Bachelor of Commerce in Accounting Inter

Bachelor of Commerce in
Accounting, Internal Auditing,

Banking and Finance,
Marketing and Human
Resources Management
(Honours) Degrees
Principles of Economics II
(Macroeconomics)
Module BBFH109
Authors: Emmanuel Dumbu
MBA (ZOU)
BAdmin Economics and Public Administration (UNISA)
CE (UZ)
Retseleng Martin Karonga

M.B.A. (Nottingham U.K.)
B.Sc. Economics (London U.K.)
Chartered Institute of Marketing (CIM) (U.K.)
Content Reviewer: TavongaNjaya

Ph.D Dev. Economics (ZOU)
MSc Development Studies (Tokyo)
BSc Hons in Economics (UZ)
Editor: ItumelengMagadi
MSc Banking and Financial Services (NUST)
BCom Banking (Hons.) (NUST)
IOBZ Diploma (IOBZ)
Published by: The Zimbabwe Open University
P.O. Box MP1119
Mount Pleasant
Harare, ZIMBABWE
The Zimbabwe Open University is a distance teaching and open

learning institution.
Year: December, 2013
Cover design: B. Pillay
Layout and design: C. S. Nhari
ISBN No.:
Printed by: ZOU Press
Typeset in Garamond, 12 point on auto leading
© Zimbabwe Open University. 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, mechanical, photocopying, recording or otherwise, without the
prior permission of the Zimbabwe Open University.
To the student
The demand for skills and knowledge academics, technologists and
and the requirement to adjust and administrators of varied backgrounds,
change with changing technology, places training, skills, experiences and personal
on us a need to learn continually interests. The combination of all these
throughout life. As all people need an qualities inevitably facilitates the
education of one form or another, it has production of learning materials that
been found that conventional education teach successfully any student, anywhere
institutions cannot cope with the and far removed from the tutor in space
demand for education of this magnitude. and time. We emphasize that our
It has, however, been discovered that learning materials should enable you to
distance education and open learning, solve both work-related problems and
now also exploiting e-learning other life challenges.
technology, itself an offshoot of e-
commerce, has become the most To avoid stereotyping and professional
effective way of transmitting these narrowness, our teams of learning
appropriate skills and knowledge materials producers come from different
required for national and international universities in and outside Zimbabwe,
development. and from Commerce and Industry. This
openness enables ZOU to produce
Since attainment of independence in materials that have a long shelf life and
1980, the Zimbabwe Government has are sufficiently comprehensive to cater
spearheaded the development of for the needs of all of you, our learners
distance education and open learning at in different walks of life. You, the
tertiary level, resulting in the learner, have a large number of optional
establishment of the Zimbabwe Open courses to choose from so that the
University (ZOU) on 1 March, 1999. knowledge and skills developed suit the
career path that you choose. Thus, we
ZOU is the first, leading, and currently strive to tailor-make the learning
materials so that they can suit your
the only university in Zimbabwe entirely
personal and professional needs. In
dedicated to teaching by distance
developing the ZOU learning materials,
education and open learning. We are
we are guided by the desire to provide
determined to maintain our leading
you, the learner, with all the knowledge
position by both satisfying our clients
and skill that will make you a better
and maintaining high academic performer all round, be this at certificate,
standards. To achieve the leading diploma, undergraduate or postgraduate
position, we have adopted the course level. We aim for products that will settle
team approach to producing the varied comfortably in the global village and
learning materials that will holistically competing successfully with anyone. Our
shape you, the learner to be an all-round target is, therefore, to satisfy your quest
performer in the field of your own for knowledge and skills through
choice. Our course teams comprise distance education and open learning
Any course or programme launched by ZOU is you may never meet in life. It is our intention
conceived from the cross-pollination of ideas to bring the computer, email, internet chat-
from consumers of the product, chief among rooms, whiteboards and other modern methods
whom are you, the students and your employers. of delivering learning to all the doorsteps of
We consult you and listen to your critical analysis our learners, wherever they may be. For all these
of the concepts and how they are presented. We developments and for the latest information on
also consult other academics from universities what is taking place at ZOU, visit the ZOU
the world over and other international bodies website at www.zou.ac.zw
whose reputation in distance education and open
learning is of a very high calibre. We carry out Having worked as best we can to prepare your
pilot studies of the course outlines, the content learning path, hopefully like John the Baptist
and the programme component. We are only prepared for the coming of Jesus Christ, it is my
too glad to subject our learning materials to hope as your Vice Chancellor that all of you,
academic and professional criticism with the will experience unimpeded success in your
hope of improving them all the time. We are educational endeavours. We, on our part, shall
determined to continue improving by changing continually strive to improve the learning
the learning materials to suit the idiosyncratic materials through evaluation, transformation of
needs of our learners, their employers, research, delivery methodologies, adjustments and
economic circumstances, technological sometimes complete overhauls of both the
development, changing times and geographic materials and organizational structures and
location, in order to maintain our leading culture that are central to providing you with
position. We aim at giving you an education the high quality education that you deserve. Note
that will work for you at any time anywhere and that your needs, the learner ‘s needs, occupy a
in varying circumstances and that your central position within ZOU’s core activities.
performance should be second to none.
Best wishes and success in your studies.
As a progressive university that is forward
looking and determined to be a successful part
of the twenty-first century, ZOU has started to
introduce e-learning materials that will enable
you, our students, to access any source of
information, anywhere in the world through
internet and to communicate, converse, discuss _____________________
and collaborate synchronously and Prof. Primrose Kurasha
asynchronously, with peers and tutors whom Vice Chancellor
The Six Hour Tutorial Session At
The Zimbabwe Open University
A s you embark on your studies with the Zimbabwe
Open University (ZOU) by open and distance
learning, we need to advise you so that you can make
This is where the six hour tutorial comes in. For it
to work, you need to know that:
· There is insufficient time for the tutor to
the best use of the learning materials, your time and
the tutors who are based at your regional office. lecture you
· Any ideas that you discuss in the tutorial,
The most important point that you need to note is originate from your experience as you
that in distance education and open learning, there work on the materials. All the issues
are no lectures like those found in conventional raised above are a good source of topics
universities. Instead, you have learning packages that (as they pertain to your learning) for
may comprise written modules, tapes, CDs, DVDs discussion during the tutorial
and other referral materials for extra reading. All these
· The answers come from you while the
including radio, television, telephone, fax and email
can be used to deliver learning to you. As such, at tutor’s task is to confirm, spur further
the ZOU, we do not expect the tutor to lecture you discussion, clarify, explain, give
when you meet him/her. We believe that that task is additional information, guide the
accomplished by the learning package that you receive discussion and help you put together full
at registration. What then is the purpose of the six answers for each question that you bring
hour tutorial for each course on offer? · You must prepare for the tutorial by
bringing all the questions and answers
At the ZOU, as at any other distance and open that you have found out on the topics to
learning university, you the student are at the centre the discussion
of learning. After you receive the learning package, · For the tutor to help you effectively, give
you study the tutorial letter and other guiding him/her the topics beforehand so that in
documents before using the learning materials. During cases where information has to be
the study, it is obvious that you will come across gathered, there is sufficient time to do
concepts/ideas that may not be that easy to understand so. If the questions can get to the tutor
or that are not so clearly explained. You may also at least two weeks before the tutorial,
come across issues that you do not agree with, that that will create enough time for thorough
actually conflict with the practice that you are familiar preparation.
with. In your discussion groups, your friends can bring
ideas that are totally different from yours and In the tutorial, you are expected and required to
arguments may begin. You may also find that an idea take part all the time through contributing in every
is not clearly explained and you remain with more way possible. You can give your views, even if
questions than answers. You need someone to help they are wrong, (many students may hold the same
you in such matters. wrong views and the discussion will help correct
The Six Hour Tutorial Session At The Zimbabwe Open University
the errors), they still help you learn the correct thing as the tutor may dwell on matters irrelevant to the
as much as the correct ideas. You also need to be ZOU course.
open-minded, frank, inquisitive and should leave no
stone unturned as you analyze ideas and seek
clarification on any issues. It has been found that Distance education, by its nature, keeps the tutor
those who take part in tutorials actively, do better in and student separate. By introducing the six hour
assignments and examinations because their ideas are tutorial, ZOU hopes to help you come in touch with
streamlined. Taking part properly means that you the physical being, who marks your assignments,
prepare for the tutorial beforehand by putting together assesses them, guides you on preparing for writing
relevant questions and their possible answers and examinations and assignments and who runs your
those areas that cause you confusion. general academic affairs. This helps you to settle
down in your course having been advised on how
Only in cases where the information being discussed to go about your learning. Personal human contact
is not found in the learning package can the tutor is, therefore, upheld by the ZOU.
provide extra learning materials, but this should not
be the dominant feature of the six hour tutorial. As
stated, it should be rare because the information
needed for the course is found in the learning package
together with the sources to which you are referred.
Fully-fledged lectures can, therefore, be misleading
The six hour tutorials should be so structured that the

