Download NQF Level 3 - Macmillan Education South Africa

Economic Environment
Economic
Environment
NQF Level 3
NQF Level 3
The TVET FIRST NC(V) series helps students, colleges and
lecturers to meet the challenges and opportunities presented
by the National Certificate (Vocational) curricula. The Student’s
Books :
•cover all the Subject Outcomes of the subject
•contain appropriate weighting of topics
•provide clearly defined key concepts
•provide comprehensive, current and easy-to-follow content, at
the appropriate language level, in a logical sequence and at a
suitable pace
•present students with a wide variety of learning and assessment
activities.
Economic
Environment
NQF Level 3
Student’s Book
ISBN 978 085320 890 7
D Bekker, S Jory, R Rehbock
& FHB Serfontein
STUDENT’S BOOK
Economic Environment
Student’s Book
TVET FIRST
NQF Level 3
D Bekker, S Jory, R Rehbock, FHB Serfontein
TVET First Economic Environment NQF Level 3 Student's Book
TVET First
© F. Serfontein, D. Bekker, R. Rhebock, S. Jory, 2007
© Illustrations and design Macmillan South Africa (Pty) Ltd, 2007
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form
or by any means, electronic, photocopying, recording,
or otherwise, without the prior written permission of the
copyright holder or in accordance with the provisions
of the Copyright Act, 1978 (as amended).
Any person who does any unauthorised act in relation to this
publication may be liable for criminal prosecution and civil
claims for damages.
First published 2007
1 3 5 7 9 10 8 6 4 2 0
Published by
Macmillan South Africa (Pty) Ltd
Private Bag X19
Northlands
Gauteng
Typeset by Lenitec Design Studio in Palatino 11pt/13pt
Cover by Deevine Design
Text design by Heather Brooksbank
Illustrations by Al Olivier
ISBN: 978 0 85320 890 7
WIP 19700000
H,6%1
While every effort has been made to trace the copyright holders and obtain copyright
permission from them, in some cases this has proved impossible due to logistic and time
constraints. Any copyright holder who becomes aware of infringement on our side is invited
to contact the publisher.
Note: Any reference to Further Education and Training (FET) in this book should be taken to
mean Technical and Vocational Education and Training (TVET).
To order any of these books, contact Macmillan Customer Services at:
Tel: (011) 731 3300
Fax: (011) 731 3535
E-mail: [email protected]
It is illegal to photocopy any page of this book without written permission
from the publishers.
Contents
Topic 1: Basic Economics
Module 1:
Module 2:
Module 3:
Module 4:
..........................................
1
Role players in the economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The factors of production and their remuneration .
Financial institutions in the economy . . . . . . . . . . . . . . . . . . . . . . . . .
Role of money and credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
15
30
44
Topic 2: Basic understanding of
financial markets and
economic indicators
.................................
Module 5:
Module 6:
Module 7:
Module 8:
Explain the concept of financial markets . . . . . . . . . . . . . . . . .
Explain market shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic indicators in the local financial market
Indicate the influence of economic indicators on
the local market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
60
72
84
97
Topic 3: Current affairs and the business
sector
107
............................................................................
Module 9: What is the business environment? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 10: Events in the physical environment that could
have an impact on the business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 11: Events in the socio-political environment that
could have an impact on the business . . . . . . . . . . . . . . . . . . . . . . .
Module 12: Events in the economic environment that could
have an impact on the business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Module 13: Events in the technological and institutional
environment that could have an impact on the
business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Topic 4: International trade
calculations
..........................................................
108
127
145
166
182
199
Module 14: International trade calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Topic 1:
Basic Economics
1
Module 1
Role players in the
economy
Overview
In this Module you will …
•
•
•
•
•
•
2
Topic 1
identify important role players in the economy
distinguish between the micro and macro environment
learn about the flow of goods and capital between households
and firms
learn about the role of government in a mixed economic
system
learn about the influence of government on the flow of goods
learn about globalisation and its impact on the economy.
Introduction
Households, individuals, firms and governments are all role players
in the economy.
1.1
Important role players in the
economy
To solve the economic problem of what to produce, how to produce it
and for whom to produce it, different people and groups of people
make millions of economic decisions every year. You, as the
consumer, decide what to buy, how much of it to buy and how much
you are willing to pay for what you buy.
Consumers making decision
about what to buy.
Producers and firms make decisions about what to pr oduce, how it is
to be produced, what factors of production are to be used and how
much to charge for their products.
