lags in Mon. &Fisc. policy are possible:

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a. term Recognition lag:Takes time to recognise & measure changes in

Economy-eg compileGDP ...Same both Policies
b. term Decision lag:Time taken to make decisions by Gov.
.. Fiscal(politics/tax/Spending)-LONG ,Monetary(SARB-
economists,meetoften4/yearSHORT
c. term The Implemantation lag:Takes time for Gov. to put decision into effect
... ..Fiscal-Long-tax 1ce/year,politics etc,Monetary Short-professionals,eg :repo
rate same
d. term the Impact lag:=OUTSIDE LAG(inside lag is all other 3)time for
effect to show in economy after implementation:Monetary-Long:12-18-24
mnths repo rate full effect lag,Fiscal=Shorter(Eg: Gov. spend)
-This is why economists call for more neutral gov. policy+just a balanced
budget-the lag can cause the wrong effect to happen (at wrong time)
The relative effectiveness of monetary and fiscal policies:
1. Both policies should be used together to influence economy.
2. Both policies are important instruments in stabilising demand.
3. Fiscal policy: better to stimulate a depressed economy.
4. Monetary Policy; better to dampen a overheated economy
5. term:Intitutional features:Fiscal=political=more used buoy
demand//monetary=Reserve Bank=more conservative
ECS102-8

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CHAPTER 9
: INFLATION:
Introduction
• often described as public enemy no. 1.
• since ww2-prices of all goods increased alot

Page 91 of 106
Definition of Inflation:
1. term: INFLATION: A Continuous and Considerable rise in Prices in General.
a. 4 Aspects to This Definition of Inflation:
i. Neutral Definition:Not state Causes(To stop wrong policies from think
only 1cause
ii. Continuous /ie :a Process, (not only 1 increase in price but many
constant ones)
iii. Considerable: if only 1% 0r 2 % per year could mean a quality better
incr. etc.-not necessarily inflation-for inflation it must be quite
considerable.
iv. General/ or average price level increase-not just 1 good(notfrom eg
asupply-/demand+)
The Measurement of Inflation:
The Consumer Price Index.

12. 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
13. 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.
14. 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.
15. Price increases ie Inflation erodes the real value or purchasing power of a fixed
nominal amount.
16. 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 .)Capital & Intermediate goods excluded.
17. term Inflation RATE=6% or 9%: If you divide this years CPI by Last years CPI * 100
(the percentage of last years prices).Inflation is allways expressed as an annual
rate.You get the inflation rate ie:not 127%-105%----BUT 127% /105% *100=6% or 9%
18. TO construct the CPI ,Stats SA must :

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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 Services
=50 % of the CPI B_Prices are collected by
questionaire sent to 2200 retailers-110 000 quotations per month and info.
double checked.,Prices used are first 7 days of month.
19. CPI available 2nd half of following month.
20. Used to calculate inflation.
21. large base 1500goods means cpi is fairly accurate.
22. PPI=Production price index= prices when leave factory,Imports when enter
country,Not services,includes capital & intermediate goods.-when ppi increase cpi
follows some months later.-Supposed to be Cost of production.eg Rand depreciates-
inported capital goods +intermediate goods increase- ppi increase immediately-Cpi
few months later-2002 cpi increase main reason!!
23. Inflation Rate Calc. using :Implicit GDP/or GNE or/GNI deflator:Nominal/real
GDP used to calc. inflation.,using prices change themselvesBetter to use GNI or GNE
implicit deflator to calc. inflation because they do not exclude imports like gdp.
The Effects of Inflation:
1. There are 3 effects of Inflation:
i. term Distribution Effects:Distribution of Income & Wealth amongst
various participants in economy.: do not hurt overall performance of
economy-only some players,can be counteracted by linking tax
/debt/pensions to CPI .
1. Inflation benefits borrowers (debtors) at the expense of lenders
(creditors) unless interest rate higher than inflation :Basic Rule is
:loss of real value in all amounts loaned by the lender: Because
when he gets his money back he does not receive full value of 10
000ie: CPI 1998/CPI 1999 * 10 000 = actual value received, unless
if interest rate is more than inflation.(&visa versa.)
a. term Real Interest Rate= The difference between nominal
interest rate and inflation rate. (negative=less than inflation,
+ = more than inflation) Between debtors & creditors-if
interest rate higher than inflation rate redistribute from
borrower to lender,BUT if Interest Rate less than inflation
then borrower wins more redistribution.: ..............
Redistribution of Income=If interest beats inflation-
redistribution of income falls away and :Redistribution of
wealth happens: wealth is redistributed:ie the repayment of
wealth causes borrower to loose. eg:Gov
securities,Bonds,some pensions& some insurance policies.