tasks for each session are very clear. Work for each
session, as much as possible, follows the structure given
below.
Session I (Two Hours)

Session I should be held at the beginning of the semester. The main aim
of this session is to guide you, the student, on how you are going to
approach the course. During the session, you will be given the overview
of the course, how to tackle the assignments, how to organize the logistics
of the course and formation of study groups that you will belong to. It is
also during this session that you will be advised on how to use your
learning materials effectively.
The Six Hour Tutorial Session At The Zimbabwe Open University
Session II (Two Hours)

This session comes in the middle of the semester to respond to the
challenges, queries, experiences, uncertainties, and ideas that you are
facing as you go through the course. In this session, difficult areas in the
module are explained through the combined effort of the students and
the tutor. It should also give direction and feedback where you have not
done well in the first assignment as well as reinforce those areas where
performance in the first assignment is good.
Session III (Two Hours)

The final session, Session III, comes towards the end of the semester.
In this session, you polish up any areas that you still need clarification on.
Your tutor gives you feedback on the assignments so that you can use
the experience for preparation for the end of semester examination.
Note that in all the three sessions, you identify the areas
that your tutor should give help. You also take a very
important part in finding answers to the problems posed.
You are the most important part of the solutions to your
learning challenges.
Conclusion for this course, but also to prepare yourself to

contribute in the best way possible so that you
In conclusion, we should be very clear that six can maximally benefit from it. We also urge you
hours is too little for lectures and it is not to avoid forcing the tutor to lecture you.
necessary, in view of the provision of fully self-
contained learning materials in the package, to BEST WISHES IN YOUR STUDIES.
turn the little time into lectures. We, therefore,
urge you not only to attend the six hour tutorials ZOU
Contents
Module Overview
Introduction _________________________________________________________________ 1
Unit One: Introduction To Macroeconomics

1.0 ________ Introduction ______________________________________________________ 3
1.1 ________ Objectives _______________________________________________________ 4
1.2 ________ Definition of Macroeconomics ________________________________________ 4
1.3 ________ Relationship between Microeconomics and Macroeconomics _______________ 4
__________ Activity 1.1 _______________________________________________________ 5
1.4 ________ Important Issues in Macroeconomics __________________________________ 5
__________ Activity 1.2 _______________________________________________________ 5
1.5 ________ Summary ________________________________________________________ 5
__________ References _______________________________________________________ 6
Unit Two: National Income Accounting

