ECE 202 Notes Study Economics Yr1 Prt2
ECE 202 Notes Study Economics Yr1 Prt2
ECE 202 Notes Study Economics Yr1 Prt2
Table of Contents
Table of Contents....................................................................................................................1
:TO MAKE :SHORTENED NOTES OF TO STUDY LATER AFTER EXAM FOR FUTURE:&
magazines/journals for economics-& questions for lecturers still to ask................................5
Questions & answers:.......................................................................................................5
Shortened notes to make:................................................................................................5
All Multipliers and index ratios:and Marginal propensty's to Consume................................6
Chapter 1:.........................................................................................................................6
Chapter 6..........................................................................................................................6
Chapter 7..........................................................................................................................6
All Formulas:........................................................................................................................6
Chapter 1:.........................................................................................................................6
Chapter 18:.......................................................................................................................6
Chapter 19:.......................................................................................................................6
IMPORTANT NOTES from LAST SEMESTER..........................................................................9
CHAPTER 1 ...........................................................................................................................10
: INTERDEPENDANCE OF MAJOR SECTORS, MARKETS AND FLOWS IN THE ECONOMY..........10
Important Boxes/concepts/graphs/pages:.........................................................................10
box 3.1 p48t Stocks and Flows.........................................................................................11
3.1 p46 THE 3 MAJOR FLOWS IN THE ECONOMY: Production ,Income and Spending........11
3.2 p47 The Interdependance between Households and Firms.........................................12
TYPES OF FIRMS:P50 BOX...............................................................................................13
Market Types;.................................................................................................................14
The Circular flow of Goods and Services Diagram.(NOT SPENDING+INCOME)...............14
The Circular flow of Income and Spending.(NOT GOODS & SERVICES).........................15
Abbreviations of major Terms:.......................................................................................15
3.3 pg 52 Introducing the Government:............................................................................16
3.4 Introducing the Foreign Sector....................................................................................17
Financial Institutions in the circular flow of income andspending.3.5t..............................18
Total Production,Income,Spending-Revisited....................................................................19
Abbreviations of major Terms:.......................................................................................19
CHAPTER 2 ...........................................................................................................................20
: MEASURING THE PERFORMANCE OF THE ECONOMY..........................................................20
Important Boxes/concepts/graphs/pages:.........................................................................20
1 . Macroeconomic Objectives-2.1p9s,p61t.......................................................................21
5 Macroeconomic Objectives used to Judge the Performance of the EcoEnomy............21
#1 Macroeconomic Objective :Econ.Growth : GDP-Gross Domestic Product-Measuring the
Level of Economic Activity.4.2t,p63...................................................................................22
Aspects on the definition of GDP....................................................................................22
About GDP:.....................................................................................................................22
The 3 Methods of Calculating GDP:...............................................................................23
Difference between the 3 Methods of calculating GDP..................................................23
Measurement at Market Prices,Basic Prices and Factor Cost(or Income).......................24
GDP at Current prices & GDP at Constant Prices:...........................................................25
Other Measures of Production ,Income and Expenditure...............................................25
GNI (or GNP)- Gross National Income ............................................................................25
Expenditure on GDP.......................................................................................................26
ECS102-8 economics Part2 Yr1 Page 1
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Chapter 1:
Chapter 6
1) #@#=1/1-c : Multiplier for Keynesian macroeconomic model without foreign sector or
Government
Chapter 7
1) The old marginal propensity to consume is c with taxes included.The slope of this
curve is c(1-t) which is allways smaller than c.
2) The new marginal propensity to consume is c(1-t) with taxes included.The slope of
this curve is c(1-t) which is allways smaller than c.
3) The Multiplier without Taxes= #@#= 1/1-c
4) Multiplier with Taxes = #@#=1/1-c(1-t)
All Formulas:
Chapter 1:
Chapter 18:
1)
Chapter 19:
GOVERNMENT SPENDING
1) Equilibrium position of Tot.Income-Production/Tot.Spending-Demand
: Y0=Abar
:Income equilibrium =Tot. Autonomous Spending
2) Consumption Function: c=C/Y :
3) Equilibrium Income=Y0
4) To calc: EQUILIBRIUM level we start with
5) Equilibrium condition : Y=A(where eqilibrium is)
6) so :Y=C+I+G because (A=C+Ibar+Gbar)
7) and C=Cbar +cY)
8) So: Y=(Cbar+cY)+I+G
TAX
1) Tax Rate: T=tY
2) Specific exercise:If the Gov. wishes to close the gap between full employment (=Yf as
an example) and lower levels by incresing spending –they must work pout how much
with above formula.=^Y=@^G :so:^G=^Y/@. where multiplier will increase %income
morethan %spending
Exports&Imports
1) The Formula for Imports/Exports is: A = C+I+G+(X –Z).
2) term Net Exports usually referred to as =(X-Z)
1) from A = C + I to A = C + I + G.+(X-Z)
2) Y=A (equil. condition)
3) A=C+ Ibar+Gbar +(Xbar-Zbar) (aggregate spending where I,G,X,Z, are autonomous)
4) C=Cbar +c(1-t)Y (consumption function)
5) SUBSTITUTING:
a) Y=A
b) Y=C+Ibar +Gbar+(Xbar-Zbar)
c) Y=(Cbar +cYd)+Ibar+Gbar+(Xbar-Zbar)
d) Y=(Cbar +c(1-t)Y))+Ibar+Gbar+(Xbar-Zbar)
e) Y-c(1-t)Y=(Cbar +Ibar+Gbar+(Xbar-Zbar))
f) Y=(1-c(1-t)) *(Cbar +Ibar +Gbar+(Xbar-Zbar))
g) Y0=1 /1-c(1-t) *****(Cbar+Ibar+Gbar+(Xbar-Zbar))
CHAPTER 1
: INTERDEPENDANCE OF MAJOR SECTORS, MARKETS
AND FLOWS IN THE ECONOMY.
Important Boxes/concepts/graphs/pages:
1. Pg47-Produc/income/spending flows diagram
2. Pg52-circular flow of-1-goods/services diagram/-2-income /spending
3. pg 57/58-circu;lar flow of goods +services with Government+Foreign+Financial sector.
4. BOX3.1 pg48-Stocks&Flows
5. BOX3.2 pg50-Different types of firms
IN MIXED ECONOMY:
FOR THE DIAGRAM: "The 3 Major Flows in the Economy"
-Production –generates- Income(from various FOP only) –generates (used to(partly)
spend on)- Spending-Buys/pays for Production
gg
gg
Producti
on
Spendi
ng Income
1. Households:all the individuals who live together and make joint economic decisions,or
others make for them./individuals,consumers/interchangably used terms.
1.1. joint income+-
1.2. primitive times no Gov,foreign sector,firms etc
1.3. members are consumers-consumption
1.4. Are the basic units in an economic system
1.5. Own the FOP and sell these factors to Firms,receive income and buy consumer
goods +services,consumed to satisfy human wants/needs.
2. In mixed economy-Households own most FOP/own labour/own capital goods/eg;anglo
american-owned by shareholders.
CONSUMERS:
3. Total consumption Expenditure(or aggregate C.E)=total consumption /spending in
economy(on consumer goods and services by households).
3.1. Symbol="C"
4. In market economy consumers determine what should be produced.
5. In economic analysis we assume consumers are rational-Max satisfaction for means at
their disposal.
6. FOP cannot satisfy human wants directly-thus sell to firms to convert.-Income from fop
flows from.
FIRMS
1. Definition of firms:The unit that employs FOP to produce goods and services that are
sold in the goods market.
