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EKN120 Notes
Economics (University of Pretoria)
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CHAPTER 11
THE SOUTH AFRICAN ECONOMY, CIRCULAR FLOWS AND
ECONOMIC LIMITATIONS
We briefly look at the structure of the Southern African economy
● First, in terms of the population size, distribution and so on
● Second, we will focus on the role players in the economy with emphasis
on households and businesses, the public sector or simply government
and the foreign sector
The role players will be added to a flow diagram to explain economic flow. We
also focus on the limitation of society's challenges from a macro perspective.
LAND, AREA AND POPULATION
Southern African land area covers 1219090km²
● Northern Cape 30% of the total area but only 2% of the population
● Gauteng 1.4% of the total area but 26% of the population
Our population in 2018 = 58.8 million
● African more than 80% of total
● White around 8% of total
● Coloured around 9% of total
● indian/Asian just below 3% of total
● 51% of total is female
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ROLE PLAYERS IN THE ECONOMY
Households
Definition:
● Consist of a single person, family or group of people who live together,
depend on a common income and within the limits of that income,
exercise their choices with a view to meeting their economic objectives
● These objectives vary from mere survival to the highest level of material
well-being made possible by the resources at their disposal
● Major spenders in the economy
● Suppliers of all economic resources
○ Land
○ Labour
○ Capital
○ entrepreneurship
Function in the economy:
● To supply primary production factors to private business enterprises as
well as to government institutions
○ Labour
○ Land
○ Capital
○ Entrepreneurship
● Also have intermediate functions to produce goods and services for
their own use
● Use the income received from the supply of the production factors to
purchase final goods and services
SA economy currently has just less than 16.2 million households (Household
survey of statistics south africa, 2017)
Sources and Distribution of income
These sources include
● Salaries
● Ages
● Self-employment
● Business income
● Grants
● Income derived from the state social security system
● Capital-related income
● Private pensions
● annuities
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2 main income types that are important
● Income from work
● Social grants
Imputed income
● The non-cash consumption benefit acquired either from owning durable
property or from performing personal services
● Consists of rent and wages that one implicitly pays oneself for use of
one's own property and services and it thus hard to capture
The functional distribution of income
● The manner in which national income is divided among the functions
performed to earn it ( or the kinds of resources provided to earn it); the
division of national income into wages and salaries, proprietors income,
corporate profits, interest and rent
● Indicates how the households earned income is apportioned among
income from work and its related categories and income from other
sources like grants
● Wages are paid to labour
● Rents and interest are paid to owners of property resources
● Profits are paid to the owners of corporations and unincorporated
businesses
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The above refers to the personal distribution income
● The manner in which the economy's personal or disposable income is
divided among di erent income classes/ di erent households/families
HOUSEHOLDS AS SPENDERS
How do households dispose of their income?
● Part of it flows to government as taxes
● Some of it is saved
● And the remainder is available as disposable income
○ Used for personal consumption expenditures
PERSONAL CONSUMPTION EXPENDITURES
Durable good
● A consumer good with an expected life/use of 3 or more years
● Accounts for 28% of the spending in the four categories
○ Goods and services
○ Housing and utilities
○ Transport
○ Food and non-alcoholic beverages
Semi-durable goods
● Goods such as clothing, footwear with a longer life span than
non-durable goods
● Have lives of less than 3 years
● Slightly more than 23% spend
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Non-durable goods
● A consumer good with an expected life/use of less than 3 years
● Food and fuel
● Spend 22%
Services
● An intangible act or use for which a consumer, firm or government is
willing to pay
● Examples
○ Lawyers
○ Barbers
○ Doctors
○ Lodging personnel
●
27% of consumers expenditure
○ This high % is why SA is classified as almost a service-oriented
economy
BUSINESS ENTERPRISES
Function
● The production of goods and services
○ Which to produce
○ Know how to combine the 4 production factors e ectively to
produce these goods and services
○ It satisfies one’s needs and wants in a market-related system
Definition
● An economic decision taker whose purpose is to earn income or to make
profit by supplying goods and services to where is a demand for in the
economy
THE BUSINESS POPULATION
Businesses constitute the second major part of the private sector.