2.0 ________ Introduction ______________________________________________________ 7
2.1 ________ Objectives _______________________________________________________ 8
2.2 ________ Definition of National Income Accounting ______________________________ 8
__________ 2.2.1 Purpose of national income accounting statistics ____________________ 8
2.3 ________ Gross Domestic Product(GDP) _______________________________________ 9
__________ 2.3.1 Gross National Product(GNP) ___________________________________ 9
__________ 2.3.2 Net National Product(NNP) _____________________________________ 9
__________ 2.3.3 Personal Income(PI) ___________________________________________ 9
__________ 2.3.4 Disposable Personal Income (DPI) _______________________________ 10
__________ Activity 2.1 ______________________________________________________ 10
__________ 2.3.5 Consumer Price Index (CPI) ___________________________________ 10
2.4 ________ Methods of Measuring of National Gross Domestic ______________________ 10
__________ 2.4.1 The Income approach _________________________________________ 10
__________ 2.4.2 The Output approach _________________________________________ 11
__________ 2.4.3 The Expenditure approach _____________________________________ 11
__________ Activity 2.2 ______________________________________________________ 13
2.5 ________ Shortcomings of Gross Domestic Product _____________________________ 13
__________ 2.5.1 Nonmarket transactions _______________________________________ 13
__________ 2.5.2 Leisure ____________________________________________________ 13
__________ 2.5.3 Improved product quality _______________________________________ 13
__________ 2.5.4 The underground economy _____________________________________ 13
__________ 2.5.5 GDP and the environment ______________________________________ 13
__________ 2.5.6 Composition and distribution of output ____________________________ 14
__________ 2.5.7 Non-economic sources of well-being _____________________________ 14
__________ Activity 2.3 ______________________________________________________ 14
2.6 ________ Comparing Income levels between Countries ___________________________ 14
__________ 2.6.1 Tangibles __________________________________________________ 14
__________ 2.6.2 Intangibles _________________________________________________ 16
__________ Activity 2.4 ______________________________________________________ 16
2.7 ________ Summary _______________________________________________________ 17
__________ References ______________________________________________________ 18
Unit Three: Unemployment

3.0 ________ Introduction _____________________________________________________ 19
3.1 ________ Objectives ______________________________________________________ 20
3.2 ________ Definition of Unemployment ________________________________________ 20
3.3 ________ Causes and Types of Unemployment __________________________________ 20
__________ 3.3.1 Seasonal unemployment _______________________________________ 20
__________ 3.3.2 Cyclical unemployment _______________________________________ 20
__________ 3.3.3 Structural unemployment ______________________________________ 21
__________ 3.3.4 Technological unemployment ___________________________________ 21
__________ 3.3.5 Frictional unemployment ______________________________________ 21
3.4 ________ Effects of Unemployment ___________________________________________ 22
3.5 ________ Solutions to Unemployment Problems _________________________________ 22
__________ Activity 3.1 ______________________________________________________ 23
3.6 ________ Relationship between Inflation and Unemployment _______________________ 24
__________ Activity 3.2 ______________________________________________________ 25
3.7 ________ Summary _______________________________________________________ 25
__________ References ______________________________________________________ 26
Unit Four: Inflation

4.0 ________ Introduction _____________________________________________________ 27
4.1 ________ Objectives ______________________________________________________ 28
4.2 ________ Definition of Inflation _____________________________________________ 28
4.3 ________ Causes of Inflation ________________________________________________ 28
__________ 4.3.1 The Monetarist theory of inflation _______________________________ 29
__________ 4.3.2 Demand- pull inflation ________________________________________ 29
__________ 4.3.3 Cost-push inflation ___________________________________________ 30
__________ 4.3.4 Structural inflation ___________________________________________ 31
4.4 ________ Effects of Inflation ________________________________________________ 32
__________ 4.4.1 Distribution Effect ___________________________________________ 32
__________ 4.4.2 Economic effects of inflation ____________________________________ 32
__________ 4.4.3 Socio-political effects of inflation ________________________________ 33
__________ Activity 4.1 ______________________________________________________ 33
__________ Activity 4.2 ______________________________________________________ 34
4.5 ________ Summary _______________________________________________________ 34
__________ References ______________________________________________________ 35
Unit Five: Money and Banking

5.0 ________ Introduction _____________________________________________________ 37
5.1 ________ Objectives ______________________________________________________ 38
5.2 ________ The Functions of Money ___________________________________________ 38
__________ 5.2.1 Money as a medium of exchange _________________________________ 38
__________ 5.2.2 Money as a store of value ______________________________________ 38
__________ 5.2.3 Money as a measure of value (unit of account) ______________________ 39
__________ 5.2.4 Money as a standard of deferred payment __________________________ 39
5.3 ________ Official Definitions of Money in Zimbabwe _____________________________ 40
__________ Activity 5.1 ______________________________________________________ 40
5.4 ________ The Demand for Money ____________________________________________ 40
5.5 ________ Zimbabwe’s Monetary System _______________________________________ 42
__________ 5.5.1The functions of Reserve Bank of Zimbabwe _______________________ 42
__________ Activity 5.2 ______________________________________________________ 44
5.6 ________ Other Financial Institutions in Zimbabwe _____________________________ 44
__________ 5.6.1 Commercial banks ___________________________________________ 44
__________ 5.6.2 Merchant banks _____________________________________________ 44
__________ 5.6.3 Discount houses _____________________________________________ 45
__________ 5.6.4 Development banks ___________________________________________ 45
__________ Activity 5.3 ______________________________________________________ 45
5.7 ________ Monetary Policy __________________________________________________ 45
__________ 5.7.1 Open market operations _______________________________________ 46
__________ 5.7.2 Reserve ratio _______________________________________________ 46
__________ 5.7.3 Discount rate _______________________________________________ 46
__________ 5.7.4 Direct control of money supply __________________________________ 46
__________ 5.7.5 Moral suasion or persuasion ___________________________________ 47
__________ 5.7.6 Special deposits _____________________________________________ 47
5.8 ________ Summary _______________________________________________________ 47
__________ References ______________________________________________________ 48
Unit Six: International and Regional Trade