2. Characteristics of firms:
2.1. basic productive unit in the economy
2.2. are actually artificial units
2.3. ultimately owned /operated by individuals/households-eg shareholders
2.4. Assumption is that rational-aim to max profit.
2.5. Profit=total revenue-explicit cost
2.6. "I"=capital formation or investment. (in capital goods)
2.7. purchase fop on the 'factor markets'
2.8. Decide what+/how+/+to whom distribute from 3-central questions in economics.
TYPES OF FIRMS:P50 BOX
Individual /Sole proprietorship
1.1. All decisions +ownership vested in single person
1.2. Main weakness unlimited liability-owner responsible all debts+liabitities of firm.
1.3. Relatively easy to form /dissolve
1.4. Suited activities require personal supervision,where: scale of operations,and
financing requirements not large.
1.5. Has no separate existence from owner-assets of firm are assets of owner.
1.6. Limited liability to raise funds for expansion
1.7. eg : shops,hairdressers,farms,plumbing services.
Partnerships:
1.8. Suited to all activities needing specialised abilities-benefit from specialisation.
1.9. Differs little from sole proprietorship.
1.10.Action of partners binding on other partners including unlimited liability.
1.11.Partners are joint owners of firm.
1.12.Exept for a bit better financing possibilities ,same liability +other of sole
proprietorship.
1.13.eg:attorneys ,accountants,doctors,etc.
Companies
1.14.Identity in eyes of law separate from owner.
1.15.Least risky form because liability usually limited to value of shares owned.
1.16.Attract better financing through eg: shares ,bonds,bank credit.
1.17.Separation of owner /mangement can create problems.
1.18.Specialists can be employed to manage firm.
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FIRMS
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c : A
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O uc CE OD
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Pr ER G
S
GOODS
FACTOR
MARKET
MARKET
SA FO G
LE O P O
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ER R N S
(S VI D
FO
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HOUSEHOLDS O C
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)
FACTOR GOODS
MARKET MARKET
IN
W CO
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PR G M
O ES E HOUSEHOLD
FI /
T S
ng
di
en
Sp
Central gov.
all gov. depts also
CSIR,SABS,
universties
general government:
incl.provincial gov.=9 provinces
admin+local gov=muncipalities+district
councils
Public sector=
pubic corporations-eskom,transnet,sabc,rand water,post office,armscor,
(can be regarded as firms for purposes of our flow diagrams)
+all of other government parts=ALL OF
FIRMS
HOUSEHOLDS
1. Financial Institutions:include Banks,insurance companies,pension funds(Iscor/Mine
employees pe..)JSE securites exchange.
2. Financial Institutions act as links between households +firms with surplus funds and
households and firms which require funds.
3. Main function of financial sector:channel /act as funnel for savings to flow to
investment spending.
4. Units(firms/or households) can be classified as;
i. Surplus Units-those in a position to save because spending less than income
ii. Deficit Units -those require funds spending more than income
5. "S" = Saving
6. "S" =To Save:means decision not to consume for households (defined as the act of not
consuming)firms can also save by not spending all their income.
7. Saving means a leakage/withdrawal from the circular flow of inc.+spend.
8. Savings channeled to financial instituions-households do save some of income-,
(savings deposits)become available to deficit units to expand production capacity.
(capital goods) called :
9. :Investment : which is a addition or injection into circular flow of inc.+spend.
10. Linkage in economics between expansion of the production capacity(investment) and
the decision to refrain from spending on consumer goods(saving)
Total Production,Income,Spending-Revisited
1. Aggregate /Total producton=all prod in economy
2. Aggregate /Total Income = Rent-nat.resources + Interest-Capital + wages-labour +
profit-entrepeneur
3. Aggregate/Total Spending= by 4 major sectors in economy=1-households-2-firms-3-
government-4-foreigners where(if one is trying to work out spending on (SA GOODS
AND SERVICES) = spending on {SA GOODS AND SERVICES Only}= E-Z = (spending by
foreigners on rsa (E)Exports MINUS spending by rsa consumers on (Z)Imports
4. Total Expenditure = C+I+G+ (X-Z)
5. (T)Taxes and (S)Savings and (Z)Imports represent = Leakages or Withdrawals.
Abbreviations of major Terms:
I=Investment in capital goods(machines,bridges,robots etc).
C=Households spending on consumer goods and services.
G=Government spending on goods and services.
E=foreign spending on RSA goods and services.
Z=RSA spending on foreign goods and services.
S = Saving
S=
Total Expediture=
Total Expenditure on SA Goods&Services=(less imports)
Z FIRMS
G
S I
Foreign Governmen
C C
Sector FINANCIAL SECTOR t
& &
Y Y
S
T
X HOUSEHOLDS
CHAPTER 2
: MEASURING THE PERFORMANCE OF THE ECONOMY.
Important Boxes/concepts/graphs/pages:
pg 80 lorenz curve graph
BOXES:
changes in purchasing power:pg78
price index construction:pg76/75
1 . Macroeconomic Objectives-2.1p9s,p61t
1. Economist must judge objectively-not own well being-1-which criteria to use? 2-
measure criteria?
2. For firms we use profit as crieria,? use for macroeconomy?
5 Macroeconomic Objectives used to Judge the Performance of the
EcoEnomy
i. Economic Growth>most important one,to grow empl.&liveStandards,econ. must
grow,eg:pop.incr
ii. Full Employment >need econ.growth to fill up,
iii. Price Stability >inflation-not prices-see normalo supply&demand
iv. Balance of Payments Stability (or External Stability)>&foreign exchange rate
v. Equitable Distribution of Income. more normative less positive,social +political threat
security
3.
i. Economic Growth :
a. First and arguably most important of criterion
b. If population grows –economy must also grow or
1. unemployment
2. living standards cannot increase
c. requires yardstick-use GDP-therefore GDP also central concept in national
accounts.
ii.Full Employment
a. Problems from unemployment:
1. personal level-
A. psycological suffering
B. material suffering
2. macroeconomic level-
A. serious threat to Social and Political Stability
b. Must have economic growth to get more employment,but you can get economic
growth without extra employment: eg technological advances cause less labour
,and more production.
iii. Price Stability
a. Since WW2 and 1973 prices only rise
gg
Producti
on
gg
Spendi
ng Income
3. Therefore different valuations of GDP yield different results ,so one should always check
prices used.
4. Different prices are only from different types of taxes and subsidies on goods and
services.
5. TERM: 'Indirect' taxes = taxes on products eg VAT
6. Taxes And Subsidies fall into 2 categories at national accountants
a. TERM Taxes and Subsidies on Products
i. Taxes on products =tax payable /unit :VAT & Duties on Imports & Taxes
on Exports
ii. Subsidies on products=subsidies linked to goods/service=per unit to
encourage export & domestic product subsidy eg:bread below cost
b. TERM OTHER Taxes and Subsidies (NOT per unit goods or service)
i. OTHER taxes =NOT /unit goods&service
eg:payroll,land,buildings,business licence.
ii. OTHER subsidies=NOT /unit goods&service eg:employment or payroll.
7. GDP @market prices – Taxes& subsidies on products=GDP@ basic prices
8. GDP @basic prices – OTHER Taxes& subsidies on products=GDP@ factor cost/FOP
/Factor Income
9. GDP @factor cost(FOP)(income) + OTHER Taxes& subsidies on products=GDP@ basic
prices
GDP at Current prices & GDP at Constant Prices:
1. TERM GDP at Current prices = Nominal GDP:expressed at current years price
levels/not converted
2. TERM GDP at Constant prices = Real GDP :use a BASE years prices,convert others
to that years : inflation eg1995
3. TERM Nominal GDP-gdp at current prices
4. TERM Real GDP-GDP at constant prices
5. TERM Nominal value-also called :'Monetary value' means in "terms of the name" ie at
face value , 5000 = 5000 or less/more
6. TERM Real value-means actual or essential,refers to purchasing power ,what? money
can buy.
