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ECONOMICS

ECS102-8
TERMS
CHAPTER 1:INTERDEPENDANCE OF THE MAJOR SECTORS,MARKETS AND FLOWS IN THJ ECONOMY.

1. 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"-.
2. 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. -Production –generates- Income(from various FOP only) –generates (used to(partly) spend on)- Spending-
Buys/pays for Production
4. Productions aim :is to use/consume raw or other products to satisfy human wants.
5. VARIOUS sectors of economy:
a. 2major types=households +firms
b. 4major types= Households,Firms,Government,Foreign 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)
c. 5 major types :Households,Firms,Government,Foreign sector,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)
6. The fundamental markets in the economy are:
i. Goods and services market
ii. Factors of production market.(fop market)labour/raw materials/entrepeneurial/capital.
7. Exchange (apart from—not incl. production/income/ spending ,exchange is another link (–ie relations in
economics)between the economic sectors.ie:takes place on goods+service market and FOP market.
8. Income -is actually the remuneration/reward for application of the factors of production.
9. RATIONAL : Assumption is that firms are rational-aim to max profit: for all Firms,and for all consumers-max utility or
10. Profit=total revenue-explicit cost
11. Total consumption Expenditure (or aggregate C.E)=total consumption /spending in economy(on consumer goods
and services by households).
Symbol="C"
12. Households:all the individuals who live together and make joint economic decisions,or others make for
them./individuals,consumers/interchangably used terms.
13. FIRMS:Definition of firms:The unit that employs FOP to produce goods and services that are sold in the goods
market.
14. TYPES OF FIRMS:P50 BOX
a. Individual /Sole proprietorship
b. Partnerships:
c. Companies
d. Close Corporations.
------------Main ones top-------------
e. Co-operatives(eg agriculture)
f. Trusts
g. Public enterprise (Gov.eg eskom,sabc)
h. Informal sector:spaza,hawker,shebeen,subsistence farmers.
15. Market Types;
a. Goods Market.
b. Factors market
16. The Circular flow of Goods and Services Diagram : Diagram which illustrates the interaction between
markets and firms.
17. The Circular flow of Income and Spending : It's direction is OPPOSITE to Goods and Service flow.
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.

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T=taxes
E=foreign spending on RSA goods and services.
Z=RSA spending on foreign goods and services.
S=saving

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

3.3 Introducing the government:


Government :includes local,regional or provincial,+national gov.////Incl:polititians ,civil servants,muncipal,mayors,etc, also
public corporations eg:Escom/Transnet/SA Reserve Bank.
1. Public Sector :in economics refer to public sector- means government +everything owned by, as representative of the
people.
2. Primary function of government in economy-establish framework within which economy operates.
3. Secondary functions of Gov.:INVOLVES 3 important FLOWS:
a. "G" =government spending on Goods and services &Factors of production(mostly labour).
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'.
Introducing the Foreign Sector 3.4

1. consumption (C)
The act of using or consuming goods and services is called consumption. The total spending of all households on
consumer goods and services is called total or aggregate consumption expenditure, or simply total consumption.
The symbol C is used to indicate total consumption or consumer spending in the economy. The most important
determinant of consumption spending by households is their disposable income.
factor cost (or factor income)
Factor cost (or factor income) is the incomes earned by the factors of production (ie their prices). It can be grouped into
four categories: wages and salaries (for labour), rent (for land) , interest (for capital) and profits (for
entrepreneurship). (more
flows
A flow is measured over a period of time. An example is investment which may be measured as the amount of
investment spending per year. A flow variable differs from a stock variable, which measures the physical quantity at a
given moment in time. Stocks and flows are related. An increase in the flow will increase the stock. For instance an
increase in investment spending increases the stock of capital.
Examples of flow variables are: Income, profit, loss, number of births and deaths, saving, demand for labour, gold sales,
etc.
total spending (expenditure)
Total spending (expenditure) in the economy consists of spending by households, firms, the government and the foreign
sector. In symbols: A = C + I + G + (X -Z). (more)
1. 'Open Economy'-strong links with rest of world-exp/imp/multinationals.
'globalisation'-recent yearst middle/lows economic links between countries grown stronger.
2. "Z" = Imports –rsa mainly capital &intermediate goods
3. "E"= Exports-rsa mainly gold & minerals
4. World bank classifies its members into 4 groups(levels of income):low income,lower middleincome,upper middle
income,high income.
5. 2 broad categories for Foreign sector : developing countries+industrial countries

Financial Institutions in the Circular Flow of Goods and services


1. Financial Institutions act as links between households +firms with surplus funds and households and firms which
require funds.
2. Units(firms/or households) can be classified as;
i. Surplus Units-those in a position to save because spending less than income
ii. Deficit Units -those require funds spending more than incomeFinancial Institutions act as links between
households +firms with surplus funds and households and firms which require funds.