6.0 ________ Introduction _____________________________________________________ 49
6.1 ________ Objectives ______________________________________________________ 50
6.2 ________ Definition of International Trade _____________________________________ 50
6.3 ________ Benefits of International Trade ______________________________________ 50
6.4 ________ Difference between International and Domestic Trade ____________________ 50
6.5 ________ Protectionism in International Trade _________________________________ 51
__________ 6.5.1 Forms of Protectionism _______________________________________ 51
__________ 6.5.2 Reasons for protectionism _____________________________________ 52
__________ 6.5.3 Arguments against protectionism _______________________________ 52
__________ Activity 6.1 ______________________________________________________ 53
6.6 ________ Theories of International Trade _____________________________________ 53
__________ 6.6.1 Mercantilist theory ___________________________________________ 53
__________ 6.6.2 Doctrine of Absolute Advantage _________________________________ 53
__________ 6.6.3 Theory of Comparative Advantage _______________________________ 54
__________ 6.6.4 Heckscher-Ohlin Theory of Comparative Advantage _________________ 55
__________ Activity 6.2 ______________________________________________________ 56
6.7 ________ Summary _______________________________________________________ 56
__________ References ______________________________________________________ 57
Unit Seven: Economic Growth and Development

7.0 ________ Introduction _____________________________________________________ 59
7.1 ________ Objectives ______________________________________________________ 60
7.2 ________ Economic Growth _________________________________________________ 60
__________ 7.2.1 Theories of economic growth ___________________________________ 60
__________ 7.2.2 Determinants of economic growth _______________________________ 61
__________ Activity 7.1 ______________________________________________________ 62
7.3 ________ Economic Development ____________________________________________ 63
__________ 7.3.1 Indicators of economic development ______________________________ 63
__________ 7.3.2 Strategies to promote economic development _______________________ 63
__________ 7.3.3 Characteristics of developing countries __________________________ 64
__________ Activity 7.2 ______________________________________________________ 65
7.4 ________ Summary _______________________________________________________ 65
__________ References ______________________________________________________ 66
Unit Eight: Balance of Payments

8.0 ________ Introduction _____________________________________________________ 67
8.1 ________ Objectives ______________________________________________________ 68
8.2 ________ Definition of balance of payments ____________________________________ 68
8.3 ________ Components of balance of payments __________________________________ 68
__________ 8.3.1 Current account _____________________________________________ 68
__________ 8.3.2 Capital account ______________________________________________ 69
__________ Activity 8.1 ______________________________________________________ 71
8.4 ________ Foreign Exchange Market __________________________________________ 71
__________ 8.4.1 Definition of foreign exchange market ___________________________ 71
__________ 8.4.2 Players on the foreign exchange market __________________________ 72
__________ 8.4.3 Determinants of exchange rates _________________________________ 73
__________ 8.4.4 Foreign exchange regimes _____________________________________ 74
__________ Activity 8.2 ______________________________________________________ 74
8.5 ________ Summary _______________________________________________________ 74
__________ References ______________________________________________________ 75
Unit Nine: Public Finance

9.0 ________ Introduction _____________________________________________________ 77
9.1 ________ Objectives ______________________________________________________ 78
9.2 ________ Public Sector ____________________________________________________ 78
__________ 9.2.1 Central government __________________________________________ 78
9.3 ________ Definition of Public Finance ________________________________________ 78
__________ 9.3.1 Local government ____________________________________________ 79
__________ 9.3.2 Public enterprises ___________________________________________ 79
__________ 9.3.3 Government owned companies __________________________________ 79
9.4 ________ Government Expenditures __________________________________________ 79
9.5 ________ Sources of Government Revenue _____________________________________ 79
__________ 9.5.1 Seignorage _________________________________________________ 80
__________ 9.5.2 Printing money ______________________________________________ 80
__________ 9.5.3 Public Finance through Parastatals /Public Corporations ____________ 80
__________ Activity 9.1 ______________________________________________________ 80
9.6 ________ Government Budget _______________________________________________ 81
__________ 9.6.1 Role of the treasury/Ministry of Finance __________________________ 81
__________ 9.6.2 Purpose of the budget _________________________________________ 81
__________ 9.6.3 Budget preparation ___________________________________________ 81
__________ 9.6.4 Budget outcomes ____________________________________________ 82
9.7 ________ National Debt ____________________________________________________ 83
__________ 9.7.1 Public debt: _________________________________________________ 83
__________ 9.7.2 External Debt: _______________________________________________ 83
__________ 9.7.3 Four reasons why a government borrows: _________________________ 83
__________ Activity 9.2 ______________________________________________________ 83
9.8 ________ Taxation ________________________________________________________ 83
__________ 9.8.1 Definition of tax and types of taxes _______________________________ 84
__________ 9.8.2 Income tax systems ___________________________________________ 85
__________ Activity 9.4 ______________________________________________________ 85
9.9 ________ Fiscal policy _____________________________________________________ 86
__________ 9.9.1 Expansionary fiscal policy: _____________________________________ 86
__________ 9.9.2 Contractionary fiscal policy: ___________________________________ 86
__________ Activity 9.5 ______________________________________________________ 86
9.10 ______ Summary _______________________________________________________ 86
__________ References ______________________________________________________ 87
Unit Ten: Economic Structural Adjustment Programme