Distinction between plant, firm and industry
Plant
● A physical establishment that performs one or more functions in the
production, fabrication and distribution of goods and services
● Examples
○ Factory
○ Farm
○ Mine
○ Store
○ Warehouse
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Firm
● An organisation that employs resources to produce a good or service
for profit and owns and operates one or more plants
● Examples
○ Corporations
○ Limited liability company (LLC)
○ Partnerships
Industry
● Group of firms that produce the same/similar products
LEGAL FORMS OF BUSINESS
Sole Proprietorship
●
●
A business owned
and operated by
one person who
personally
supervises its
operation
Has no limited
liability for the
owner and is thus
important to note
that the business
liability includes
the owner's
personal assets
●
●
●
Partnership
Private or public
company
A natural
outgrowth of the
sole
proprietorship
2 or more
individuals/partn
ers agree to own
and operate a
business together
They share risks
and profit/loss
●
●
●
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A legal creation
that can acquire
resources, own
assets, produce
and sell products,
incur debts,
extend credit, sue
and be sued and
perform the
functions of any
other type of
enterprise
It is distinct and
separate from the
stockholders who
own it
Run by hired
CEO’s
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GO THROUGH ON PG 123 OF E-BOOK
GOVERNMENT’S ROLE
●
●
●
●
●
Provide the legal structure
Provide public goods and services
Private goods
○ Characteristics - rivalry and excludability
Public goods
○ Characteristics - non-rivalry and non-excludability
○ Free-rider problem
Quasi-public goods
○ Education
○ The reallocation process through taxation
Can read thoroughly on pg 23
ROLE OF THE FOREIGN SECTOR
●
●
●
Include all role players
Open economy
International trade
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THE ECONOMIC SYSTEM
THE ECONOMIC FLOW OF RESOURCES: GOODS, SERVICES AND MONEY
Production factors flow from households to firms through the resource market
and goods and services flow from firms to households through the product
market. Opposite these real flows are monetary flows. Households receive
income from firms ( their costs) through the resource market, and firms receive
revenue from households ( their expenditure) through the product market.
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RESOURCE MARKET
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CHAPTER 12
Measuring domestic output and national income
ASSESSING THE ECONOMY’S
PERFORMANCE
National income accounting
● Techniques used to measure the overall production of the economy and
other related variables for the nation as a whole
● It does for the economy as a whole what private accounting does for the
individual firm or for the individual household
● A business firm measures its flows of income and expenditures regularly ,
with that information in hand the firm can gauge its economic health
● If things are going well and profits are good, the accounting data can be
used to explain that success
This accounting enables economists and policymakers to…
● Assess the health of the economy by comparing levels of production at
regular intervals
● Track the long-run course of the economy to see whether it has grown,
been constant or declined
● Formulate policies that will safeguard and improve the economy’s health
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GROSS DOMESTIC PRODUCT
VS
GROSS NATIONAL INCOME
The primary measure of the economy’s performance is its annual total output
of goods and services, or as it's called, its aggregate output and is labelled
gross domestic product.