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CHAPTER 2
:MEASURING THE PERFORMANCE OF THE ECONOMY.
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1. GDP (gross domestic product)Definition is :The total value of all final goods and services .
produced within the borders of a specific country in a particular period.
2. TERM 5 Macroeconomic Objectives used to Judge the Performance of the EcoEnomy
a. Economic Growth>most important one,to grow empl.&liveStandards,econ. must grow,eg:pop.incr
b. Full Employment >need econ.growth to fill up,
c. Price Stability >inflation-not prices-see normalo supply&demand
d. Balance of Payments Stability (or External Stability)>&foreign exchange rate
e. Equitable Distribution of Income. more normative less positive,social +political threat security
3. 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.
4. 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!
5. TERM GDP is also called GVA-Gross Value Added.
6. Term :"Current Production" means only thatyeargoodsand services produced use tocalculateGDP.
7. 3 SETS of PRICES that can be used to calculate GDP =
PRICES TYPE USED USED FOR CALCULATING :
Market Prices Expenditure method(Final Final goods Subsidies & LESS this =
goods ) Indirect Basic Prices
Tax&Subs./Unit good or Taxes on
service.Tx-Vat,imp+ exp. products
Subsidy for exports/Domestic
for bread
Basic Production method(val.add) Val. added OTHER taxes LESS this =
Prices Other Tax&Subs NOT /Unit & subsidies Factor Prices
goods/service on products
eg:Tax-payroll,land
tx,buldings,licence firm.
:Subsidies-on employment or
payroll
Factor Income method(factor cost) Factor cost +"Other"=bas
Cost fop

8. TERM: 'Indirect' taxes = taxes on products eg VAT


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.
9. TERM GDP at Current prices = Nominal GDP:expressed at current years price levels/not converted
10. TERM GDP at Constant prices = Real GDP :use a BASE years prices,convert others to that years :
inflation eg1995
11. TERM Nominal GDP-gdp at current prices
12. TERM Real GDP-GDP at constant prices

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13. TERM Nominal value-also called :'Monetary value' means in "terms of the name" ie at face value , 5000
= 5000 or less/more
14. TERM Real value-means actual or essential,refers to purchasing power ,what? money can buy.
15. Inflation :causes monetary values of goods/pricesto change per year-thus cannot compare different years GDP's
16. 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.
17. 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: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 NOT an increase of eg. 127 %,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 according to a weighted average(how much bread eaten to meat)to get final
composite or general index.
18. TERM Base year:year used as guideline for coverting other years prices to, to find Real value/Constant Prices
19. TERM GNI=Gross National Income=GNational P>derived by :(IS NOT GDI,but GNI)
a. SUBTRACT :all FOP-income earned in borders of SA by FOREIGN NATIONALS.
b. ADD :all FOP-income earned outside borders of SA by RSA NATIONALS.
i. include in FOP-Interest from money lenders,dividends(profit) etc.
20. TERM GNP=Gross National Product=GNI=[GDP-(foreigners+locals overseas)FOP income]
21. TERM:Primary Income Payments&Receipts:Payments=to foreigners ; Receipts=from foreigners. –
The FOP add/subtract in calculation can also be called this insread.
22. TERM :NET primary income pay.OR rec.=larger minus smaller (name =larger)
23. 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.
24. TERM Gross Capital Formation:In national accounts Investment spending called capital formation,Note
includes Gov. spend on Investment.,and Gross means not less depreciation.
25. TERM GDE =gross domestic expenditure-only money spent in the borders :incl.imp./excl.exp
26. TERM Net Exports=(for common GDP calculation) =X-Z
27. (TERM Residual value difference 3 methods calc GDP)
28. (TERM:NET primary income pay.OR rec.=larger minus smaller (name =larger))
29. TERM Unemployment:of those willing and able to work ,the rate/index/% etc of those not employed.
30. TERM INDEX NUMBER:expresses value of some series over given period as % of it's value in a base
period.
a. Specific Indices :for relative changes:Convert all values in a list to percentages.
b. General or Composite Indices :for combine different series:
31. TERM CPI Consumer Price Index: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.
a. TERM Determine Weight of each good/sevice: ..Stats SA
does a survey 5 yrly to determine relative importance in Av. Consumers Basket.
b. TERM Decide on a BASE YEAR for calculating CPI :
..Base year is year in which the Survey(5 yearly) is done
32. 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 money into and out of country9like a bank
statement.eg sales +purchases of assets-bonds,shares etc .
33. TERM :Surplus on Current account:Exports exceeded Imports
34. TERM :Deficit on Current account:Imports exceeded Exports.
35. TERM :Surplus on Financial account:(also –NET INFLOW of Capital):Inflows of money exceeded
Outflows of Money.

