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Chapter 3 3.1 Production, Income and Spending Production generates → Income (for various factors of production) → use for Spending on Production (fig.3.1) Stock versus Flow variable → Time dimension difference Once versus Continues (box 3.1) 3.2 The interdependence between Households and Firms Figure 3.2 (goods and services) + Figure 3.3 (income and spending) Households: people who make economic decisions and sells factors of production on the factor market Firms: employs factors of production and produce goods and services for the goods market 3.3 Introducing the Government Figure 3.4 Government = local + regional + national = Public Sector Government spending = injection in economy (circular flow) Taxes = leakage or withdrawal from economy (circular flow) 3.4 Introducing the Foreign Sector Figure 3.5 Export = addition or injection in the economy (circular flow) Import = leakage or withdrawal in the economy (circular flow) 3.5 Financial Institutions in the circular flow of income and spending Figure 3.6 Examples: Standard Bank, ABSA, FNB, Pension funds, stock exchange Savings = leakage or withdrawal from the economy (circular flow) Investments = addition or injection in the economy (circular flow) 3.6 Total Production, Income and Spending: Summary C = spending (Consumption) by households and consumers I = spending (Investment) by firms G = spending by Government X = spending (Export) by foreigners Z = spending (Import) by South Africans in another country (-) C+I+G+X-Z = Total Expenditure S = leakage (Savings) by households and consumers T = leakage (Tax) by government 2017-05-23 http://johan008.bizhat.com ECS1601 1 Chapter 15 15.1 The function of Money Medium of exchange (intermediary)/ unit of account (measure)/ store of value (deferred payment) Definition: anything accepted as payment for goods + services + debt 15.2 Different kinds of money Commodities: problem of uniformity/durability/divisibility/carry→ coins: problem of large transactions → paper money: problem of fiduciary /credit money (more paper money than gold backing) therefore intrinsic value = 0 with only exchange value → cheque accounts + credit cards (Box 15.1) 15.3 Money in S.A. M1 = coins + notes + demand deposit (immediately) (bigger than others) M2 = M1 + short + medium term deposit’s M3 = M2 + long-term deposit’s 15.4 Financial Intermediaries Link between surplus units and deficit units 15.5 South African Reserve Bank (Functions) formulating and implementation of monetary policy services to government (custodian of foreign exchange reserve) provision of economical and statistical services maintaining financial stability (issuer of banknotes + coins, Banker’s bank-cash reserve) 15.6 Supply of money Banks create demand deposits through deposit + loans – passive Banks create demand deposits through overdraft facilities – active (Box 15-4) SARB control supply of money with: Cash reserve requirement to guard against cash withdrawals and accommodation policy at repo rate. Other factors that influence money supply: foreign trade (export) and government budget finance and tax deposit’s 15.7 Demand for money Table 15.2 → Figure 15.1 15.8 Equilibrium in the money market Figure 15.2 is demand determined money supply 15.10 Instruments of Monetary Policy Definition: measure/ monetary authorities/ money supply or Interest rate/ stable prices +full employment+ growth/ Direct (non-market): credit ceilings, deposit rate and exchange control versus Indirect (through market): accommodation policy, open-market policy, reserve asset requirement and public debt management. Open-market policy: inverse relationship between price of bond and yield. 