7. Inflation :causes monetary values of goods/pricesto change per year-thus cannot
compare different years GDP's
8. In world of inflation,All values,not just GDP,must be expressed in nominal and real terms
tocompare
9. TERM Purchasing power-what a certain amount of money can buy.To calculate:The %
of the first/base years price over the % of currrent years price .(how much this years go
in last years=?70%)EG: 2000=100%=base year,this year 2003 = 115% of that:answer
=100%/divided by 115%= 0.87: so to work out a answer you say 0.87 * 5 baskets in
2000 will give purchasing power of 4.35 baskets at current years prices.
10.TERM Base year:year used as guideline for coverting other years prices to, to find Real
value/Constant Prices
Other Measures of Production ,Income and Expenditure.
GNI (or GNP)- Gross National Income
1. TERM GNI=Gross National Income= :(IS NOT GDI,but GNI) derived by:
a. SUBTRACT from GDP: all FOP-income earned in borders of SA by FOREIGN
NATIONALS.
b. ADD to GDP :all FOP-income earned outside borders of SA by RSA
NATIONALS.
i. include in FOP-Interest from money lenders,dividends(profit) etc.
2. TERM GNP=Gross National Product=same as GNI
6. term Inflation RATE: If you subtract Last years CPI from this years cpi ,AND divide
the quotient by last years cpi * 100 (the percentage %)you get the inflation rate
ie:127%-105% / 105
7. % *100
8. TO construct the CPI ,Stats SA must :
a. Select the "goods and services" to be included in the "Shopping Basket." :
..To select-Stats SA does survey of household every 5 years.
b. TERM Determine Weight of each good/sevice:
..Stats SA does a survey 5 yrly to determine relative importance in Av.
Consumers Basket.
c. TERM Decide on a BASE YEAR for calculating CPI :
..Base year is year in which the Survey(5 yearly)
is done
d. Decide on FORMULA for calculating CPI
..Standard price index formula used,Weight of item decides it's effect on CPI,
e. Collect prices each month to calculate CPI.
A_....RSA 1500 different goods&services,in -1- 40 groups/subgroups,for
which a CPI is calculated for each one -2- 5 expenditure groups,pensioners,9
provinces+14 major urban areas.+metro+other urban areas+rural
B_Prices are collected by questionaire sent to 2200 retailers-
110 000 quotations per month and info. double checked.,Prices used are first 7
days of month.
9. CPI available 2nd half of following month.
10. Used to calculate inflation.
11. large base 1500goods means cpi is fairly accurate.
9. Purchasing Power =year 1% / year 2 % .Also ,or nominal % /price level %=real value.
10. eg:between 1920-1930 purchsing power increased by 40 % in SA ie :there was
negativeinflation.
#4 MACROECONOMIC OBJECTIVE:Equality in Distribution of
Income: 3 Methods of Measuring Inequality.
1. a-measuring performance of economy in general no easy task ,-b- but measuring this
one type is most difficult of all.-data from tax returns/census etc.-then applying
measures to estimate degree
2. TERM Personal distribution of Income:to people/races/levels,all fop included.
3. TERM Functional distribution of Income:Between FOP only.
Method #1 of 3 : Lorenz Curve
1. Term A Lorenz Curve is a simple graphic device which illustrates the degree of
inequality in dist. of income.(or any other variable)-named after american statistician
developed it 1905.
2. To construct:
a. Make Chart with -1-Population % poorest to richest -2- Income -3- Cumulative
Population -4- Cumulative Income %
Number of Each Cumulative
Population Income Population Income
Poorest 20% 3 % 20 % 3%
Next 20% 7% 40 % 10 %
Next 20% 15 % 60 % 25 %
Next 20% 25 % 80 % 50 %
Richest 20% 50 % 100 % 100 %
b. Plot Graph –
i. see graph pg80 in textbook
ii. (-1-)Horizontal axis =Cumulative %'s of Population.
iii. (-2-)Vertical axis =Cumulative %'s of Income.
iv. Axes are joined to form a square
v. Diagonal drawn from Origin A to point B corner:Diagonal indicates a
perfectly equal distribution of income-Serves as a reference point. ie:
perfectly equal distribution occours along line :first 20% population would
earn 20% of income and so on etc.
vi. A Lorenz curve ALLWAYS starts at Origin and ends at B(opposite corner
= 100%).
vii. Greater distance between diagonal and Lorenz Curve – the greater the
inequality.
viii. Area (shaded) between diagonal and Lorenz curve = called- "Area of
inequality"
ix. Greatest possible inequality: where 1 person earns all money=curve O-A-
B(triangle)
Extra Notes:
RSA:
best known for ;precious metals,fruit,wine
Services sector largest.
muanufacturing sector 15% of GDP
maize most important crop,mined=mang,gold,chrome,platinum ,coal,diamonds.
export production nurtured in eg:ostridge meat,high value fruit,wine
Gauteng 33% of GDP,western cape15%
unemployment 29.4%=4.7million=SA ranked as on of most unequal disb.of Income in
word,where accurately measurable.
CHAPTER 3
: THE MONETARY SECTOR.(MACROECONOMICS)ch
ch15t,pg353
INTRODUCTION:
• Money important -double coincidence of wants,etc
• Years 'neutrality of money '(print 2*more money ,cause 2*higher prices )y , was
economic cornerstone,today different thinking slightly.
• a bank is a place that will lend you money if you can prove you dont need it.-bob
hope
• money is a good servant but a bad master-proverb english
• money like muck,not good exept it be spread around-francis bacon.
The Functions of Money:
2. Is not a Flow,money is a Stock which can finance a much larger flow of income during a
period.
Different Kinds of Money.
2. eg:cocoa beans,cigarettes,tea,seashells,cattle,silver:earliest forms were commodities
value intrinsic.
3. Uniformity,durability,divisability,ability to be carried.
i. Coins,too heavy,
ii. Paper money.1st paper money was certificates of deposit at goldsmith.
iii. TERM Fiduciary/credit money(gov. issued partly covered by gold in reserve)
iv. Today-no gold deposits ,based on confidence in Gov.to control supply of notes.
v. Cheque accounts-next development-Constitutes largest part of money stock
indeveloped lands
4. debit +credit cards&electronic payment make difficult pinpoint exactly what money is
esp.infin Markt
5. A cheque ,debit or credit cards or electronic transfers ARE Transfer methods NOT
MONEY-the deposit is,and a credit card is in addition1 a means of getting short term
loan AND 2method transfer.
6. Credit card means of deferring/postponing payment.
7. Credit card :Also people 'economise' on holding money,hold less on avg,buy on credit
pay end mnth.
Money in RSA.
1) Not easy to measure money,ie:assets/differnt means of payment/
2) Economists interested in store of value function of money:3 measures of money by
SARB:M1,2,3
TERM 1-Coventional measure:M1
1) M=C+D (Money quantity =Cash(all coins ,notes)+demand deposits with monetary
sector.)
2) TERM THE Money Supply =C ,not D of M=C+D only cash in circulation outside
banking sector can be regarded as the money supply.
3) monetary sector incl. in SA :land bank,public finance corporation,private banks,post
bank, SARB
4) Solely on basis as medium of exchange (Incl. M1A=cash notes+coins only)
5) TERM :Demand deposits =91% of money in SA,refer to deposits can be withdrawn
immediately.
TERM 2-M2
1) M2 =M1+all other short term and medium term deposits of the domestic private sector
with monetary institutions(more than 1.5 times m1 in SA)
2) Short term=less than 30 days ,Medium term=less than 6 months.can only withdraw
sooner at a cost
3) Quasi money =nearly money : short and medium term deposits,since maturity not very
long.
TERM 3-M3
1) M3 =M2 + all long term deposits of the domestic private sector with monetary
institutions.