10.0 ______ Introduction _____________________________________________________ 89
10.1 ______ Objectives ______________________________________________________ 90
10.2 ______ Definition of ESAP _______________________________________________ 90
10.3 ______ Why ESAP? _____________________________________________________ 90
__________ Activity 10.1 _____________________________________________________ 90
10.4 ______ Components of Economic Structural Adjustment Programme ______________ 91
__________ Activity 10.2 _____________________________________________________ 91
10.5 ______ Economic Structural Adjustment Programme in Zimbabwe (ESAP 1991-1995) 91
__________ Activity 10.3 _____________________________________________________ 92
10.6 ______ Results of ESAP _________________________________________________ 92
10.7 ______ Criticisms of ESAPs ______________________________________________ 93
__________ 10.7.1 National sovereignty _________________________________________ 93
__________ 10.7.2 Privatization (selling of government equity in public entities) ________ 93
__________ 10.7.3 Agriculture ________________________________________________ 93
__________ 10.7.4 Environment _______________________________________________ 94
__________ 10.7.5 Austerity __________________________________________________ 94
__________ 10.7.6 An alternative to ESAP _______________________________________ 94
__________ Activity 10.4 _____________________________________________________ 94
10.8 ______ Summary _______________________________________________________ 94
__________ References ______________________________________________________ 95
Module Overview
Introduction
T
his module is built on the concepts you came across in the module
BBFH104. That module was looking at microeconomics, that is, the
decisions made by the individual firms and households in the economy.
Now turning to macroeconomics, we are considering the aggregate decisions
of all the economic participate in a particular economy at a given time. The
first unit deals with the definition of the term economics and tries to distinguish
between microeconomics and macroeconomics. It also highlights the
importance of studying macroeconomics.
Principles of Economics II (Macroeconomics) Module BBFH109
The unit on National Income comes second in this module. It defines National
Income Accounting and explains in detail the three measures of National
Income. The unit also explains the limitations of using National Income statistics.
Unit three looks at one of the most troublesome concept to many countries.
Unemployment is one of the twin devils of any economy. In this unit, the
causes and solutions to unemployment are discussed. Attention is also brought
to the effects of unemployment to the economy. Another twin devil of the
economy is inflation. This concept is discussed in detail in unit four. The unit
explains the concept of inflation. It also discusses the causes, solutions and
effects of inflation in an economy.
Money and banking is covered in unit five. The characteristics and functions
of money are discussed in this unit. The unit goes on to identify reasons for
demanding money and discussed the ways of curbing growth of money in an
economy. The next unit is on International and Regional trade. What is covered
in this unit are issues related to theories of international trade and the forms of
protectionism. Regional integration is also discussed in this unit. Unit seven
deals with Economic Growth and Development. Theories of economic growth
and development are elucidated. Factors constraining economic growth are
explained.
Unit eight starts by defining the Balance of Payment and describing its
subsections. Recommendations for remedying the Balance of Payment are
given attention. The unit goes on to look at the three foreign exchange market
rates. Components of the public sector are dealt with in unit nine. In this unit
an explanation of how the government raises its revenue is given. The last unit
covers the reasons for the Economic Structural Adjustment Programmes. A
criticism of the ESAP is given to wind up the unit.
2 Zimbabwe Open University

Unit One
Introduction To
Macroeconomics
1.0 Introduction
I
n this module we introduce you to Principles of Economics
11(Macroeconomics). In Principles of Economics 1, you learnt that
economics is a social science. The focus of the subject is on how economic
agents behave or interact and how economies work. Macroeconomics
analyses the entire economy and issues affecting it, including unemployment,
inflation, economic growth, and monetary and fiscal policy. Economic analysis
may be applied throughout society, as in business, finance, health care,
government and performance of the economy in terms of national income.
The study of macroeconomic variables is indispensable for understanding the
working of the economy. Our main economic problems are related to the
behaviour of total income, output, employment and the general price level in
the economy. In this unit we are going to look at the definition of
macroeconomics, the relationship between microeconomics and
macroeconomics and the evolution of macro economics.
1.1 Objectives
By the end of the unit, you should be able to:
 define the term macroeconomics
 distinguish between macroeconomics and microeconomics
 discuss the importance of studying macroeconomics issues
1.2 Definition of Macroeconomics

Macroeconomics is the study of whole economic systems aggregating over
the functioning of individual economic units. It is primarily concerned with
variables which follow systematic and predictable paths of behaviour and can
be analysed independently of the decisions of the many agents who determine
their level. More specifically, it is a study of national economies and the
determination of national income. Macroeconomics considers the performance
of the economy as a whole. Macroeconomics includes topics such as
economic growth, inflation, total employment and trade performance.
1.3 Relationship between Microeconomics and

Macroeconomics
Macroeconomics is the study of the economy as a whole. The economy’s
actions are looked at together. It reflects on the governmental aspect of the
economy, regarding tax and regulation actions they address. Microeconomics
is the study of economics in a miniature scale. It breaks down the economy
into attributes and analyses each specific component. Key features are to
explore the possibilities of lowering production costs and increasing income.
Micro-economics needs the help of Macro-economics, for example, the sale
of a firm not only depends on its price but also the total purchasing power.
The value of profit of a firm depends on aggregate demand, national income
and general price level. Similarly, the help of micro-economics is inevitable
for macro-economics. For example, national output and income are the sum
of the income of millions of individuals and numerous firms respectively. Hence,
the theory of the study of individual units and aggregate are both equally
important. There is really no opposition between micro-economics and macro-
economics. Both are absolutely vital. You are less than half-educated if you
understand the one while being ignorant of the other.