Firms making decision about
what to produce and how
much to charge for it
Module 1: Role players in the economy
3
Words &
Terms
Household
s are a ba
sic decisio
making u
n
nit in the
economy.
Firms are
responsib
le
productio
n of goods for the
and
services in
the econo
my.
Governm
ent is also
known as
the public
sector an
d it includ
all levels
es
of govern
ment.
The foreig
ns
all the cou ector consists of
ntries in th
e
the world
with whom rest of
we trade.
The government must decide what goods and services and how
much of these should be provided to its citizens and, importantly, it
must decide how it is to finance its expenditur e.
These decisions are not limited to decisions about what is to take
place inside the borders of a country but are also about conducting
business with the rest of the world. We must make decisions about
what goods and services must be bought fr om the rest of the world
and what goods and services must be sold to the r est of the world.
Foreign trade is an important part of the economy of countries and
an important role player in the economy.
Important role payers in our economy are, therefore, households,
firms, government and the foreign sector.
Important role players in the economy are: Households, firms, government and the
foreign sector
•
•
•
•
Households are the people who live together and make joint
economic decisions. A household can consist of an individual, a
family or a group of people that jointly decides on how to earn an
income and how to spend it.
Firms or producers are responsible for the production of goods
and services in the economy. To produce these goods and services
they use (employ) the factors of pr oduction that are owned by
households.
Government is a broad term that includes all levels of government
– local, provincial and national. In economics it is often r eferred to
as the public sector.
The foreign sector refers to all the countries in the world with
which we trade as well as the international institutions that
govern the flow of goods and services, and the flow of funds
between and amongst countries.
The economic decisions that these different role players make have
an important influence on the economic life of every individual in a
country. This is because the decisions of one person or r ole player
cause a reaction in the behaviour of other participants.
4
Topic 1
Case Study
If households increase their cell phone usage and more households buy cell phones, it will have an impact on
both the cell phone industry and on the economy. Because of the higher spending by households the producers
and service providers in the cell phone industry will have to increase their production. To increase their
production they will need to employ more factors of production such as labour and capital. As more labour is
employed, unemployment in the economy decreases and the income of some of the households increases. The
increase in production also means that materials and machines have to be imported. A change in the spending
behaviour of households not only affects firms in the cell phone industry but also the economy of South Africa
and foreign trade patterns.
Assessment Activity 1.1
1. In your groups discuss the likely impact of the following event on the behaviour of households,
firms and on the foreign sector.
The government drastically increases import duties on imported clothes so that imported clothes
are now 25% more expensive for consumers.
Your participation in the group discussion will be assessed using the
following rubric.
Student Name:
Activity:
Criteria
4
Outstanding
3
Competent
2
Not yet competent
1
Not achieved
Confidence in
speaking
Student spoke very
confidently and with
great authority.
Student spoke with
some confidence
some of the time.
Student did not speak Student did not
with confidence.
contribute to the
discussion at all.
Expression of
opinions
Student expressed
opinions and has a
strong factual base
for opinion.
Student had opinions
but occasionally
lacked a factual base
for them.
Student expressed
Student did not
very little opinion and express any opinion.
had no factual base.
Group dynamic
Student encouraged
others to participate
in the discussion.
Student occasionally
encouraged others to
participate in the
discussion.
Student seldom
encouraged others to
participate in the
discussion.
Listening skills
Student listened
attentively and with
interest when other
students spoke.
Student did not listen
Student listened with Student fluctuated
some interest when
between listening to to other students at
other students spoke. other students speak, all.
and not listening at
all.
Student never
encouraged others to
participate in the
discussion.
Module 1: Role players in the economy
5
1.2
Words &
Terms
In the mic
ro environ
ment the
individual
parts of th
e econom
are studie
y
d. For ins
tance, the
decisions
of a house
hold and
firm, how
a
pri
and how p ces are determined
rices dete
rmine the
productio
n, d
of goods a istribution and use
nd service
s are
looked at.
In the ma
cro enviro
nment we
study the
overall fu
nctioning
the econo
of
my. For in
sta
look at th
e total pro nce, we
duction in
country, th
a
eg
unemploym eneral price level,
ent and e
xchange
rates.
The micro and macro environment
In the micro environment the decisions that the role players make
have an important impact on what kinds of pr oducts are produced
and consumed, what the price of a specific pr oduct will be, and how
much of this specific product will be produced and consumed. It is in
this environment that we are confronted with issues such as:
• why do households prefer one product over another?
• what is behind the factors that determine the demand for a
specific product?
• what is the impact of a change in the price of a pr oduct on the
quantity demanded?