2017-05-23 http://johan008.bizhat.com ECS1601 2 Chapter 16 16.1 Role of Public Sector in the Mixed Economy Private sector is more efficient in the production of goods and services. Free market cannot function without government enforce rules (contracts) Free market are not efficient (fair) as market fails (monopoly) Free market does not produce equitable outcome 16.4 How does government intervene? Public provisions (national defence)/market participant (largest employer)/government spending (child grants)/taxation (tobacco products) /regulation (anti-tobacco law) 16.5 Government failure Politicians/bureaucrats/rent-seeking 16.6 Nationalisation and privatization Definition and arguments for and against 16.7 Fiscal Policy and the budget Definition: level + composition of government spending and taxation versus monetary: quantity of money + interest Demand Management: Monetary + Fiscal to manage Y (Total goods + services) Expansion (stimulate) versus restrictive (reduce) 16.8 Government Spending Increases: → Table 16.2 Causes: changing preferences/ shocks( military) / redistribution/ misconceptions (popular demand)\ population growth Changes: defence , police, social services, interest Table 16.3 16.9 Financing of Government Expenditure Income: property, fishing and mining rights →very small; Taxes: main source Borrowing: International/Domestic: issue bonds, Reserve Bank, 20c interest of every R1 taxed 16.10 Taxation Direct (company + PAYE=wealth) versus Indirect (VAT+ custom duties=consumer) Progressive: personal income tax (Y% tax) versus Proportional: company tax (% tax fixed) versus Regressive: vat (Y % tax) Criteria for a good tax: neutrality (minimum effect)\ equity horizontal and vertical)\ Administrative simplicity (cost) 16.11 Taxation in South Africa Marginal-: % of excess versus Average (effective) tax rate: total tax/income (table 16.6) Rise in tax burden → Table 16.7 16.12 Tax incidence: Who really pays the taxes? Statutory (legal)- versus effective incidence Figure 16.3 →Consumer: R2.40 + Supplier: R1.60 because of demand curve slope, also fewer jobs. 2017-05-23 http://johan008.bizhat.com ECS1601 3 Chapter 17 17.1 Why countries trade Absolute Advantage: specialize in what do best (Table 17.2) Wool Video cameras Australia (100) 5 Japan 50 (10) Comparative (Relative) Advantage: relative price (opportunity cost) must be different and worse than international ratio (1 Car : 5 Wine) (Example p373) Cars Wine Germany 2 (1) 8 (4) SA 1 6 Equal advantage: opportunity cost are the same no international trade. Sources of comparative advantage: technology (superior), resource endowments (capital/labour), differences in tastes or demand (rich/poor countries) 17.2 Trade policy Specific (fixed amount) versus ad valorem (% of price) tariff. Figure 17.1 before trade Pd, with international competition Pw, with tariff Pt. Against (↑P) and for trade tariff (production and employment and revenue ↑, Z↓) 17.3 Balance of Payment Current Account = Goods (Import and Export) + Gold + Services (Import and Export) + Transfer (Net) Financial Account = financial assets + Loans + Borrowings Gold and foreign reserves = sum of the above 17.4 Exchange Rates Definition: rate at which currencies are exchange on the foreign exchange market Demand and Supply of foreign exchange figure 17.3 (quantity of dollars and dollars price in Rands) Table 17.4 Movement of demand and supply curves of dollar. (US is supply curve and RSA is Demand curve) Appreciation versus Depreciation - examples Table 17.5 ability of SARB to intervene depends on foreign reserve. Exchange Rate policy: nothing, intervene, interest rate 17.5 The terms of trade Definition: ratio between X prices and Z prices. Formula p.401 Welfare increase if ↑terms of trade because gold prices (X) ↑ 2017-05-23 http://johan008.bizhat.com ECS1601 4 Chapter 4 4.1 Macroeconomics Objectives Economic Growth: increase in goods and services Full Employment: to achieve social and political stability Price stability: inflation (change in prices) as low as possible Balance of Payment stability: Balance between Z and X Equitable distribution of income: to achieve social and political stability 4.2 Measure the level of economic activity: Gross Domestic Product (GDP) GDP: /total value/ final goods and services/ a country/ period/ 3 Methods of calculating: (table 4.1) 1. Production: value added at each stage 2. Expenditure: final value of goods and services 3. Income: earned income by owners of production factors Basic prices= Factor cost + taxes on production (payroll) – subsidies on production (training) Market prices= Basic prices + taxes on products (per unit: vat) - subsidies on products (per unit: export) Current prices (nominal)= prices ruling during that period Constant prices (real) = prices ruling during previous base year (purchasing power) Box 4.1 + 4.2 4.3 Other measures of production, income and expenditure GDP= C + I + G + X – Z GDE= C + I + G GNI(GNP)=GDP +f actor receipts (SA overseas)–factor payments (foreigners in SA) Example: Table 4.4 4.4 Measuring employment and unemployment Unemployment rate: % of people willing + able, but do not have jobs Difficult to measure: part-time, seasonal, housewives, illegal activities? 