2) Long term deposits-maturity value longer than 6 months.
3) Most comprehensive measure of money.,also regarded as most reliable indicator.
4) Emphasis is more on store of value function as we move from m1-m2-m3,m3 most store
function.
Financial Intermediaries.
1) Financial intermediaries main function is : to act as an intermediary between surplus
units and deficit units in the monetary economy.
2) TERMIndirect/Direct Financing:Indirect-through financial intermediatry/Direct –person
to person
3) TERM Financial Transactions :Distinguished from real transactions by fact no
goods/other services involved.(distinction between 2 divides economy into real and
financial sector)
4) TERM Real transactions :All transactions where goods and services are involved.
(divides fin/real)
5) The institutions in the financial sector have one main function, namely to act as an
intermediary between surplus units and the deficit units in the monetary economy.
6)
7) When the government borrows money, it uses treasury bills and government stock or
bonds as security.
8) TERM Security or Credit instrument issued. In exchange for funds, a piece of paper
issued,this document stipulates the interest rate at which funds are loaned as well as
when and how the loan is to be repaid. Examples of credit instruments are bills of
exchange, promissory notes, and bankers' acceptances. Government uses treasury bills
and gov.stocks and bonds.
9) Financial intermediatries includes:Insurers,pension funds,banks,unit trusts,finance
companies,SARB.
10) TERM Interest is amount borrower must pay lender for use of funds concerned.
11) Banks can create money by granting overdrafts which is M1 money class.=D (of
C=D=M1),and banks can do this because need only keep % of deposits in reserve
bank ,so can lend rest out.
12) TERM monetary baseAlso known as high-powered money. It usually refers to the
stock of cash (notes and coins) and includes the cash in the hands of the non-banking
public, vault cash of banks and cash deposits with the Reserve Bank
4- The most notable feature of banks is able write a cheque to draw against account,or
transfer on demand,therefore it they be treated as money.-very convenient so little
interest paid.
5- Demand deposits can be created in tho ways:
a. Deposit=(^='change in') ^M=^C+^D so = -C1000+D1000=M0
b. Overdraft facilities. ^M=^C+^D so = C0 +D1000=M1000 -bank
created credit
2-Reserve Asset position and Credit Multiplier:
1. TERM :Cash reserves : IN SA 2.5% of Total Liabilities WITH RESERVE BANK at 0 interest
;amount banks know have to pay for withdrawals/transfers to other banks-eg confidence
run on bank- eg saambou 2002 run on bank.
2. TERM CREDIT multiplier:=formula is 1/b^(change)R=D(deposit M=C+D) (In RSA 1/b is
40) : If someone deposits money in a bank,by multiplying that ammount by the Cred.
Multipl. you get the eventual amount of bank deposits,including the original one ,that
can be created by that deposit eventually.This works like that because only a certain
percentage of each deposit can be lent out to someone ,the rest must be banked by law
in the reserve bank.Now if a bank lends a % out of every deposit they receive ,those who
lent this money pay others who re-deposit that amount with other banks,which
continues the cycle until no more bank deposits can be created from one original
deposit.
3. TERM:Classical cash reserve system :where gov. does control economy by changing
the rate to be held in reserve bank.Today it is not an essential part of monetary control
system in SA,we use cost of additional reserves
4. BUT Under the present system the money supply process in SA is a function of
demand for credit ,and this is determined by the level of the interest rate of banks
lending out money,and not by the amount of credit banks are able and willing to extend.
This reduces gov.control over size of money supply(reserve rate wont affect)
3-Other Factors in Supply of Money
1. Foreign trade exports/ BRINGs money into/increases supply of money in country,and
imports reduce it
a. A countries money supply increase when gold & foreign reserves increase and
decrease visa versa.
2. Gov. spending increases supply of money by reducing amount of taxes,which take
money out of suppy,being kept in the SARB(today gov. keeps some of tax in
normal banks to incr. supply of moneyin circulation
3. TERM inflationary financing:Gov. lending from reserve bank can cause inflation to
rise.
3. On capital Market 4 main types of long term financial instruments are traded.
a. Fixed-Interest-Bearing Securities (or bonds).
b. Variable Interest Securities
c. Shares
d. Negotiable Documents.
4. Interest rates determined in capital market (eg on gov. bonds with different maturities)
are long term rates and determined by market forces of supply and demand.
5. TERM Perpetuity:a special kind of bond where no maturity date is set-only a fixed
amount of money is set to be paid each year as interest and buyer makes no promise to
buy it back.
6. The most important relationship in the market for interest bearing securities is the
inverse relationship between the price of bonds and the interest rates on them.bond
prices high when interst rates low and visa versa-is inverse reationship.
The Demand for Money.
1. Holders of wealth must decide in which form to keep:eg financial assets,land
,art,antiques
2. TERM demand for money is: the amount holders of wealth decide to hold as money
balances.
3. TERM Financial assets: there are 2 types
a. Bonds(interest bearing assets)
b. money
4. TERM Fixed property:Means real estate.
5. :The Opportunity Cost of holding any money balance is the actual interest that could
have been earned had the money been used to purchase bonds instead.
6. TERM Liquidity Preference :The Reasons for holding money instead of bonds are
:ByKeynes in30's
a. TERM Transactions motive:for paying for goods,wages weekly so hold money
between,the more money you earn,more need to pay for –so transactions need for
money is function of national income.
b. TERM Precautionary Motive:for emergencies,also function of national income.
c. TERM Speculative Motive:-keynes most important add to monetary economics.If
Interest rates high then opportunity cost is high for money so people invest in
bonds.Also there is a negative /inverse relationship between qty money Demanded
for speculation and interest rates.
7. TERM Active Balance: for 1-transactions or 2-precautionary motive.-main
determinant-Income
8. TERM Passive(or idle) Balance : for speculative motive. –main determinant-Interest
rate
9. Equation for demand for money: L=f(Yi) L-Liquidity preference/Y-National Income/i-
Interest Rate
10. Graph of DEMAND FOR MONEY:
a. Active balance Curve:=f(Y) Income controlling factor:Vertical line,shift right income
increase/visaversa.
b. Passive balance Curve:=f(i) negative slope reflects inverse relationship between
interest rate and Qty demanded of money. ie:cash held with purpose of investing if
rates are high enough will=0.At certain interest (i1)rate no funds will be demanded
for spec.purposes.(i1)(this should be on diagram where curve meets vertical line and
interest is highest .
c. The Joint or total money demand curve or Total Liquidity Preference graph(same as
passive graph but label curve "L= L1+L2" ( is merely the horizontal addition of the
two other graphs/is made up of the other two graphs)
i. The negative slope reflects inverse relationship between interest rate and Qty
Demanded- for speculation purposes ie:cash held with purpose of investing if rates
are high enough will=0
ii. The position of curve:affected mainly by demand for active balances.-from income
level.Increase in Income levels will shift LL curve to right,decrease LL to left.
iii. See pg 370 textbook for diagrams.
The supply of money is determined by the interaction of interest rate and demand for
money.see up(5)
to purchase back the same security at the same price,and including an agreed
amount of interest as cost of obtaining funds also specified on agreement,on a
specified date(usually in 7 days time). .The underlying securities
which may be used for this purpose are :Gov.bonds,Land bank/treasury bills,reserve
bank debentures.(first leg is flow 1 way,second leg is flow other way)
4. Introduced 1998,repurchse agreement between SARB and it's banking clients, .
5. Repos are at present the main source of funds for banks as a measure of last resort-
thus control.
Open market policy.