• what are the factors that influence the supply of a pr oduct?
• what determines why a product is imported or exported?
In the macro environment we are confronted with the bigger picture.
In this environment the decisions by the role players influence the
overall functioning of our economic system and these decisions
determine the overall level of production, the rate of inflation, the
unemployment rate, the interest rate and the exchange rate.
1.3
The flow of goods and capital in the
economy
Let’s look at the way in which goods, services and capital all flow in
the economy.
1.3.1
The flow of goods and services
In any economy there is a flow of goods and services and capital
between and amongst the various role players. In diagram 1.1 the
flow of goods and services between the households of our economy
and the firms in our economy is demonstrated.
Diagram 1.1: The flow of goods and services between firms and households
6
Topic 1
Households are the owners of the factors of pr oduction which they
make available to the firms who ar e responsible for the production of
goods and services. In return for these factors of production
households receive an income from firms. This income can be in the
form of rent, wages, interest and profits. For instance, if you sell your
labour to a firm you receive an income in the form of a salary or a
wage.
Households then use their income:
• to buy goods and services from firms
• to save money
When households buy goods and services these flow fr om the firms
to the households.
Assessment Activity 1.2
Use the following information to complete the empty blocks in
the diagram and answer the questions.
The income households receive from firms is R100 million.
Households use this R100 million to buy goods and services to
the value of R95 million and the r est is saved.
?
??
Did you know?
In 2006 South African
households spent R1 080 074
million on goods and services.
This is known as consumption
spending by households. Of
this R1 080 074, households
spent R110 664 million on
durable goods (furniture and
household appliances,
entertainment goods, etc);
R110 508 million on semidurable goods (clothing and
footwear, motorcars, tyres,
parts and accessories, etc);
R417 086 on non-durable
goods (food, beverages,
tobacco, medical and
pharmaceutical products, etc);
and R441 817 million on
services (medical services,
educational services,
household services, etc).
South Africa household spend
Source: South African
Reserve Bank, Quarterly
Bulletin, March 2007
1. If firms pay out R120 million to households what happens to
their income?
2. If the income of households increases what will happen to
their spending on goods and services?
3. If households buy more goods and services how will firms
react to this increased spending?
Module 1: Role players in the economy
7
1.3.2
Words &
Terms
A comma
nd system
is an
economic
system ch
aracterise
by public
d
ownership
of the
factors of
productio
n.
In a mixe
d econom
y not all th
factors of
e
pro
hands of p duction are in the
rivate peo
ple, some
are govern
ment own
ed.
Economic
decisions
are made
partly thro
ugh the m
arket and
partly by g
overnmen
t.
Flow of capital
But what happens with the savings of households? In our economy
these savings by households flow to financial institutions such as
banks. These banks then lend it to firms that use it to finance the
building of factories, the opening of new businesses, the buying of
machines and tools and the expanding of existing businesses. A flow
of capital between households and firms thr ough financial
institutions takes place as illustrated in diagram 1.2.
Diagram 1.2: Flow of capital between households and firms
1.4
The role of government
The role of the government in any economy will depend on what sort
of economy it is.
1.4.1
The role of government in a command
economic system
In a command system it is the government or central authority that
makes most of the economic decisions of what to pr oduce, how to
produce it and for whom it should be pr oduced.
1.4.2
The role of government in a mixed economic
system
In a mixed market system, such as the one we have in South Africa,
most economic decisions are made by private individuals and private
firms. An important role of government in a mixed system is that it
provides us with goods and services such as roads, water, electricity,
police services, defence services, health services and educational
services.
8
Topic 1
Government, however, not only provides us with goods and services
but it also creates and maintains our legal and social framework
through its various laws, regulations and ordinances to ensure a
stable and effective environment in which the production and
consumption of goods and services can take place. It is thr ough this
regulatory and ordering function that government intervenes
indirectly in the economy.
Government
services
Apart from its allocation and regulation and ordering function our
government is also involved in the redistribution of income and
wealth. If you receive some form of child support grant, old age
pension or if you are a beneficiary of black economic empowerment,
you are part of the attempt of government to r edistribute income and
wealth in South Africa.
Finally, the stabilisation function of government refers to its
monetary and fiscal policies, which are aimed at promoting economic
stability and smoothing out the impact of the business cycle.
Assessment Activity 1.3
1. Indicate the role of government that the following examples r efer to.
a) The government designs regulations to protect consumers against harmful products.
b) The government uses its monetary policy to stabilise the economy .
c) The government increases the number of constables in or der to combat crime.
d) The government increases old age pensions.