GDP
●
●
●
●
GNI
●
●
●
●
The total market value of all final goods and services produced annually
within the boundaries of SA, whether by SA or foreign-supplied
resources
Includes all goods and services produced by either citizen-supplied or
foreign-supplied resources employed within the country
Only the value of final goods and services are taken into account
GDP also measured within a particular period and then compared with
similar periods in other years or sometimes quarters of another year
Gross national incomes
The total market value of all final goods and services produced in a
given year by the residents or registered businesses from a particular
country anywhere in the world
Ownership-based
The value added attributable to all factors of production owned by a
country’s residents, regardless of where those factors are actually
employed
GDP AT FACTOR COST, BASIC AND MARKET PRICES
3 types of GDP
● At factor cost
● Basic prices
● Market prices
The di erent methods to calculate GDP can only be compared if the same GDP
is measured
● The expenditure approach is normally linked to the GDP at market price
while the income approach is associated with the GDP at factor cost
● GDP at basic prices is reflected in most cases with the production
approach
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Table 12.1 National income and production accounts for South Africa
(current prices, R millions)
2015
2016
2017
2018
2019
Compensation of
employees
1912084
2072859
2225800
2320180
2418544
Net operating surplus
1079222
1123567
1226323
1249182
1296696
Consumption of fixed
capital
560416
617969
638782
676486
713078
Gross value added at
factor cost
3551722
3814395
4090906
4245848
4428317
Other taxes on
production
81169
85519
92075
101936
105061
Less subsidies on
production
7983
8356
9653
6492
9798
Gross value added at
basic prices
3624908
3891558
4173328
4341292
4523580
Taxes on products
440102
482772
497335
545558
564866
Less subsidies on
products
15126
15270
17084
12951
10821
Gross domestic
product at market
prices
409884
4359061
4653579
4873899
5077625
Taxes and subsidies on production are the 2 main reasons for this di erence.
The di erence between the 3 formats of GDP:
● Gross value added at factor cost
○ Plus: other taxes on production
○ Less: other subsidies on production
● Gross value added at basic price
○ Plus: taxes on products
○ Less: subsidies on products
● Gross domestic product (GDP) at market prices
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TAXES AND SUBSIDIES ON PRODUCTION
The account: Taxes on production and imports
● A national income accounting category that includes such taxes as
sales, excise, business property taxes and tari s that firms treat as costs
of producing a product and pass on (in whole or in part) to buyers by
charging a higher price
National income
● Total income earned by resource suppliers for their contribution to
gross domestic product plus taxes on production and imports
● The sum o wages and salaries, rent, interest, profit, proprietors income
and such taxes
● Why do national income accountants add these indirect business taxes
to wages, rent, interest and profits in determining national income?
○ Mainly for accounting convenience
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The account: Subsidies on production
● Subsidies paid to business in order to subsidise the production of a
particular commodity to allow manufacturers to sell at a lower price
● Normally a practise of the government to subsidise the production of
certain necessities, like bread, to make it more accessible for low- and
no-income consumers
● Why do national income accountants deduct these indirect business
subsidies in determining national income?
○ Mainly for accounting convenience
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CHAPTER 13
BASIC MACROECONOMIC RELATIONSHIPS
ONLY SLIDES INFO
INCOME
VS
CONSUMPTION/SAVING
Income-consumption
● Positive relationship - the more the consumers earn (after tax), the more
they spend (but not necessarily all)
Income-savings
● Savings = not spending or the part of disposable income not consumed
● Positive relationship - the more consumers earn, the more income they
can save
Yd = Disposable Income (DI)
● Key determinant of consumption
● Recall this represents personal consumer income after taxes
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Yd = total income - taxes = Y - T
Yd = C + S
C = consumption
C = Yd - S
S = savings
S = Yd - C
Marginal propensity to consume ( MPC )
● Portion of change in income that is consumed
●
ΔC / ΔYd < 1
Marginal propensity to save ( MPS )
● Portion of change in income that is saved
●
ΔS / ΔYd < 1
Marginal propensity
● MPC + MPS = 1
○
The fraction of any income change not consumed is saved
● 1 - MPS = MPC
● 1 - MPC = MPS
MPC and MPS as slopes