1. TERM Open Market Policy is where the SARB sells or buys domestic financial
assets(mainly Gov. Bonds or Treasury bills) in order to exert a specific influence on
interest rates and the Quantity. of money.
a. SARB- buy from banks at low prices (to force 'buy') and debit /increase their
cash reserve in payment ,thus allowing banks to create more money by lending
out or ,visa versa SARB sells domestic financial assets to banks to in turn
decrease the amount of money they can use to create a supply of money by
lending out ...
b. There is an inverse relationship been prices of such securities and the
Yield/Interest that can be earned on them,so ,if high prices of purchase,then
yield is lower and visa versa etc,thus banks must sell low to be able to get
buyers or visa versa to get sellers. ...Thus if banks buy at high
prices,they will send interest rates up,and if sell at low prices they will send
interest rates down,sothis can also be used to support the accomodation policy
of the SARB,
c. ...in RSA this is used to :Sell cheap bonds ,to cause banks to use Repo
system,to make accomodation policy of SA more effective.
2. TERM domestic financial assets: treasury bills and government bonds ,or land
bank bills or municipal stock etc.
3.
Public Debt management
• Market-orientated
Intervention in foreign exchange markets.
• Market-orientated
CHAPTER 4
: THE PUBLIC SECTOR.(MACROECONOMICS)
CHECKLIST
Important Boxes/concepts/graphs/pages:
graph –17.1 pg 426 import tariffs effect on supply/prices etc.
graph pg 443 17.3 dollar /rand rate
table 17.4+17.5 pg 445
e. Full Employment
i. AND ALSO BASICLY :Total Spending
ii. Income-(Y)
iii. Employment
6. .Term Demand management:an instrument of Fiscal policy is classified as an
instrument of Demand management because it is an effective means of influencing
Total Spending in the economy.Monetary policy is also such.(Definition: can be used
to manage/regulate the total demand for goods and services in the economy.)
7. TERM Expansionary Fiscal &monetary policies:If economy in Recession,to
stimulate economic activity-means -1-Reduce or Not increase Tax -2-Raise Spending.
8. TERM Contractionary or Retrictive Fiscal &monetary policies:If economy
expanding too rapidly and -1-Inflation -2-Balance of Payments problems
experienced:means Gov. must-1- Taxes Increase and/or Reduce Spending.
9. Term Lags/Delays-one of basic difficulties assosiated with attempts stabilise
economy.
10. Term Budget Deficit /Surplass:Difference between Gov. spending and
Income.
11. Fiscal policy can influence microeconomics as well:specific markets/products
tax,subsidy or town.
-3-Government Spending-16.8p401
1. Gov. involvemnt in economy often measured by level spending,but many other types
involvemnt too.
2. "Crowding out effect"-when Gov.spending increases and crowds out private sector.
3. Gov spending can be classified
a. economically
i. consumption spending :for final consumption = 3%
ii. investment spending :investment in capital goods = 19%
b. functionally:Changed from from War/Internal strife defense/policing type and
economic services (mining,agriculture,exporter support) spending to social
spending.
4. Gov, spending has increased form 12% to 22% from 1960 to now.This worrisome
because of how to finance this(Tax).Number other countries had similar
experience.REASONS:
a. Changing consumer preferences. :peoples Income went up ,then demand for Gov.
services rise so gov spend more on consumption as well. (Income elasticity of gov
services greater 1,so as income up ,greater % of income on service.)
b. Political and other shocks. :War spending and internal strife spending on law+order.,
c. Redistribution of income.: Shift in spending to uplift previously disadvantaged
peoples,majority
d. Misconceptions and Entitlement.People think gov.services cheap,expect more-if
politician listens then spending go up alot,not a little.
e. Population growth and Urbanisation.:housing,water+lights,sewerage,roads-
infrastructure+AIDS.
-4-Financing of Government Spending 16.9,p403
1) There are 3 ways of financing Gov.Spending-
a) Income from Property(2% totl.)– incl.Escom,+Profit fishing,agriculture+Rent-Mining
Licence fees.
b) Borrowing –Budget deficit. ,domesic/Intnl.capital market(gov.bonds) or Central bank.
(overdraft) ..-1-Incr. Public Debt.+-2-Inflationary Financing
c) Taxes
2) Term Budget Deficit /Surplass:Difference between Gov. spending and Gov. Income .
80/90's >gov.Invstmt. Future generation must pay for todays borrowing,OK for
capital(=returns),not OK for consumption.
3) Term Inflationary Financing: gov.borrowing because increases money supply.
4) Term Public debt: 34%90's-45% gdp:from gov.borrowing-eg 1990,increases Interest
on gov debt.to 20c per R Tax today.
-5-Taxation 16.10
1) Largest source Gov revenue-97%
-1-Criteria for a good tax:
-Adam Smith-equitable,convenient,economic,certain
a) Neutrality :The cost(damage) of taxes must be kept as low as possible:but can also
be used to fix
i) -1-Distort Relative Prices:allocation of resources+welfare-make some things more
expensive than others.-Relative prices
ii) -2-Disincentive to owners-FOP:eg workers(work less)+factories not produce
certain.
b) Equity:People must be taxed equally :two principles to this
i) Ability to pay principle: Must pay according to ability
(1)Horizontal equity-same income taxpayers to pay equally
(2)Vertical equity -Richer must pay more than poorer people.
ii) Benefit principle:or User Charges-each user pay benefits they get from Gov.-eg
toll rd.,h20,
c) Administrative Simplicity:Keep costs low + easy admin (tax loopholes +complicated
taxes)
i) Costs:
(1)Compliance costs: user pay accountant to do tax return.
(2)Administration costs.: Gov.costs tax collector
2) Term Tax Avoidance: legal find loopholes-cause frustration those who cannot
3) Term Tax Evasion: illegal-make +sell t-shirts on flea market,not declare taxes.
4) term Relative Prices:price of one good relative to another
-2-Different Types of Tax:
1) term:Direct Tax (or "Taxes on Income +Wealth"):Personal+Company+Estate Duty.
2) term:Indirect tax (or "taxes on Goods and Services") :on transactions
:vat.,customs,excise.
3) term:General tax:on variety of things,not specific eg VAT.
4) term :Selective tax:on specific things eg: fuel or tobacco or alcohol.
5) term Specific Excise Tax:Per unit:eg R4 on each beer
6) term Ad Valorem tax:% of value eg 5%
7) based on ratio of tax to income
a) term :Progressive Tax:Rich pay higher "!! % !!" than poor.eg RSA
b) term :Proportional Tax:Rich pay same levels as Poor(in %) eg company tax
c) term :Regressive Tax: takes less as income levels increase eg VAT(% of income paid
out)
-6-Taxation in RSA.
1) 3 main types of tax in RSA:'
a) Personal Tax:Most important in SA today,on 'taxable income',from table with
minimum start/rate
i) term Marginal Tax Rate:rate each additional rand (rate for each level is
taxed(=on tax table
ii) term Average/Effective Tax Rate:ratio between rate and income
iii) last years SA less tax brackets(15to 6)+base broadened(More fringe benefits
taxed)
iv) term Capital Gains Tax:sales of fixed property-to compensate nominal/real gains
only above 10 000-difficult to administer,+increases horizontal equity+integrity
Personal .Tax Base.(per inc.level)
b) Company Tax:-was Proportional tax:at 30% flat rate
i) term Secondary tax :on shares dividends to shareholders.7.5%
c) VAT: 'regressive tax', thus some goods zero rated for vat.
d) Today: personal=#1,vat=2,companies=3,excise =4,customs =5 from before
companies 2,
-7-Tax Incidence-ie: Who really Pays the Taxes?
1) Fly –paper theory:taxes stick where Gov. puts them-but not exactly true
2) term Incidence-not who pays the tax,who is burdened by it actually.
3) term Statutory or Legal Incidence of Taxes: Gov. can specify who must hand tax
over to them.