2. Write a short paragraph explaining why you think the government has these r oles.
1.4.3
Government and the flow of goods
Through its spending and taxation powers, the government has an
important impact on the flow of goods and services in the economy .
Let’s look first at the impact of taxation. In or der for the government
to fulfil its role in the economy it needs income. It gets this income
mainly from taxes. An important form of taxation in South Africa is
income tax. This is a tax that is levied on the income that households
receive. Before households can spend their income on goods and
services they must first pay their income taxes to the government.
Module 1: Role players in the economy
9
Words &
Terms
Income ta
x is a tax
levied on
income.
Disposab
le income
is the
income th
at househ
olds have
available
after they
have paid
income ta
xes.
The income they have left after their income taxes ar e paid is known
as their disposable income. Households then use their disposable
income to buy goods and services and this spending becomes part of
the demand for goods and services. What do you think is going to
happen to the amount of goods and services that households buy if
the government decreases income taxation? The lower income tax is,
the higher the disposable income of households is and the mor e they
will be able to spend on goods and services. This has the ef fect of
increasing the flow of goods and services to households. A
contribution is made to economic growth, employment and the
alleviation of poverty.
The following diagram shows how income flows fr om households to
the government in the form of taxation.
Think about it
The problem with exports is
that the demand for exports
originates from the rest of the
world. The demand is mainly
influenced by the state of the
economy of our trading
partners and this is something
we have no control over. South
Africa can nevertheless
influence the level of exports
to a limited extent through
•
maintaining a realistic
exchange rate between the
rand and other currencies
•
establishing trade
agreements
•
promoting exports by
assisting exporters with
marketing, information,
research and financing.
10
Topic 1
Diagram 1.3 The government and the flow of goods
Government not only taxes people but it also pr ovides goods and
services to people.
In order to provide these goods and services to the people it buys
goods and services from households and firms in the economy. This
all contributes to the flow of goods and services as is illustrated in
diagram 1.3. For instance, when a public servant (such as a teacher) is
employed by government his or her salary is the payment for a
service the government buys from a household. If the government
decides to provide schools with text books it will buy these text
books from firms in the economy.
When the government increases its spending on goods and services
more goods and services are demanded in the economy and ther efore
more goods and services are produced in the economy. In this way
the government helps to increase the economic growth rate, create
more jobs and alleviate poverty.
Case Study
Let’s look at an example of how government can help to increase the economic growth rate, create more jobs
and alleviate poverty. If the government, for instance, decides to increase its spending on education by building
more schools, hiring more teachers, buying more textbooks, pencils and stationery, changes will happen in the
economy.
As the government spends more, the total spending in the economy increases. A higher spending implies there
is a higher demand for these goods and services. In the building industry, builders will start to build more
schools and they will need more cement, bricks, glass and construction workers. Producers of cement and
bricks will increase their production and will also employ more people. Economic growth occurs, employment
increases, unemployment decreases and a contribution is made to the alleviation of poverty.
Assessment Activity 1.4
1. In your groups discuss, with the aid of diagram 1.3, the possible impact of an incr ease in income
taxation on the flow of goods in the economy.
1.5
The influence of the global economy
Because of globalisation South Africa’s trade relations with the rest of
the world are today far more open and advanced than they wer e
before. The trading of goods and services and the flow of capital has
become much more important for the economic well being of our
people, and the efficient functioning of our businesses, and of the
economy.
Here are some of the causes of globalisation.
• Trade and investment barriers are disappearing and it is much
easier nowadays to trade with other countries.
• Because of advances in transportation and telecommunications, it
is easier and cheaper to transport goods.
• Economic culture around the world is becoming more and more
similar.
• National economies are merging into an interdependent global
system.
1.5.1
Globalisation and the flow of goods and
services
Many of the things we use in our everyday lives ar e imported from
other countries of the world. These include things such as CD
players, computer games, DVDs, jewellery and food. It is not only
households that use goods from the rest of the world but firms do,
too. To produce goods and services machines are needed and many
of the machines as well as other intermediate pr oducts (such as oil,
chemicals, material) are imported from the rest of the world. These
Words &
Terms
Globalisa
tion is a p
rocess by
which the
economie
s of the
world bec
om
integrated e increasingly
in
of goods a terms of the flow
nd service
s and
capital.
?
??
Did you know?
World trade/GDP ratio ( total
world trade as a percentage of
total world output) has
increased from 39% in 1980 to
44% in 1999.
Module 1: Role players in the economy
11
goods and services that are bought from the rest of the world are
known as imports.