4.5 Measuring prices: the consumer price index Index of prices/representative “basket”/consumer goods and services/ to calculate inflation. Box 4.5 4.6 Measuring the links with the rest of the world: balance of payments Record of transactions with the rest of the world Current account(goods and services import and export, income receipts and payments) + Financial account(financial flows) 4.7 Measuring inequality: the distribution of income Lorenz curve (figure 4.1), Gini coefficient (figure 4.1), Quartile ratio (table 4.6) 2017-05-23 http://johan008.bizhat.com ECS1601 5 Chapter 18 18.1 Production, Income and Spending National Accounts: Measures → production = income = spending versus Macroeconomics: explanation of the above flows. 3 Possibilities: Aggregated Spending (A) = Production = Income (Y); Spending > Production and Income (increases); Spending < Production and Income (decreases) Say’s Law: Supply creates own demand (Y → A) versus Keyn’s: Demand (G) creates own supply (A → Y) 18.2 Basic Assumptions Box 18.2 page 463 18.3 Consumption Spending C = C + cY, C = autonomous consumption, c = marginal propensity to consume, Y = income, cY = induced consumption (figure 18.2) S = - C + (1 – c) Y, S = Savings (Box 18.4) 18.4 Investment Spending Definition: production + purchase of capital goods Autonomous: not determined by income, but cost of capital, interest rate, and expected revenue. Figure 18.3 and 18.4 18.5 Simple Keynesian Model – Without a Government 45 – degree line: Aggregated Spending A (C + I) = Y (production) (figure 18.6) Excess demand: A > Y (figure 18.7); Excess supply: A < Y (figure 18.7) Equilibrium level of income determined through: Using words on page 418 (change in inventory); Using symbols A = C + I and Y = A (solve Y); Using numbers A = 200 + 0,8Y and table 18.1 (only one value where A = Y); Using graphs figure 18.8 on page 420 18.6 Algebraic Version Only the results on page 420 (18-6a) 18.7 The Multiplier Only need to know in the study guide 1. Ratio between ΔA → ΔY 2. α = 1÷(1-c) 3. Additional income spend (c) in the next round 4. Graphically figure 18.10 18.8 A Brief Summary Repeat of the above 2017-05-23 http://johan008.bizhat.com ECS1601 6 Chapter 19 19.1 Introducing Government into our Model G = Autonomous (political issues) A = C + I + G; Graphically figure 19.2 Impact of G: Increase A, leaves α unchanged, increase Y (Y = α.A) Proportional Tax: T for the economy as a whole is a certain proportion of Y. Disposable income (Yd): Income that households have available after they have paid taxes. Impact of T: Leaves A unchanged, reduce the multiplier → 1÷[1-c (1-t)]; reduce Y Equilibrium level of income in an economy with G and T → figure 19.5 Numerical example: Box 19.1 + 19.2 + 19.3 + 19.5 19.2 Foreign sector into the model: Open Economy X = Autonomous (economy of the rest of the world, international competitiveness, exchange rates) Impact of X: increase A, leaves α unchanged, increase Y Z = Autonomous (unrealistic) → Net export (X – Z) Box 19.7 Z = induced imports (mY) (m) marginal propensity to import Box 19.8 19.3 A brief summary Repeat of the above 2017-05-23 http://johan008.bizhat.com ECS1601 7 Chapter 20 20.1 Aggregated demand (AD) aggregated supply (AS) model Definition: General levels of prices and total production versus Micro Economics: Demand and Supply of a particular commodity Shifts of the AD: Δ in any aggregate spending items (A), Fiscal (G + t), Monetary (i); Table 20.1 Shift of the AS: Δ any factor prices, productivity Table; 20.2 Expansionary / Contractionary monetary and fiscal → ΔAD (Figure 20.3) Supply shock (example, high increase in oil prices) → ΔAS (Figure 20.4) Box 20.1 20.2 Monetary transmission mechanism Definition: Change in the monetary sector (i) → change in the rest of the economy (real sector : Y) With graphs: Figure 20.6 (a) interest rate change→ (c) change prices and income/production With symbols: Δi → ΔI→ ΔA → ΔAD →ΔY and ΔP Crucial links in transmission mechanism: interest elasticity of investment and slope of AS figure 20.2 20.3 Monetary and fiscal policy in the AD-AS framework Demand management (monetary policy with interest rate and fiscal policy with G and t) can be contraction and expansionary Monetary and fiscal policy lags: recognition, decision, implementation and impact. Effectiveness of monetary (dampen) and fiscal (stimulating) Policy dilemma in a open economy: (Figure 20.9) Reduce unemployment (Y0→Yf) increase deficit. Reduce deficit (Y0 → YB) increase unemployment. 