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Chapter 3:
Production,
income and
spending in the
mixed economy
Chapter Outcomes
Once you have studied this chapter you should be able to
• describe how total production, total income and total spending in
the economy are related
•
distinguish between stocks and flows
•
describe the different sources of production and income
•
distinguish between households and firms and show how their
decisions and activities are interrelated
•
show how the government sector interacts with households and
firms
•
show how the foreign sector interacts with the domestic economy
•
describe South Africa’s factor endowment
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Introduction
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Production, income and spending
Figure 3-1 The three major flows in the economy (Textbook page 41)
Box 3-1 Stocks and flows (Textbook page 41)
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Sources of production:
the factors of production
• Natural resources (land)
• Labour
Box 3-2 Specialisation and the division of labour
(Textbook page 43)
• Capital
• Entrepreneurship
• Technology
• Money is not a factor of production
• The choice of technique
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Sources of income:
The remuneration of the factors
of production
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Sources of spending:
The four spending entities
• Households
• Firms
Box 3-3 Different types of firms (Textbook page 47)
Box 3-4 The goods market and the factor market
(Textbook page 48)
• The government
• The foreign sector
• Total spending: a summary
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Putting things together: a simple diagram
Figure 3-2 The different components of production, income and
spending (Textbook page 50)
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Illustrating interdependence: circular flows
of production, income and spending
• Households and
firms
Figure 3-3 The circular
flow of goods and
services
(Textbook page 50)
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Illustrating interdependence: circular flows of production, income and spending
Households and firms
Figure 3-4 The circular flow of income and spending
(Textbook page 51)
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Illustrating interdependence: circular flows of production, income and spending
• Adding the
government
Figure 3-5 The
government in
the circular flow
of production,
income and
spending(Textbook
page 51)
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Illustrating interdependence: circular flows of production, income and spending
• Adding the foreign
sector
Figure 3-6 The foreign
sector in the circular flow
of income and spending
(Textbook page 52)
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Illustrating interdependence: circular flows of production, income and spending
Adding the foreign sector
Figure 3-7 Financial
institutions in the
circular flow of
income and spending
(Textbook page 52)
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Illustrating interdependence: circular flows of production, income and spending
• The overall picture
Figure 3-8 The major elements of the circular flow of income and
spending (Textbook page 53)
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A few further key concepts
• Specialisation and exchange
• Specialisation, opportunity cost and comparative
advantage
Box 3-5 Why did Charl Schwartzel not finish matric?
• The five main macroeconomic objectives
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Appendix 3-1: South Africa’s
factor endowment
• Natural resources
• Labour
• Capital
• Entrepreneurship
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Important concepts
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Production
Income
Spending
Stock
Flow
Goods market
Factor market
Factors of production
Natural resources (land)
Labour
Specialisation
Division of labour
Human capital
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Capital
Consumption of fixed capital
Entrepreneurship
Technology
Money
Capital-intensive production
Labour-intensive production
Rent
Wages and salaries
Interest
Profit
Household
Consumer spending
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Important concepts
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Firms
Profit
Captial formation
(investment)
Government
Public sector
Government expenditure
Taxes
Transfer payments
Foreign sector
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Balance of payments
Imports
Exports
Circular flow
Injection (addition)
Leakage (withdrawal)
Financial sector
Absolute advantage
Relative advantage
Macroeconomic objectives
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