Unit 1 Introduction To Macroeconomics
Activity 1.1
? 1. What is macroeconomics?
2. Distinguish between microeconomics and macroeconomics
1.4 Important Issues in Macroeconomics

The study of macroeconomic variables is important for understanding the
working of the economy. It gives a bird’s eye view of the economy. For the
formulation of useful economic policies for the nation, macroeconomic analysis
is of utmost significance. Economic policies cannot be obviously based on the
basis of the fortunes of a single firm or even a single industry or the price of
individual commodity. It is far more fruitful to regulate aggregate employment
and national income and to work out a national wage policy. The increasing
total investment, total output, total income and total consumption should raise
unemployment caused by deficiency of effective demand. Thus,
macroeconomics has special significance in studying causes, effects and
remedies of general unemployment.
Activity 1.2
? 1. Discuss the relationship between macro-economics and

microeconomics.
2. Explain the important issues that are dealt with in macroeconomics.
3. Distinguish between endogenous variables and exogenous variables.
1.5 Summary
We introduced the course, macroeconomics to you in this course because
you have done the other part of economics. In this unit, we covered the
relationship between macroeconomics and microeconomics. We also looked
at the importance of macroeconomics and highlighted that it gives the bird’s
eye view of the economy.
Zimbabwe Open University 5

References
Gwartney, J.D. and Stroup, R.L. (1992). Microeconomics. Private and
Public Choice. Sidney: Harcourt Brace Jovanovich College Press.
Henderson ,J.V. and Poole, W. (1991). Principles of Economics.Toronto:
D.C Heath and Company.
McConnell, C.R. and Brue, S.L. (2002). Economics 15 th Edition
Irwin:.McGraw-Hill.
Stanlake, G. and Grant, S. J. (2000). Introductory Economics. 7th Edition.
Essex: Longman.

Unit Two
National Income Accounting
2.0 Introduction
T
he unit looks at national incomeaccounting.Three ways of measuring
national income are presented.The problems of measuring national
income are provided. It will also explain the limitations of Gross Domestic
Product.
2.1 Objectives
 define national income accounting
 describe disposable income via Net National Product
 identify macroeconomic measures, for example, Gross Domestic
Product, Gross National Product, National Income
 explain the three measures of National Income
 identify the major components of GDP
 calculate Gross Domestic Product using expenditure and income
approaches.
 explain limitations of Gross Domestic Product
2.2 Definition of National Income Accounting

National Income, according to the American heritage dictionary, is the total
net value of all goods and services produced within a nation over a specific
period (quarterly or annually), representing the sum of wages, profits, rents,
interest and pension payments to the residents of the nation.
McConnell and Brue (2002) says it is the total market value of all final goods
and services produced in a given year which includes all goods and services
produced by either citizen-supplied or foreign-supplied resources employed
within the country.
2.2.1 Purpose of national income accounting statistics

National income accounting statistics are used to:
 Measure the overall performance of the economy, (economic growth),
that is,whether the economy is growing, slowing down or stagnating;
 Formulate economic policies;
 Assess the health of the economy by comparing levels of production at
regular intervals for example quarterly or annually; and
 Measure the people’s standard of living.
However, care should be taken when using national income statistics to measure
standard of living because prices may change leading to an increase in income
which will not translate into an improvement in the standard of living. In addition,
national income accounting omits some economic activities and not all products
included in the national income accounts are beneficial to the general populace,
for example, the production of atomic and nuclear weapons.

Unit 2 National Income Accounting
2.3 Gross Domestic Product(GDP)

The primary measure of the economy’s performance is its annual total output
of goods and services(aggregate output). Aggregate output is calledgross
domestic product(GDP).Suppose aneconomy produces two tractors and three
wheelbarrows inyear one and three tractors and two wheelbarrows in year
two.What is the economy’s total output? We cannot answer that question
until we attach a price tag to each of the two products to indicate how society
evaluates their relative worth. That is what GDP does.
2.3.1 Gross National Product (GNP)

GNP measures income earned in Zimbabwe (GDP) plus receipts by Zimbabwe
residents of dividends,interest,and profits from assets that they own but which
are located overseas. By the same token, dividends, interest and profits earned
on assets located in Zimbabwe, but owned abroad , must be deducted from
GDP.
GNP=GDP-Foreign factor payments+foreign factor receipts.
Or
GNP=GDP+net income from abroad where net factor income is the difference
between foreign factor receipts and foreign factor payments.
2.3.2 Net National Product (NNP)

Whilst GDP and GNP provide for depreciation NNP will eliminate it in order
to fully show the return of factors of production to investors.
NNP=GNP-depreciation.
2.3.3 Personal Income (PI)

It includes all income received whether earned or unearned. It differs from
national income(income earned) because some income earned aidslevy,
nationalsocial security (NSSA),corporate income taxes, and undistributed
corporate profits is not received by households. On the other hand income
received such as compensation payments, government pensions and funeral
assistance to pensioners by government is not earned and must be added to
obtain PI.

2.3.4 Disposable Personal Income (DPI)

Disposable Personal Income is the amount of income that households have
after paying personal current taxes. That is DPI=PI-personal current
taxes.Disposable income is divided between consumption and saving.
Activity 2.1
? Briefly explain the following measures of macroeconomic activity; Gross

Domestic Product (GDP), Gross National Product (GNP), Net
National Product (NNP), National Income (NI), Personal Income (PI)
and Disposable Personal Income (DPI).
2.3.5 Consumer Price Index (CPI)

CPI is measure of the price of a special collection of goods and services,
called a “market basket of essential or basic household goods and services”,
in a given year as compared to the price of an identified(or highly similar)
collection of goods and services in a reference base year. Algebraically,
Price index in given year= price of market basket in current year x 100
price of same market basket in base year
2.4 Methods of Measuring of National Gross

Domestic
There are three methods of measuring a country’s total output or GDP. These
are the income approach, output approach and the expenditure approach.
The three approaches or methods are presented in the following sections;
2.4.1 The Income Approach