2017-05-23 http://johan008.bizhat.com ECS1601 8 Chapter 21 21.1 Definition of Inflation Definition: continuous and considerable rise in prices. Aspects of definition: neutral (not the cause), process (continuous), considerable (more than 3%), general (not a particular good) 21.2 The measurement of inflation Definition of CPI: cost of (living) representative basket of consumer goods and services Definition of Core Inflation (headline inflation): underlying inflationary pressure which excludes highly volatile prices. Definition of PPI: Measure prices at the first level of commercial transaction (cost of production) Table 21.3 Implicit (side effect) GDP deflator: measure prices of all final goods and services. Difference between current and constant GDP 21.3 Effects of inflation Distribution: creditors (lender) → debtors (borrower) (purchase power) Elderly → young (income) Private → government (bracket creep and outstanding debt) Economic effects: new production → anticipating inflation Savings → speculative practices Balance of payment (X down, Z increase) Social and Political effects: cost of living increases (rent, service charges, taxi fares etc.) Greatest cost: inflation expectations causes inflation 21.4 Causes of inflation Demand pull: C + I + G + X + Ms (Monetary an Fiscal policies) Fig. 21.1 Cost push: increase in wages, import, profits and disasters; decrease in productivity Fig 21.2 2017-05-23 http://johan008.bizhat.com ECS1601 9 Chapter 22 4.4 Measuring employment and unemployment Employment: how many people have jobs Unemployment: how many people are willing and able but do not have jobs Difficult to measure: part-time, seasonal, housewives, illegal activities? 22.1 Unemployment Cost of unemployment: Individual (psychological cost, experience) versus Society (crime, damage to social and political structure, opportunity cost) Types of unemployment: voluntary or involuntary (Box 22.1) 1. Frictional (between jobs) 2. Seasonal (part of each year) 3. Cyclical (recession or business cycle) 4. Structural (change in job requirement) Policies to reduce unemployment: 1. Supply side (limit population growth, immigration, wrongly skilled) 2. Demand side (increase government spending, stimulate consumption and investment, labour intensive production, special projects, informal sector, tax incentive, relative price, labour legislation) Unemployment in the Keynesian and AD-AS models: horizontal axis is Income (Y) for both models and Y↑ → N↑ figure 22.1 except for structural and frictional unemployed, capital intensive growth and too much new entrance. 22.2 Unemployment and inflation: the Phillips curve Figure 22.2 Trade of principal and stagflation 2017-05-23 http://johan008.bizhat.com ECS1601 10 Chapter 23 23.1 Definition and measurement of Economic growth Definition: Annual (real) rate of increase (per capita) in total production (GDP) Problems with GDP: Non market production (G) Unrecorded activity (informal sector) Data revision (new + better) Economic welfare (by-products, distribution) Calculating economic growth: real term (- inflation) + per capita (per person) The Business cycle (Study Guide only) Definition: pattern of upswing (expansion) and downswing (contraction) Stages: Trough (A), Upswing (AB), Peak (B), Downswing (BC) 23.3 Sources of Economic growth Supply factors: Natural Resources (discover, techniques) Labour (quality: education, health, nutrition, attitude) Capital (buildings, machines, equipment) widening (increase for more workers) versus deepening (increase for more per worker) Entrepreneurship (identify opportunities) Demand factors: Domestic Demand (C+I+G) increase through inward industrialization (worsen BOP and increase CPI) NO Export Demand (Economic conditions elsewhere) YES • Import Substitution (capital goods imported, protection of local market) NO 2017-05-23 http://johan008.bizhat.com ECS1601 11