● MPC is a numerical value of the slope of the consumption schedule
● MPS is a numerical value of the slope of the saving schedule
● Schedule = the line in the graph (the function)
Non-income determinants of consumption and savings
● Wealth (nexisting wealth, assets)
● Expectations ( future income)
● Real interest rates ( if it decreases H/Hs save less, consume more)
● Household debt ( if higher, consumers spend more)
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Example
* 1 open space = (ΔC / ΔYd ) 15/20
* 2nd open space = ( ΔS / ΔYd) 1-MPC
●
●
●
Lines start on y-axis, thus income = R0
# consumption function
2 savings function
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●
●
●
●
●
C0 = Exogenous C
○ C = C0 if Y = 0, S = -C0
Yd = Disposable income ( Y-T)
C and S are determinant by Yd (1st variable)
○ C = Yd
○ S = Yd - C
C and S are determinant by MPC ( c ) and MPS (1-c) (2nd variable)
S0 = exogenous savings
○ S0 = -C0
○ Exogenous C is assumed to be drawn from previous savings and is
thus represented as dissavings
BE AWARE OF DIFFERENT SYMBOLS ( some look very similar)
Consumption Function
Savings Function
C = C0 + cYd
S = -C0 + ( 1- c )Yd
INCOME = EXPENDITURE
Y
= C + I + G + (X - Z)
2nd graft, y-axis = savings
● - - - - - - - ● = equilibrium points
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INTEREST RATE AND INVESTMENT
Expected rate and investment
● (r)
● Not guaranteed rate of return
The real interest rate
● (i )
● Nominal interest rate - inflation rate
● Matters for investment decisions
Meaning of r = i
● Firms undertake investment decisions up until this point and not where r
is below i
Investment demand curve
● Constructed by arraying all potential:
○ Investment projects in descending
○ Order of their expected rates of return
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CONSUMPTION AND INVESTMENT
●
Simplifications
○ Private closed economy
○ Planned investment
○ Investment schedule
●
●
GDP Equilibrium
Expenditure Approach
C + I = GDP (Y)
Y=C+I
Y = Co + cYd + I
●
Injection Leakage Approach
S=I
-Co + ( 1 - c)Yd = I
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Consumption and investment
Saving and investment
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ADD THE PUBLIC SECTOR
Government Expenditure = G
Y=C+I+G
Y = Co + cYd + I + G
Or
S=I+G
-Co + ( 1-c)Yd = I + G
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(income/expenditure approach ; G=20
and T=0)
Leakage = injection ; T=0
GDP Graphically
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ADDING TAXES
t= 10%
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FOREIGN SECTOR
Y
= C + I + G + ( X - M)
Income = Expenditure
● If expenditure decreases, income will decrease
● If expenditure increases, income will increase
And vice versa
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CHANGES IN EQUILIBRIUM
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NB!!
THE MULTIPLIER EFFECT
●
●
●
●
Concerns the relationship between changes in spending and that of real
GDP
An increase in initial (exogenous) spending may lead to a multiple
increase in real GDP and similarly, a decrease in autonomous
(exogenous) spending may result in a larger decrease in real GDP
The initial change in autonomous (exogenous) spending is frequently
associated with investment spending as a result of its volatility
It stems from 2 facts
○ The economy supports repetitive, continuous flows of
expenditures and income through which rands spent by X are
received as income by Y
○ Any change in income will vary both consumption and saving in
the same direction as, and by fraction of the change in income
Multiplier (k)
● The ratio of change in the equilibrium GDP to the change in investment
or in any other component of aggregate expenditures
● Multiplies the investment amount from foreign money
● New money comes into the country and boost the economy
○ This money multiplies through the economy and causes the GDP
to grow
QUESTION BOOK TABLE 13.9 = good example
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Know the di erent methods they can ask:
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Increase in I=30
Increase in I=30
Increase in I=30
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EQUILIBRIUM VERSUS FULL-EMPLOYMENT GDP
Graph (a): recession gap =AE at Yf GDP that falls short to reach Yf GDP
Graph (b): inflationary gap = AE at Yf GDP that exceeds those to reach Yf GDP
●
●
●
Recession = decrease in demand
Yf = full employment GDP
AE = aggregate expenditure
Limitations of the model
● Does not show price level changes
● Ignores premature demand-pull inflation
● Limits real GDP to the full-employment level of output
● Does not deal with cost-push inflation
● Does not allow for “self-correction”
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