It measures GDP in terms of earnings of factors of production during the
course of producing goods and services (total output).
Under the income approach the following categories of earnings are summed
up to give GDP at factor cost;

 Wages and salaries from employment;

 Rent from land and buildings as well as royalties from patents and
copyrights; and
 Profits from business enterprises and interest earned from the use of
capital.
2.4.2 The Output Approach

It measures GDP in terms of the value added by each of the sectors of the
economy.Adding up the value of output presents two conceptual problems.
The first is the valuation of inventories of goods produced but unsold and
valued at market prices which has the effect of recording as part of current
output(and income)the profits that will only be received by the firm when and
if the goods are sold.
The second problem is double counting (or multiple-counting depending on

the number of market values of the outputs of firms added up) which occurs
when we add up market values of outputs of all firms. According to the output
approach, each firm’s value added is the value of its output minus the value of
inputs that it purchases from other firms for example a flour miller buys grain,
diesel and electricity for 80 dollars to produce a finished product worth 150
dollars. To calculate GDP we use 150 dollars.
2.4.3 The Expenditure Approach

It calculates the flows of expenditure needed to purchase the nation’s output.
These expenditure components include consumption (C), gross investment
(I), government (G) and net exports (difference between total exports and
total imports).
Consumer expenditure is all expenditures by households on durable consumer

goods for example cars, refrigerators, bicycles and lounge suites); and non-
durable consumer goods
(bread, milk, vegetables, mealie-meal and cooking oil), and services from
doctors, lawyers, mechanics, hairdressers and dentists. Consumption
expenditure is the largest component of GDP.
Algebraically, GDP=C+I+G+(X-M).
In the following sections, each expenditure component of GDP is briefly

explained:

Gross Domestic Investment (I)
Investment is defined as the act of producing goods that are not for immediate
consumption; the goods are called investment goods. These are produced by
firms and may be bought by either firms or by households. Three major
components of investment goods are inventories, capital goods and buildings.
 Inventories: These include inputs(raw materials), semi-finished goods
and finished goods waiting to be sold.
 Capital goods; also called fixed investments, for example, plant and
heavy equipment.
 Buildings include new constructions of residential flats and houses as
well as office blocks.
The total investment in the economy is called gross investment. The amount
necessary for replacement is called the capital consumption allowance or
depreciation. Net investment is the difference between gross investment and
depreciation.
Government expenditure (G)
Government expenditure is in two forms, namely capital expenditure, and

recurrent expenditure. Capital expenditure involves government expenditure
and infrastructure development for example construction of roads, dams, and
power stations. Recurrent expenditure involves government expenditure on
goods and services.
Net Exports (X-M)
International trade transactions are a significant item in national income

accounting. We know that GDP records all spending on goods and services
produced in Zimbabwe, including spending on Zimbabwean output by people
abroad (Bata Shoes, Mazowe Orange Crush and Prime Beef ).These are
called exports. Exports are goods and services sold to other countries by
Zimbabweans.
At the same time we know that Zimbabweans spend a great deal of money
on imports, for example, Chinese clothing, mobile phones, shoes, Japanese
cars and electrical products. Imports are goods and services bought by
Zimbabweans from other countries. We must therefore subtract spending on
imports, that is, (X-M).
Net exports (Xn)= exports (X)-imports (M)
GDP=C+Ig+G+Xn

Activity 2.2
? Describe three methods of measuring a country’s total output.
2.5 Shortcomings of Gross Domestic Product

The factors of gross domestic product as a measure of economic well-being
include;
2.5.1 Nonmarket transactions

The services of private housing contractors and housing cooperatives and
do-it-yourself activities are not included in the GDP.
2.5.2 Leisure
The working week has declined from 60 hours to 40 hours in Zimbabwe
since the 1960s and hence increased the welfare of the workers. However,
where workers have long working hours like China, the increase in that
country’s GDP will not reflect the leisure foregone by the workers.
2.5.3 Improved product quality

Cars, radios, television sets today are of much better quality than those of a
decade ago but GDP does not capture that.
2.5.4 The underground economy

Gamblers, smugglers (border jumpers in Zimbabwe), prostitutes and drug
dealers have good reasons for concealing their incomes. Participants in the
informal sector engage in perfectly legal activities but choose not to pay taxes.
The value of this economy goes from an average of 10% to in the developed
countries to 80% in developing countries (Journal of Economic Literature,
2000 p104).
2.5.5 GDP and the environment

Social costs (externalities) or negative by-products, for example, river pollution
due to industrial waste, traffic noise and exhaust fumes reduce the welfare of

the population but not deducted from the GDP and yet when money is spent
by government on cleaning up that is added to GDP.
2.5.6 Composition and distribution of output

GDP does not show how a country’s income is distributed.GDP may increase
over time while the distribution of incomes is benefiting a few.
2.5.7 Non-economic sources of well-being

There are some things that could make a society better without necessarily
raising GDP, a reduction in crime, peaceful relations with other countries,
better understanding between parents and children, a reduction in child labour
and street kids, political parties and a reduction in alcohol abuse.
Activity 2.3
Is GDP a good indicator of the standard of living of any nation?
? Discuss.
2.6 Comparing income levels between countries

When looking at the different countries with the aim of comparing national
income statistics as a measure of wealth and prosperity between them, we
encounter various problems split between tangibles and intangibles as stated
below.
2.6.1 Tangibles
i) Different size of the non-monetised sector and differences in the
availability and reliability of data
Comparisons of GNP per capita between countries will be misleading if the

relative importance of the non-monetised economy is greatly different. In
developed countries, most goods and services produced are exchanged for
money in the organised market. However, in some low income countries,
where barter trade is prevalent, the national income estimates will not be able
to capture this flow of goods and services.