4) term Effective Incidence of Tax :who actually pays cannot be determined by who
hands Rands over to Gov.1-because everyone shifts tax forward/backward to customers
etc+ 2-changdecision
5) The degree to which a tax can be shifted depends on the price elasticities of the
goods/services-high=not easy,low=easy
The Impact of a Specific Excise Tax:
1) Two types of Excise Tax:
a) term Specific Excise Tax:Per unit:eg R4 on each beer
b) term Ad Valorem tax:% of value eg 5%
2) Example:A specific Excise tax on cigarretes will have a burden on :
a) Companies:they must pay Gov. extra (egR4.00) per cigarette packet.
i) They willtry to pass the full tax on to the consumer but may not be able to
because it depends on price elasticity of goods And also general supply in
market.,so they might have to pay some of tax themselves as price decrease.
ii) less demand from high prices will cause a loss of {qty2*price1} –
minus{qty1*price2) because companies only pass on maybe half of tax to the
consumer,they bear some too ,plus also supply drops.
b) Employees:less sales=less employees needed or must accept lower wages(can also
shift supply right again cause cheaper to make smokes+can sell cheaper
then=more demand new 'E')
c) Customers loose:must pay more for cigarettes (exept what companies bear of tax
burden on tax..,maybe 40% etc.)
The supply curve ss will shift to left(per qty. higher price).:causing all 3
parties to bear burden of excise tax.(see number /point 2 above)
PS:Try read 16.2 as per study guide extra reading-also check economies of
scale etc.
CHAPTER 5
: THE FOREIGN SECTOR.(MACROECONOMICS)
absolute advantage financial account deficit
ad valorem tariffs financial account surplus
appreciation floating exchange rates
balance of payments foreign exchange market
current account foreign reserves
current account deficit gold and other foreign reserves
current account surplus import tariffs
demand for foreign exchange (eg open economy
dollars) portfolio investment
depreciation relative (comparative) advantage
direct investment specific tariffs
equilibrium exchange rate supply of foreign exchange (eg dollars)
CHECKLIST
Important Boxes/concepts/graphs/pages:
{You must,for each type, to find out who has comp.advantage,divide other product
by that ones 'number of'.This gives the 'cost' of that one
.Now compare 'costs' to check which has less-that one has comp.advantage. }
Example:(1)IF
Opportunity costs different,even if one can produce more of all goods using fewer
resources(eg labour)
Both countries will benefit from trade if the opportunity costs of production (or relative
prices)differ between the two countries
Eg:If japan foregoes(opportunity cost )Wine it costs them 7500DVD players,but in RSA
2000 DVD players must be sacrificed ,so it costs relatively less to produce wine in RSA.So
japan is in "absolute" terms 2.75 times more efficient than RSA in making dvds but only
marginally more efficient in making wine,So RSA is relatively(not absolutely) more
efficient(or less inefficient)in producing wine.
But they will only effect such specialisation and trade if
each can trade at a higher ratio than their opportunity cost: ie It is in the interest of Japan
to exchange DVD players for wine with South Africa where it will get a liter of wine for
only 2 DVD players. It is also in the interest of South Africa to exchange wine for DVD
players with Japan since it can get 5 DVD players instead of only 2 DVD players
1) SOURCES OF COMPARATIVE ADVANTAGE:
a) Technology: "Product life cycle of international trade theory" ;korea cheap
labour copies germany technology now exporter instead of importer as before.
b) Abundant Resources:Not all countries posess same'FOP' "Hecksher-Ohlin
theory":Countries will tend to export those goods that most intensively use the
countries relatively more abundant resouces.eg:Capital/Labour.
c) Differences in taste and demand: If tastes for fish in A are more than in
B,then A could be more expensive(greater demand) than in B,and more
bigger/market for.Eg;social,religious,climatic,cultural. :ALSO:poor-
necessities;less luxury.will trade with poor;rich(developed) will trade with rich
-all make luxuries.
Intra industry trade:
-most international trade can be explained by comparative advantage principle or product
life cycle theory.-BUT lots of trade is inter-industry trade rg:both export/import watches to
each other.
-inter is mostly in differentiated goods(toyota+mercedes) but also in homogenous(seasonal
AGRICULTURE –costs)
-,imperfect competition +demand side factors(increases choice to consumer)+economies
of scale(specialisation).+market overlap(to wealthy in other country)-
-gains from trade:low price +wider product choice.
-2-Trade Policy
1. Inter.Trade causes greater prod.of trade goods+greater welfare+low price +more
variety BUT:
2. term:Trade policy: Governments (1)PROTECT domestic firms against imports+(2)
CONTROL volume of imports by means of trade barriers eg:import tariffs.(3)Also
encouraging exports by assist with marketing,giving subsidies etc. for expert etc.
TYPES OF GOVERNMENT CONTROLS FOR Int .Trade.
1. Import Tariff
2. Import Quotas(Quantitative Restrictions.)
3. Subsidies
4. Other Non-tariff bariers:
a. Exchange controls
b. Exchange rate policy.
1-Import Tariff:
1. term:Protective tariff: to protect local industry
2. term Revenue tariff : To earn revenue for government only.(eg goods not made
here-computer)
3. Two categories of tariffs:
a. term Ad-Valorem -% of value of item
b. term Specific tariffs-Specific amount:eg R5 on each unit of wine.
4. THE ECONOMIC IMPACT OF AN IMPORT TARIFF
SEE GRAPH PAGE 426 TEXTBOOK.:
Explanation of graph:
1. q1= domestic supply.at price Pw
2. Number of Imports=difference q5 minus q1 (q1 = domestic supply possible at lower
word rate.)
3. horizontal line Sw-Pw is world supply at price Pw.
4. Here: Imports Cause lower
a. -1-Employment
b. -2-Decrease Domestic Production
c. -3-Weaken Balance Payments
5. Here imports cause better:
a. Cheaper prices consumers
b. If textiles imported-Clothing producers can raise their production.
c. THUS NET RESULT OF 'these textile' IMPORTS UNCERTAIN(some production also
raised)
6. IF GOV. imposes an Import tariff at Pt- will cause
a. increase domestic production +supply to Q2(help employment)
b. decrease imports to Q4
c. Better position Balance of Payments.
d. Brings Revenue for Gov.
e. HOWEVER-COULD BE UNWISE MOVE-because with lowering effect on 'raised
clothing production' and all factors taken into consideration="NET RESULT
UNCERTAIN"
-2-Import Quotas(Restrictions):
1. Form of DIRECT INTERVENTION.
2. Will have basicly same effect as tariff-Pt in graph above.!!
3. Seller benefit by higher prices(less supply) , Gov does not benefit from revenue
tariffs.
4. Gov can -1-auction licences -2-sell licences -3-issue licences
5. Most quotas in RSA abolished as required WordTradeOrganisation.
-3-Subsidies:
1. Does not raise prices of eg:maize by a tariff to poor consumers-mostly the wealthy
pay tax and will thus pay bear burden more than the poor.
-4-Admin. Barriers:
1. eg:extra red tape,special licences,give gov.contracts to local only,special technical
conditions.
2. Will probably remain hinderence to word trade for long still.
-5-Exchange Controls:
• Eg: only so much froreign exchange allowed for the E.U. /america etc.(frequently
done Dev.Cnty)
2) term Exchange rate is a Ratio- represents price of one currency in terms of another.
3) term Foreign exchange market : international market where currencies can be
exchanged.Include in SA all authorised foreign currency dealers;RSA major Banks and
others. RSA 8.4billion$/day
4) term Appreciation:price of one currency goes up in relation to another one.
5) term Depreciation:price of one currency goes down in relation to another one
6) Methods of quoting exchange rates:
a) term Direct method:most countries(RSA too)-shows ? much local for 1 foreign eg
R10 to $1(ie:price of a commodity since foreign exchange is just a commodity like
bread)
b) term Indirect method:some –shows ? much foreign for 1local eg R1 to $0.1
The foreign exchange market:
1) The Rand –Yen/Pound etc rate is derived from the R-$ exchange rate,and worked out
from there.