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36. TERM :Deficit on Financial account:(also –NET OUTFLOW of Capital): Outflows of money exceeded
Inflows of Money.
37. 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.
38. TERM Personal distribution of Income:to people/races/levels,all fop included.
39. TERM Functional distribution of Income:Between FOP only.
40. 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.
41. TERM Gini coefficient or ratio =area of inequality /divided by/ area of triangle [axes-diagonal].
42. TERM Gini Index = Gini coefficient multiply*100 (ie between 0-100 then,not 0-1)
43. TERM Quantile Ratio is [the % income of Highest 20%] divided by [% income of Lowest 20%]

The growth in total production can be measured by The growth on a per capita basis is provided by the growth in the real GDP
calculating the percentage change in the real GDP from one per capita.

year to the
next.

South Africa
(more) South Africa
(more)

19. economic growth


Economic growth is traditionally defined as the annual rate of increase in total production or income in the economy. This definition
has to be qualified in two important respects. First, the production, or income should be measured in real terms, that is, the effects of
inflation should be eliminated. Second, the figures should also be adjusted for population growth. In other words it should be
expressed on a per capita basis. (more)
b. full employment
Full employment is one of five macroeconomic objectives. It is achieved when all available resources (labour,
capital, land, and entrepreneurship) are used to produce goods and services. This goal is commonly indicated
by the employment of labour resources (measured by the unemployment rate). (more)
c. price stability
Price stability is one of five macroeconomic objectives. It refers to the objective of keeping inflation as low as possible.
Inflation is a rise in the general (average) level of prices in the economy. Inflation is calculated by measuring the change in the
consumer price index (CPI). The consumer price index reflects the cost of a representative basket of consumer goods and
services consumed by the average South African household. (more)
d. balance of payments
The balance of payments is a systematic statistical record of all economic transactions between residents in
the reporting country (eg South Africa) and the rest of the world during a particular period (quarter or
year). (more

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CHAPTER 3
:THE MONETARY SECTOR.

CS102-8
CHAPTER 4
: THE PUBLIC SECTOR.(MACROECONOMICS)

le 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
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. .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.)

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5. TERM Expansionary Fiscal &monetary policies:If economy in Recession,to stimulate economic activity-
means -1-Reduce or Not increase Tax -2-Raise Spending.
6. 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.
7. Term Lags/Delays-one of basic difficulties assosiated with attempts stabilise economy.
8. Term Budget Deficit /Surplass:Difference between Gov. spending and Income.
9. Fiscal policy can influence microeconomics as well:specific markets/products tax,subsidy or town.
1. Crowding out effect"-when Gov.spending increases and crowds out private sector.
2. 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.
1) 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.
2) Term Inflationary Financing: gov.borrowing because increases money supply.
3) Term Public debt: 34%90's-45% gdp:from gov.borrowing-eg 1990,increases Interest on gov debt.to 20c per R Tax
today.

-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
i) term Marginal Tax Rate:rate each additional rand (rate for each level is taxed(=on tax table

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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

CHAPTER 6
1. 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 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
2. 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
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)

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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.

1. term 4 major types of Consumer goods&services: durable,non-durable,semi-durable,services.


a. Consumption increases/decreases as Income increases/decreases(direct relationship)
b. Consumption Positive even if Income Zero(shows influence non-income determinants on spending)
c. Consumption increases Less than an Income increase. (part Saved)
• 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
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)
1. TERM "S"= SAVING
1. capital formation:investment spending called this in 'national accounts'.
1. term Real Investment=capital goods for production purposes only no shares etc
2. term Financial Investment =eg shares,bonds,deposits

Term Aggregate spending is the total demand for goods and services in the economy and is given by the following
equation:

A = C + I + G + (X - Z)

C - consumption expenditure
I - investment expenditure
G - government expenditure
X - exports
Z - imports

1. term "Aggregate Spending Function" A = C+I or ( A=Abar cY )


2. term Y0 = INCOME equilibrium 45 deg intercept . –see dotted line indicating on graph.
3. term A0 = DEMAND/ equilibrium 45 deg intercept . –see dotted line indicating on graph.
{ "Aggregate Spending Function" A = C+I or ( A=Abar cY ) }
This Multiplier is one of central concepts in macroeconomics:#@#*Change in I =change in Y

chapter 7- keynes incl gov + foreign

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