Imports are both important for production to take place and for
satisfying the needs and wants of households. Capital goods such as
machines, tools and equipment are an important factor of production
and we are to a large extent dependent on the rest of the world for
these capital goods. We also import intermediate goods such as oil,
without which production and the transport of goods and services
would not be possible. These goods ar e also important for the
production of goods for our export markets.
This buying of imports results in a flow of goods fr om the foreign
sector to the households and firms in the economy as illustrated in
diagram 1.4.
Diagram 1.4 Foreign sector and flow of goods
We not only buy goods and services fr om the rest of the world but
we also sell goods and services to the r est of the world. These goods
and services are known as exports. In diagram 1.4 you can see how
this selling of exports to the r est of the world results in a flow of
goods and services from firms in the economy to the r est of the
world.
Exports are important for two reasons. The first is that by selling
goods and services to the rest of the world we earn for eign exchange
which we can use to buy the imports that we need fr om the rest of
the world. In addition imports are important for the production of
goods and services and for satisfying the needs and wants of
households.
12
Topic 1
The second reason is that by producing goods and services for the
export sector we create employment opportunities and thereby
decrease our level of unemployment. This incr eased employment in
return provides households with income which they can use to
satisfy some of their needs and wants.
Assessment Activity 1.5
1. In your groups discuss, with the aid of diagram 1.4, how an
increase in exports might affect the flow of goods in the
economy.
2. Keep notes on your discussion and decisions r eached.
Assess your own participation in the gr oup discussion by answering
the following questions:
• Did I speak with confidence?
• Did I express my opinions?
• Did I encourage other students to participate?
• Did I listen when other students spoke?
• Did I contribute to the discussions?
• Did I add value to the learning for other students?
1.5.2
?
??
Did you know?
In 2001 South Africans
imported goods to the value of
R221 235 million and in 2006
we imported R476 545 million
worth of goods. The rise in
imports is mainly on account
of the increase in the
economic growth in South
Africa which required more
imports.
South African imports
Source: South African Reserve
Bank, Quarterly Bulletin,
March 2007
Flow of capital
It is not only goods and services that flow between countries but also
capital. In this regard one can distinguish between direct investment
and portfolio investment.
Direct investment includes all transactions where the purpose of the
investor is to gain control of, or have a meaningful say in, the
management of the enterprise in which the investment is made (for
example, the establishment of new businesses or the acquisition of
shares in existing businesses).
Portfolio investment refers to the purchase of assets, such as shares
or bonds, where the investor is interested only in the expected
financial return on the investment.
?
??
Did you know?
In 2001 direct investment from
the rest of the world was equal
to R58 404 million, while in
2005 it was R39 770 million.
Portfolio investment was equal
to R24 000 million in 2001
while in 2005 it was R36 026
million.
Module assessment
1. Identify important role players in the economy and give an
example of each.
2. Give an example of an economic issue that is studied in the micr o
environment and an economic issue that is studied in the macr o
environment.
3. What do banks do with the savings of households?
4. What are the functions of government in a mixed economy?
5. Use a diagram to show how the government influences the flow of
goods and services in the economy.
Module 1: Role players in the economy
13
?
??
Did you know?
In 2001 we exported goods
(excluding gold) to the value of
R236 556 million and in 2006
we exported goods (excluding
gold) to the value of R398 532
million to the rest of the world.
The reason for this increase in
exports is because of the
increase in the economic
growth rates of our trading
partners.
6. Use a diagram to show how an incr ease in exports influences the
flow of goods.
7. Differentiate between direct investment and portfolio investment.
Module summary
In this Module we identified the main r ole players in the
economy – households, firms, government and the for eign
sector. We also showed how these various r ole players interact
with one anther and how they influence the flow of goods and
services in the economy. We also looked briefly at the impact
that globalisation might have on an economy in terms of the
flow of goods and capital.
80–100% 70–79%
I am able to identify the main role
players in the economy.
I am able to describe the main
role players in the economy.
I am able to distinguish between
the micro and macro environment.
I am able to describe the flow of
goods and capital between
households and firms.
I am able to identify the role of
government in a mixed economy.
I am able to describe the impact of
government on the flow of goods
in the economy.
I am able describe the impact of
the foreign sector on the flow of
goods in the economy.
I am able to distinguish between
direct investment and portfolio
investment.
14
Topic 1
Not
achieved
Source: South African Reserve
Bank, Quarterly Bulletin,
March 2007
Not yet
competent
Outstanding
South African exports
Competent
Assess yourself
60–69%
0–59%