REASONS FOR THE DEMAND FOR DOLLARS:
2) Demand Curve has Inverse/negative slope :the lower the price, the more is demanded.
3) term Derived demand the lower the price ,the more demand is derived from this price
change.
i) RSA IMPORTERS
ii) RSA tourists for overseas
iii) RSA Investors buying overseas assets eg shares
iv) Overseas investors selling local investments eg:shares and convert proceeds to US
Dollars.
v) Speculators in currency wanting to buy other currencies.
4) The Rule is : the higher price of dollars,the less will be demanded+ visa versa.-also the
more american goods will be demanded if price of $ low-thus causeing more demand for
$
5) On graph pg 443 if above price of equilibrium-excess supply/ if below E excess demand
for Dollars.
REASONS FOR THE SUPPLY FOR DOLLARS:
6) Supply curve has a positive slope:more price =more supply
7) term Derived supply the higher the price ,the more supply is derived from this price
change.
i) SA exporters exporting
ii) Foreign buyers of Stocks and Gov.Stocks.
iii) SA investors selling foreign assets.
iv) Foreign tourists.
v) Speculators.
8) The rule for supply is higher prices-more supply.
THE EQUILIBRIUM EXCHANGE RATE:
NOTE:Label the price and quantity with dotted line as p1/q1 etc-for points as per
studyguide alsoE1/E2.
: ALSO remenber to WRITE an EXPLANATION for each diagram explaining :RAND
'APPRECIATES . or DEPRECIATES'
----if just the price above e = excess supply of $ then–if price changeMOVEMENTon
both curve
----if just the price below e = excess demand of $ then –if price changeMOVEMENTon
both curve
Change Graph change RAND DOLLAR
Demand for Qty $ increases(at each Demand curve SHIFT Depreciat Appreciat
price) right es es
Supply of Qty $ Increases (at each Supply curve SHIFT Appreciat Depreciat
price) right es es
Demand for Qty Dollars falls(at each Demand SHIFT left Depreciat Appreciat
price) es es
Supply of Qty $ falls(at each price) Supply SHIFT left Appreciat Depreciat
es es
Table of effect on domestic prices and current account and export/import from
Rand/Dollar Appreciation/Depreciation.
ChangeinR$ exchange Export Import Current Domestic
rate prices in $ prices R account prices
rand depreciate decrease increase improves rise
rand appreciate Increase decrease worsens fall
immediate price change.To stop speculators SARB sometimes makes high interest rates
to stop them lending to buy $ .
ECS102-8
CHAPTER 6
: INCOME DETERMINATION IN A SIMPLE KEYNESIAN
MACROECONOMIC MODEL(MACROECONOMICS)
CHECKLIST
Important Boxes/concepts/graphs/pages:
c=change(C2-C1) in C / change(Y2-Y1) in Y
SAVING;
1. TERM "S"= SAVING
2. Because Y=C+S(income = consumption plus saving) thus NOT
SPENDING=auto=SAVING.
3. marginal propensity toconsume+marginal propensity to savemust=1:so if
mpc=0.75,then mps=0,25
4. if above is true then anything influening one will influence other-and thus -Cbar
=Sbar :why?pg469t
Investment Spending:
1. Investment spending is smaller than consumption spend and most volatile of all
spending types.
2. term capital formation:investment spending called this in 'national accounts'.
3. Investmnt spending is NOT a function of Income. –(show this by a horizontal line on
graph T.Income down T.Investment top ) BUT investment spending does determine
income
11.
Interest Rate
=I
Investment Spending
3. term IN THE 3 GRAPHS BELOW "THE CONSUMPTION FUNCTION GRAPH " IS ADDED
TO THE INVESTMENT FUNCTION GRAPH TO GET Aggregate SPENDING FUNCTION
GRAPH.
4. the cons.funct. will increase by cY as consumption increases,:+ the Cbar intercept.
5. Once graphs are added:The vertical intercept is now equal to Cbar + Ibar = Abar .
6. Now-At each level of income and output, aggregate spending A = Abar +cY.
(A=Cbar+Ibar)
7.
0
The 45 Line
1. According to Keynes theory:Equilibrium is where Y=A or where Tot Demand =Tot
Production
2. According to Says theory :Equilibrium is where all FOP are at 'Full Employment
level.'
3. If a line is drawn at 45deg through Origin A/Ygraph and both axes same scale:it
must=Keynes Equilibrium where Y=A :
4. ABOVE 45deg line = A> Y (axes scale same) so Excess DEMAND --Inventories
will FALL=
5. Below Y0 OR A0 = above 45 BUT below Aggregate Spending Function =Excess
DEMAND
6. BELOW 45deg line = A< Y (axes scale same) so Excess SUPPLY ----Inventories
will RISE
7. Above Y0 ORA0 = below 45 BUT above Aggregate Spending Function = Excess
SUPPLY
8. Point 1 :Equal demand production =equilibrium.(see the below graph.)
9. Point 2:demand > supply =excess demand
10. Etc.
USING WORDS
1. Where aggregate spending(A) = aggregate income(or production) there is
equilibrium between 2.
2. Where aggregate spending(A) > aggregate income(or production) there is
a. 1-excess demand
b. 2-firms inventories will fall
c. 3-firms will thus raise production
3. Where aggregate spending(A)< aggregate income(or production)....Visa Versa.
USING SYMBOLS/EQUATIONS
1. A=C+I
2. C=Cbar +cY
3. Thus A =I + Cbar + cY
4. BUT Y=A SO : Y=I + Cbar + cY
5. SO : Y-cY=I+Cbar
USING NUMBERS:
The formula for equilibrium output: An example
Assuming the following values, the equilibrium level of income can be calculated as follows:
C = 200
I = 300
c = 0,8
Put a section with all this at beginning of the notes after contents::::
All Multipliers and index ratios:
Chapter 1:
ECS102-8
CHAPTER 7
:KEYNESIAN MACROECONOMIC MODELS INCLUDING
THE GOVERNMENT and THE FOREIGN SECTOR.
CHECKLIST
1-Introduction:
1) As the leakages increase so multiplier becomes smaller.
2) Extra FLOWS added to model:
a) G=Gov. Spending
b) T=Taxes
c) X=Exports
d) Z=Imports
3) ASSUMPTIONS WHICH STILL APPLY:
a) (A) Interest rates given(exogenous):(cannot analyse changes in fin. markets)
b) (B)Prices Exogenous.(cannot analyse inflation ie:CPI)
c) (C)Wages Exogenous.
4) Economic theory has 3 purposes:
a) 1-to explain -2-to predict ?happen if something changes 3-analyse economic
policy.
2-Introducing The Government into our Model:
1) We must consider impact of Gov.Spending (G) and Taxes (T) on
a) The level of Aggregate Spending (A) :=(+Gbar)
b) The Multiplier (#@#) :=(T decreases it) =1/1-c(1-t)
c) Equilibrium Income(Y)
2) term Determinants : We must consider how determinants(G)Gov. spending & (T)Taxes
can be used as policy instruments to influence (Y) =Income. : T &G are main
ingredients of BUDGET and main instruments of FISCAL POLICY.
3) We are Mainly interested in influence on INCOME :Y.
1-Government Spending:(G)
Government Spending VS Income: G vs I
1) During 70-90' Gov spending increased-
housing,defence,education,health,safety &security.
2) term Gov.Spending is a Political Issue-causes
SHIFT in curve and thus is Autonomous to Income(Y):Thus
G=G bar (ie:autonomous.)
3) horizontal line,independant ,political
issue,autonomous,upward shift,vertical intercept.
