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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%