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b. People with mortgages are debtors who benefit from inflation

because the real values of their loans decreases as
prices(inflation) increase.
2. Inflation distributes From elderly to young: because young
borrow more and (houses etc.) and elderly have fixed nominal
incomes(pension/or interest),so young win from assets bought with
borrowing have more value from inflation,and elderly's fixed
nominal incomes loose value,so flow-away
3. From to Private Sector to Gov. :Gov. is allways a Net borrower
and so inflation benefits Gov.(at expense of holders of public stock.
depends on Real interest rate)
4. From Taxpayer to Gov.:
a. term Bracket Creep-or The Fiscal Dividend:(from moving
to higher tax bracket)taxpayers nominal incomes rise even if
real income stay same from inflation,but Gov. gets more More
Tax due to PROGRESSIVE income tax system.higher
wages so RATE higher
b. Economic effects:
i. Entrepeneurs/managers get more concerned with inflation than new
production opportunities
ii. Speculative investment at cost of production investment
iii. Reduce Saving-not going to be worth much
iv. Balance of Payment problems:exports become more expensive- so less
exports-,also import competing industries more expensive....so more
imports:To fix this one depreciates the rand,but in RSA mainly capital &
intermediate goods imports so production costs will rise.RSA inflation rate
must stay in tune with most important trading countries of the worlds
inflation rates or Problems like this.
c. Social & Political Effects:
causes unrest-taxi fares up-difficult keep up with all purchases - groups blame each
other-eg Lenin
Hyperinflation-the Greatest Cost of Inflation.
 people try to be compensated for higher cost of inflation:want
higher wages,rents,"Expectations" cause- producers raise prices to
manage to purchase inputs for production,or to benefit from
inflation,people rush to buy goods before prices go up-causes higher
prices from more demand etc.
 DEFLATION:can cause factory close/layoffs –cannot recoup
expenses from inputs,farmers also cannot recoup costs,borrowers etc
loose-money paid for house etc is double current price etc
The Causes of Inflation:
Demand- Pull and Cost-Push inflation.

1. Difficult distinguish between the two-become intertwined in inflation process.
2. Both cannot :
a. ignores possible linkages between the Aggregate Demand&Supply
b. Only explain price level-not process of inflation.

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Demand-Pull Inflation.
1. When aggregate(macroeconomics)-demand UP but Aggregate supply remains
unchanged-prices go up.-'too much money chasing too few goods"-Causes prices to
go up.
2. Can be caused by any of components of AGGregate Demand:
a. (C)-consumption spending-lower interest rates(cheaper credit)
b. (I)investment sending-eg from lower interest rates,or better business
sentiment.
c. (G)Government spending-eg provide better services to population,or to combat
unemployment.
d. (X)export earnings- higher earnings cause more spending by earners.
3. MONEY SUPPLY increase :Allways accompanied by increase in money supply.-
allways related to increases in aggregate demand components.
4. Restrictive Monetary and Fiscal policies by Gov. used to keep Demand-Pull
inflation in check.: Can cause Unemployment-decreased
Production,decreased,income
a. MONETARY:Higher interest rates to make credit more expensive,& reduce
availability of credit to various sectors(I)/(C) of the economy.-left Shift+
b. FISCAL:reduce Gov. spending,and /or increase taxation.-cause leftward shift
5. Illustrated by AdAs model.:increase in aggregate demand cause a shift to right of

demand curve. Further increases in aggregate demand shift the AD curve to the
right, for instance to AD4. At an equilibrium point of E4, the price level is higher but
the level of output is still at the level of full employment YF. Increases in aggregate
demand beyond the level of full employment can only lead to price increases
because prod.cannot increase=Yf (full employment of FOP).
Cost–Push Inflation:
IF production costs increase-
then Supply Curve Shifts to left from higher prices at each Qty.supplied.
c. 'E'quilibrium goes up-Prices UP & Production&Income down.(+unemployment)

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3. Stagflation:Stagnation in: production/income and Inflation from: higher prices.