4) Summary:addition of (G )
a) raises level of Aggregate Spending
b) leaves multiplier unchanged
c) raise equilibrium level income Y0 cet.par.
Introduction:
1) Matters kept simple by assume X&Z are autonomous(unaffected by change in Income)
@
c) Equilibrium level income Will affect by multiplier
:Y effect+
Exports &Imports:
3) Exports &Imports Autonomous to INCOME(Y)=horizontal line=expressed
X=Xbar /or/Z=Zbar
4) BUT imports can be induced-ie they can be affected by (Y)income
5) The positive relation between imports and economic activity in sa is one of stongest
macroeconomic relationships in the country.
6) EXPORTS are an Injection into economy & IMPORTS are a leakage.
7) The Formula for Imports/Exports is: A +C + Ibar+Gbar+(Xbar –Zbar)
8) term Net Exports usually referred to as =(X-Z)
Graphs of the horizontal line of import/export function against tot.income or
production.
2) In diagram b the aggregate spending curve A0 represents aggregate spending C + I + G and the
corresponding equilibrium level of income Y0 without a foreign sector.
3) When the foreign sector is added, the vertical intercept
changes.
4) If net exports are negative, as indicated by
(X-Z)1, autonomous aggregate spending A declines and the aggregate spending curve
shifts downwards and the equilibrium level of income decreases
5) It can also be visa versa depending on which way 'Net exports' leans to positive or
negative.
ECS102-8
CHAPTER 8
: MORE ON MACROECONOMIC THEORY AND POLICY
CHECKLIST
2.
3. term :Supply Shocks:Where A SUPPLY curve SHIFTS UPWARD:ie could cause
stagflation—presents Gov. difficult decision—If expansionary Policy used to increase
Demand to in turn increase employment(stop stagnation part of stagflation)-then
Inflation will go even more up because higher demand curve SHIFT Up =Higher
Equilibrium.BUT if Contractionary policy is used then opposite (eg oil crisis of 73's-
expan.=worst since 50's war korea inflation //then of 79's –contr.-worst unemp.
=recession since ww2) SOLUTION= TO: lower wages+production costs ,including an
Anti-inflationary "INCOMES POLICY"(very difficult-keep wages growth balanced with
productivity growth.)-this will cause OPPOSSITE SHIFT(right /downward) of Supply
curve.
1left
2left bottom
3right
ECS102-8
CHAPTER 9
: INFLATION:
Introduction
• often described as public enemy no. 1.
• since ww2-prices of all goods increased alot
Definition of Inflation:
1. term: INFLATION: A Continuous and Considerable rise in Prices in General.
a. 4 Aspects to This Definition of Inflation:
i. Neutral Definition:Not state Causes(To stop wrong policies from think
only 1cause
ii. Continuous /ie :a Process, (not only 1 increase in price but many
constant ones)
iii. Considerable: if only 1% 0r 2 % per year could mean a quality better
incr. etc.-not necessarily inflation-for inflation it must be quite
considerable.
iv. General/ or average price level increase-not just 1 good(notfrom eg
asupply-/demand+)
The Measurement of Inflation:
16. TERM CPI Consumer Price Index:=115 % or 120% is an index of the prices of a
representative "basket " of consumer goods and services: it thus represents the cost
of the shopping basket of goods & services of a typical RSA household.CPI is normally
=115% or 132% or so (not 6.2% like inflation:ie the change from one years to the
next .)Capital & Intermediate goods excluded.
17. term Inflation RATE=6% or 9%: If you divide this years CPI by Last years CPI * 100
(the percentage of last years prices).Inflation is allways expressed as an annual
rate.You get the inflation rate ie:not 127%-105%----BUT 127% /105% *100=6% or 9%
18. TO construct the CPI ,Stats SA must :
Demand-Pull Inflation.
1. When aggregate(macroeconomics)-demand UP but Aggregate supply remains
unchanged-prices go up.-'too much money chasing too few goods"-Causes prices to
go up.
2. Can be caused by any of components of AGGregate Demand:
a. (C)-consumption spending-lower interest rates(cheaper credit)
b. (I)investment sending-eg from lower interest rates,or better business
sentiment.
c. (G)Government spending-eg provide better services to population,or to combat
unemployment.
d. (X)export earnings- higher earnings cause more spending by earners.
3. MONEY SUPPLY increase :Allways accompanied by increase in money supply.-
allways related to increases in aggregate demand components.
4. Restrictive Monetary and Fiscal policies by Gov. used to keep Demand-Pull
inflation in check.: Can cause Unemployment-decreased
Production,decreased,income
a. MONETARY:Higher interest rates to make credit more expensive,& reduce
availability of credit to various sectors(I)/(C) of the economy.-left Shift+
b. FISCAL:reduce Gov. spending,and /or increase taxation.-cause leftward shift
Cost–Push Inflation:
IF production costs increase-
then Supply Curve Shifts to left from higher prices at each Qty.supplied.
c. 'E'quilibrium goes up-Prices UP & Production&Income down.(+unemployment)
ECS102-8
CHAPTER 10
: UNEMPLOYMENT:
Unemployment:
• Unemployment & Inflation are referred to as the twin evils of Macro-economics.
• RSA : 20/30% 94' - 30/40% 2002' -25% 2007 unemployment of Labour force /
Economicly active/able Participants.:high & rising unemployment is most serious of
RSA social troubles.
The Employment Pool:
1. Stock Concept-Level or Rate of Unemployment is a stock.
2. Flows -People Entering & Leaving the unemployment pool.
3. 4 reasons to enter unemployment pool:
a. New entrant still looking for
b. leave specially to look for another job-but still searching
c. laid off(retrenched till demand picks up)
d. firm closes-no hope of re-employment.
4. 3 reasons to exit unemployment pool
a. hired
b. recalled from a lay-off
c. get discouraged and stop looking for work.
Measuring Unemployment.
1. Very difficlt to measure unemployment because of:seasonal/housewives/those not
seeking work but able/criminals/hawkers-self-employed etc. ....so different. estimates
done can easy differ alot.
2. term Rate of Unemployment=The % of the EAP –Economically Active Population –
(those Willing & Able to work or the Workforce/or Labour force)NOT working.
3. Various ways of Obtaining Data on Unemployment.
a. Official Census Data : bad side –1-Once per 5 years -2-Lag before publication
of data.
b. Unemployment Register :bad side :only very few register-ie those collecting
UIF.
c. Subtract (1) subsistence agriculture (2) informal sector(hawkers) (3) In
d. Formally employed FROM: EAP(econ. activ. popul.).
e. Statistics S.A. estimate-bad- controversy between strict or expanded
definition usage.Went from strict 'pre-94 –to expanded '94 etc.,TODAY publish
both of!
4. term Strict Definition of Unemployment : (1)over 15 (2) available 7 days prior
interview for Self-employment OR Paid employment. (3) took steps to find /search 4
weeks prior interview for S or P work.
5. term Expanded Definition of Unemployment: OMITS (3) above-ie:only WANT
work–not look
i. Frictional unemployment
ii. seasonal unemployment
iii. new entrants: to market may be too many -be more than the rate of incr.
in Prod.
iv. Skills- if workers Not have needed skills may still unemploy even in
economic growth.
v. Capital goods/Technology type increase in production increase emplmnt.
For GRAPH BELOW:Yf= production/income at FULL EMPLOYMENT
Nf= employment at FULL EMPLOYMENT
the curve of the production function shows the law of diminishing returns:
the rate . of increasing returns from more people employed will
slowly decrease as more are . ... employed.
ECS102-8
CHAPTER 11
: Economic Growth:
Introduction:
Economic development is a separate subdiscipline in economics apart from economic
growth. ,whereas for years it was seen as the same thing by economists.