4. Cost–push inflation caused by:
a. Wages increase-(60% of cost of GDP)
b. Cost of imported Capital & Intermediate goods (eg Oil,) from currency depr. or
price incr
c. Increase in Profit margins.
d. Decreased productivity.
e. Natural Disasters.
5. Measures To take to reduce this:
a. CANNOT be Combated by restrictive Fiscal & Monetary policy's.
b. incomes policy=to keep wages low

Page 96 of 106

Page 97 of 106
ECS102-8
CHAPTER 10
: UNEMPLOYMENT:

Page 98 of 106
Unemployment:
• Unemployment & Inflation are referred to as the twin evils of Macro-economics.
• RSA : 20/30% 94' - 30/40% 2002' -25% 2007 unemployment of Labour force /
Economicly active/able Participants.:high & rising unemployment is most serious of
RSA social troubles.
The Employment Pool:
1. Stock Concept-Level or Rate of Unemployment is a stock.
2. Flows -People Entering & Leaving the unemployment pool.
3. 4 reasons to enter unemployment pool:
a. New entrant still looking for
b. leave specially to look for another job-but still searching
c. laid off(retrenched till demand picks up)
d. firm closes-no hope of re-employment.
4. 3 reasons to exit unemployment pool
a. hired
b. recalled from a lay-off
c. get discouraged and stop looking for work.
Measuring Unemployment.
1. Very difficlt to measure unemployment because of:seasonal/housewives/those not
seeking work but able/criminals/hawkers-self-employed etc. ....so different. estimates
done can easy differ alot.
2. term Rate of Unemployment=The % of the EAP –Economically Active Population –
(those Willing & Able to work or the Workforce/or Labour force)NOT working.
3. Various ways of Obtaining Data on Unemployment.
a. Official Census Data : bad side –1-Once per 5 years -2-Lag before publication
of data.
b. Unemployment Register :bad side :only very few register-ie those collecting
UIF.
c. Subtract (1) subsistence agriculture (2) informal sector(hawkers) (3) In
d. Formally employed FROM: EAP(econ. activ. popul.).
e. Statistics S.A. estimate-bad- controversy between strict or expanded
definition usage.Went from strict 'pre-94 –to expanded '94 etc.,TODAY publish
both of!
4. term Strict Definition of Unemployment : (1)over 15 (2) available 7 days prior
interview for Self-employment OR Paid employment. (3) took steps to find /search 4
weeks prior interview for S or P work.
5. term Expanded Definition of Unemployment: OMITS (3) above-ie:only WANT
work–not look
The Costs of Unemployment:

1. Two main costs of unemployment are:
a. TO Individuals :
i. Ill health,hunger,cold death
ii. loss of income
iii. Confidence& self esteem&shock&frustration,criminality,loss of skills
b. TO Costs to Society at large:
i. Crime,Unrest,Riots,Demonstrations.

Page 99 of 106
ii. Overthrow Government eg Hitler etc.

iii. Opportunity Costs of assisting the unemployed.(loose out public goods &
services)
iv. Money cost to society of assisting the unemployed.
v. Labour Cannot be saved & used later like other FOP.
2. In RSA NOT First world country with Good unemployment benefits-so here very
meagre.
Types of Unemployment:
1. Most basic distinction in Types of unemployment: Strictly all is theoretically
Involuntary ONLY
a. term Voluntary Unemployment..: not want/feel like working
b. term Involuntary Unemp....:cannot find work
2. term Economist usually Distinguish between 4 Main types of
Unemployment.:
a. Frictional Unemployment:Left one job to find another one –but still looking
+New Entrants to job market also included here.:not serious-allways will have
some
b. Seasonal:Eg: Fruit pickers are out of work in off-season for fruit.
c. Cyclical(or demand deficiency) Unemp....: Laid off-(retrenched -till demand
picks up again,then can get re-employed.)
d. Structural: serious because cannot be remedied by simply increasing Aggr.
demand-needs retraining or relocation to where skills in demand
i. Structural decline in industries: eg:RSA Gold mining less of.
ii. Lack of skills/education(even if econ. booming-no find job!)
iii. Technologically unemployed.-
iv. Changing Consumer preferences- no more production/jobs for that stuff.
v. Foreign competition:eg textiles china
vi. Discrimination :eg for whites/not blacks
Policies to Reduce Unemployment.
1. Must be tackled from Both Supply & Demand side.
2. In RSA last 2 decades unemployment from both Supply-350000 new entrants/Yr, and
Demand-stagnating & declining economy.,&capital goods-labour relative cost(labour
up).
3. Causes of unemployment:
a. supply side-
i. Population growth
ii. Immigration
iii. Oversupply of unskilled labour /Shortage of skills
b. demand side
i. as with forms of.
4. Policies to reduce unemployment:
a. SUPPLY SIDE:
i. Less people : Reduce population growth
ii. Less people : Stricter immigration control
iii. Reduce oversupply of unskilled labour by teaching them skills.
b. DEMAND SIDE:
i. raise aggregate demand for goods & services by:
1. Raise G:
a. if this is financed by BORROWING :will RAISE interest
rates& negate the effect (i up! =wrong)

Page 100 of 106
b. if financed by TAXES: will negate effect =less I-

investment
c. If financed by increasing money supply-can cause
inflation
2. Lower : i -INTEREST RATE & TAXES =limited because will
cause Inflation & Balance of payment problems.
3. Raise EXPORTS-
a. by decrease production costs
b. maintain realistic exchange rate
4. (also can raise ,I,C or raise 'Net' Exports or raise C bar)
ii. LABOUR INTENSIVE ENTERPRISES: make production more:
1. actually promote these types of production.
iii. Promote small business & informal sector(claimed more labour
intensive than large enterprises)
iv. Create gov. employment programs:eg :build dams(very
temporary)
v. Subsidies & Tax benefits.
vi. Keep relative price of labour low to capital goods(-interest
FOP)machines
vii. Keep strikes less
viii. Labour legislation relax-more employer friendly
Unemployment in the Keynesian & AD-AS Models.
1. Both graphs assume that Level of Production IS positively related to Employment .
2. Law of Diminishing Returns:can cause increase in production to only help to a
point in unemployment –because as employment increases so production
increases ,but at a diminishing rate,until it goes backwards.
3. Slope of production function is = marginal product of labour =thus declines as
employment increases.
a. Why production increase (Y!!) (!! ie:called Economic Growth here too !!) alone
is a neccessary but insufficient condition for reducing unemplmnt.: Structural
and Frictional & Seasonal lags cannot be done away with by increasing prod.
i. Frictional unemployment
ii. seasonal unemployment
iii. new entrants: to market may be too many -be more than the rate of incr.
in Prod.
iv. Skills- if workers Not have needed skills may still unemploy even in
economic growth.
v. Capital goods/Technology type increase in production increase emplmnt.
For GRAPH BELOW:Yf= production/income at FULL EMPLOYMENT
Nf= employment at FULL EMPLOYMENT
the curve of the production function shows the law of diminishing returns:
the rate . of increasing returns from more people employed will
slowly decrease as more are . ... employed.

Page 101 of 106
If an increase in in the level of output from Y1 to Y2

is accompanied by an increase in capital intensive
production methods the following occurs:
The production function shifts upwards. At each

level of output less labour is required than before.
To produce a level of output of Y2, N1 number of

workers are required and the level of unemployment
is unchanged.
In this case jobless growth has occurred.
ECS102-8

Page 102 of 106
CHAPTER 11
: Economic Growth:
Introduction:
Economic development is a separate subdiscipline in economics apart from economic
growth. ,whereas for years it was seen as the same thing by economists.

Page 103 of 106
Definition and Measurement of Economic Growth.

24. term : Definition of Economic Growth:
Economic Growth:annual rate of increase in aggregate production &
income in the economy.,to be qualified in real terms and per capita terms.
1. MUST :Real and not nominal GDP ... . /production/income should be used
and PREFERABLY: be expressed on a per capita scale . to distinguish it from
population growth ,but latter is not allways done.
2. Real GNI is also used as a measure of economic growth,is better if big swings in
terms of trade are occuring at the time ,since it is adjusted for terms of trade by
national accountants.
3. GDP best to measure domestic production output itself.
4. ps-tricky question:(4 types could be :Real -1-gdp+ -2-gni and per capita real -3-gdp+-
4-gni)
Some problems associated with GDP as measure of economic growth:
1. Jokingly called 'grossly deceptive product' or 'grossly distorted picture'-due to:
2. The problems associated with GDP include the following:
a. Non-Market Production :
i. Eg:farmers consumption of own produce.
ii. government output:cannot valued at market prices ,but at cost prices-eg
wage empl
b. Unrecorded Activity
i. informal sector/,shadow economy/,underground sector/,
ii. include crimnal-smuggle,drug,prostitution,Also tax evasion.,Also
unlicenced Hawkers
iii. Rough estimates are however included since 1994 in GDP
c. Data revisions
i. Frustrating to analysts:figures are often revised as new & better data
becomes available-GDP figure can change
d. Economic welfare:
i. GDP :Not good measures of economic welfare:negative externalities
:eg:pollution,noise,congestion.,
ii. Also R1 Mil spent on military orR1mil spent on health not equatable.
iii. Allowance Depletion scarce Natural Resources.
iv. Quality of goods not stated.
v. Distribution of income per capita could be uneven-even if average high-
eg:kuwaitoil
1. ( separate point :M.E.W.-measure of economic welfare-gdp is
irregulary & periodicly adjusted in some countries to portray the
MEW,but not in RSA.)
Calculating Economic Growth:
1. ANNUAL BASIS.
2. Calculation : eg 1,8 ,3%
3. EG:for 2003- is shown as a percentage increase from the 2002 price eg :5%
a. 2003 –:ie,% by how much % 2003 is more than %2002.
i. First- Both years data convert to 2002 prices ie:REAL GDP/GNI
ii. Second- (2003-2002 ) / 2002 * 100/1 = %change from 2002
prices=Economic Growth Measure
4.

Page 104 of 106
The Business cycle:

• The long term trend in economic activity ,(albeit growth or level) is broken up by
short term swings up & down called: upswings(expansion)(booms) and
downswings(contraction)(recession) .
• A business cycle has 4 'elements': trough,upswing,peak,downswing,
• A business cycle always starts on a trough And nds on a trough.
Sources of Economic Growth:

1. Note:supply factors= FOP ,while demand factors=components of aggregate
spending:
2. Supply-increase prod.capacity /Demand-increase demand for goods&services
-aggregate spending capacity.
Supply Factors:
a. increase in quantity &/or quality of fop.
b. NATURAL RESOURCES:Can :-1-Explore for gold or 2- if Depletion use other FOP-
manufacture(entrepeneur+labour etc.)/ or render services(labour)
c. LABOUR: Influenced by:
i. Human capital-quality ie: Training/Skills +Health+Hygine +Nutrition
+Attitude.
ii. Size-net migration rate AND births / OR -could increase working hours-.
d. CAPITAL:
i. Economic Growth :Depends on Quantity &Quality of countries capital –
eg:machinary,buildings,roads,dams.(also -1-finance & -2-in RSA foreign
exchange)
ii. Quantity :Increase in the capital stock may take form of either:
1. CAPITAL WIDENING:

Page 105 of 106
a. Average capital /worker stays same- more capital because

more workers.
2. CAPITAL DEEPENING:
a. Average capital/worker increases –increase in 'capital
intensive' (intensity of ) production- more capital used for
every worker.
iii. Quality : must have technology to compete imports-also need skilled
labour:INTERDEPENDANCE of: labour,capital,technology.(technology=5th
FOP).
e. ENTREPENEURSHIP :
i. Gov. can act as one in beginning stages if shortage of them.
ii. Also unneccesary rules & regulations to stifle growth remove.
Demand Factors:
1. Increase in Supply NOT sufficient for growth-ther must also be an increase in
DEMAND.
2. HOWEVER : ANY increase in domestic AGGREGATE DEMAND SHOULD also BE
ACCOMPANIED by an increase in AGGREGATE SUPPLY or it could cause inflation (just
higher prices from demand –no big supply increase) AND Balance of Payments
problems (from INCREASED IMPORTS)
3. INWARD INDUSTRIALISATION : this is a strategy for economic growth which focuses
on domestic demand eg:demand for electricityr & houses :In RSA this type growth
policy was used where urbanisation by rural poor is seen as catalyst to -1- increasing
demand by redistributing income to them (then spend more),-2-in turn demanding
more gov. services & demand for goods-but must also add the supply side to this
policy or causes above-inflation& balance payment problems.
4. Economic Growth( in DOMESTIC ECONOMY) is Caused by :individual parts of
aggregate demand.
a. C:Consumption.
i. :is primarily a function of INCOME
b. G:Government :
i. determined by Gov. Policy.
c. I:investment :
i. is primarily a function of expected profitability of investment projects
and therefore also interest rates.(remember multiplier) to supply all this
investment demand.
d. E: increase exports
i. –-1-favourable slightly undervalued exchange rate -2-keep production
costs down -3- stimulate exports by subsidies -4- gov assist with
marketing&finance&other for exporters.
e. Less of Z: Import substitution.
i. Decrease imports by producing them locally:
ii. METHODS :BY import tariffs/quotas protect local producers in the initial
stages
iii. DRAWBACKS:
1. Over –Protection,not withdrawn timely enough, can cause
inefficient /uncompetative local producers.
2. Firms can Overfocus on local market & do not develop exports &
become internationaly competative.
3. Level of imports could stay same and composition could just
change-from dependant on consumer goods to dependant on
capital goods.-eg:RSA.

Page 106 of 106
PRINT FROM PAGE 88- 97

Must re-print all multipliers/indexes etc after 'contents/index section' And diagrams file in
study week.
Do a search in study guide & also own notes for above words:multiplier & index .

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Page 1 of 106

GDE: Gross Domestic Expenditure.................................................................................26

ECS102-8 economics Part2 Yr1 Page 2

: THE PUBLIC SECTOR.(MACROECONOMICS)........................................................................41

ECS102-8 economics Part2 Yr1 Page 3

The Simple Keynesian Model of a Closed Economy without Gov.......................................65

ECS102-8 economics Part2 Yr1 Page 4

The Employment Pool:.......................................................................................................98

:TO MAKE :SHORTENED NOTES OF TO STUDY LATER

ECS102-8 economics Part2 Yr1 Page 5

All Multipliers and index ratios:and Marginal propensty's to

9) Thus:to solve above equation:

16) and :C=Cbar +cY (consumption curve equation)*******

ECS102-8 economics Part2 Yr1 Page 7

ECS102-8 economics Part2 Yr1 Page 8

IMPORTANT NOTES from LAST SEMESTER

1. -The 4 Factors of Production +sometimes 5th identified =technology and their

ECS102-8 economics Part2 Yr1 Page 9

ECONOMICS part 2 Yr1

ECS102-8 economics Part2 Yr1 Page 10

box 3.1 p48t Stocks and Flows

3.1 p46 THE 3 MAJOR FLOWS IN THE ECONOMY: Production

-IN ECONOMICS EVERYTHING IS RELATED TO EVERYTHING ELSE ,OFTEN IN MORE

ECS102-8 economics Part2 Yr1 Page 11

1. In the mixed economy.

ECS102-8 economics Part2 Yr1 Page 12

ECS102-8 economics Part2 Yr1 Page 13

1.19.Can be sometimes abused by unscrupulous people.

• Aggregation:lump all different markets into one heading,ie:in macro economics.

4. Consumers /Households purchase Goods on Goods market.

The Circular flow of Income and Spending.(NOT GOODS & SERVICES)

Abbreviations of major Terms:

ECS102-8 economics Part2 Yr1 Page 15

Z=RSA spending on foreign goods and services.

ANSWERS FROM LECTURER:

1. Government :includes local,regional or provincial,+national gov.////Incl:polititians ,civil

ECS102-8 economics Part2 Yr1 Page 16

b. "T' =Taxes levied on households+firms,-used to finance services eg roads,defense.

(goods and services)

(goods and services)

3.4 Introducing the Foreign Sector.

Foreign sector spending and spending and income

1. 4th major sector-foreign sector-consists of rest of world +international fin.istitutions

ECS102-8 economics Part2 Yr1 Page 17

B. developing countries:africa/asia etc-most south american +RSA=middle

jjjjjjjjjjjjjjjjjjj saving Investment

ECS102-8 economics Part2 Yr1 Page 18

THE MAJOR ELEMENTS OF THE CIRCULAR FLOW OF INCOME AND

C,S,T,Z=LEAKAGES and I,G,X=INJECTIONS

ECS102-8 economics Part2 Yr1 Page 19

ECONOMICS part 2 Yr1

ECS102-8 economics Part2 Yr1 Page 20

ECS102-8 economics Part2 Yr1 Page 21

b. Price stability Refers to keeping inflation as low as possible,not no change(refer to

ECS102-8 economics Part2 Yr1 Page 22

8. GDP one most important barometers of performance of economy,(Macro. Growth obj.

The 3 Methods of Calculating GDP:

BY:The Production or Income or Spending method.

i. THE PRODUCTION METHOD:(or VALUE ADDED METHOD)

ECS102-8 economics Part2 Yr1 Page 23

4. Income from FOP = Rent(Land NR) , Interest(Capital) , Profit(Entrepeneurship) ,

2. 3 SETS of PRICES that can be used to calculate GDP =

ECS102-8 economics Part2 Yr1 Page 24

ECS102-8 economics Part2 Yr1 Page 25