ii) Differences in data availability and the difficulty is the non-availability of

data in most developing countries. Comparing relatively more accurate
estimates of developed countries with relatively inaccurate figures of
developing countries will yield misleading results.
iii) Different accounting practices
Differences arise in the following cases:Different provision for depreciation

because of different accounting practices and tax laws. Thus when comparing
the performance of two countries, this problem can be solved by using the
‘gross’ concept of national income.Some developing countries exclude change
in inventory in their national income estimates because of lack of data. Also,
the method of valuing inventory differs from country to country.In using GNP
for comparison, one has to realise that some countries like Philippines and the
US use factor income rather than property income.
iv) Different currencies involved
It is an accepted policy to convert national income estimates in the respective

national currencies to a universally accepted currency, the US$, for
comparison.However, this may not be satisfactory as the exchange rate
between currencies may fluctuate for various reasons and with each fluctuation,
the converted NI will change in value. Official exchange rates are not always
reliable since they are subject to manipulation by the government or to huge
capital flows.As an alternative, the purchasing power parity (PPP) is often
used to eliminate some of the shortcomings of the official exchange rate. In its
simplest form, the PPP tells us how much goods and services can be bought
by a unit of currency at home compared with the purchasing power of other
countries’ currency.Converting each country’s GNP using PPP rates rather
than official exchange rates tend to lead to more accurate comparisons of
national income.
v) Differences in composition of national income
In developed countries such as USA, a significant proportion of their national

income is derived from the production of finished products and tertiary services
while in developing countries national income is derived from production of
primary commodities and consumer goods.
(vi) Differences in income distribution
A country’s GNP per capita may be higher than another but the living standards
in the former may be lower due to greater inequality in the distribution of

income. For example, the gross domestic product of a country may be very
large, but the majority may still be poor as most of the income accrues to a
few rich individuals.
2.6.2 Intangibles
i) Differences in external costs
The higher national output in some countries may be accompanied by higher

levels of pollution, congestion and depletion of natural resources. The higher
national output could actually mean lower standard of living for such countries.
ii) Differences in the hours of work vesus leisure time
The higher GDP per capita in some countries may be the result of people
working harder or longer hours. A higher GDP per capita does not therefore
necessarily mean a better standard of living if the increased GDP is due to
longer working hours.
Activity 2.4
? Discuss the major limiting factors of gross domestic product as a

measure of economic well being of a country.In the process of using
national income statistics to compare living standards of different nations
what possible challenges can one encounter? Include specific examples
in your answer.

Firms
Factor Factor
payments Final goods
services
and services
Payments for
final goods and
services
Households
Figure 2.1: Real and Money Flows between Firms and Households
(Circular Flow of Income Source: Lipsey (1992)
The household sector has an inflow of disposable income and outflows of

consumption spending and savings.The Firms:This entity has inflows of
payments for goods and services purchased by households and sources of
funds for business investment and an outflow of investment funds and payment
of wages, rent, interest, and dividends.
2.7 Summary
We defined national income accounting then proceeded to look at the
derivations of the various measures. After that we compared the three measures
of national income, their challenges and international comparisons. Last but
not least we briefly explained the circular flow of income.

References
Delorme and Ekelund. (1983). Macroeconomics, Business Publications Inc.
Dornbusch, R. Fischer, S., Mohr, P. and Rogers, C. (1993).
Macroeconomics, Johannesburg: Lexicon Publishers.
Ghatak, S. (1995). Monetary Economics in Developing Countries,
Macmillan.
Gwartney, J. D, Stroup R.L. and Sobel R.S. (2000). Economics-Private
and Public Choice
Lipsey, R. G. (1992). An introduction to Positive Economics, ELBS:
McConnell, C, R. and Brue, S. L. (2002). Macroeconomics
Principles, Problems, and Policies. Irwin: McGraw-Hill College.

Unit Three
Unemployment
3.0 Introduction
U
nemployment is a major challenge to many economies. The unit will
deal with the definition of unemployment, the measurement of
unemployment and the causes of unemployment. It will also describe
the Phillips Curve as it helps the government come up with the trade-off
between inflation and unemployment.
3.1 Objectives
By the end of the unit, you will be able to:
 define unemployment
 discuss the measurement of unemployment
 evaluate the causes of unemployment
 explain how the various types of unemployment can be curbed
3.2 Definition of Unemployment

Unemployment refers to a situation where able bodied and employable people
(18-65 year age groups) are looking for jobs and cannot find them. People
concerned will be failing to get gainful employment. Unemployment is measured
as follows:
Unemployment rate = No of unemployed x 100%
Working population
3.3 Causes and Types of Unemployment

There is a diversity of factors that contribute to the problem of unemployment.
The causes and types of unemployment include frictional unemployment,
seasonal unemployment, structural unemployment, demand deficiency
unemployed, voluntary unemployment and technological unemployment.
3.3.1 Seasonal unemployment

Seasonal unemployment arises because certain occupations only require
workers for part of each year. This includes activities such as picking and
processing fruit and vegetables which have particular growing seasons. This
kind of unemployment is prevalent in economies that are agrarian in nature. In
Zimbabwe seasonal unemployment is a result of variations in seasons. For
example, in regions where cotton, tobacco and coffee are grown high
employment is expected during the picking season. Many people in areas
surrounding the farms will be employed. However, when this picking season
is over, they are retrenched because the main business will be over.
3.3.2 Cyclical unemployment

Cyclical unemployment is sometimes called the demand deficiency

Unit 3 Unemployment
unemployment. It occurs when a slump or recession in the economy gives rise

to unemployment. When an economy experiences a recession like what
happened in Zimbabwe during 2002-2008 there is a general downturn in
economic activity. Sales drop and some workers lose their jobs because there
is insufficient demand for the goods and services they produce.
3.3.3 Structural unemployment

Structural unemployment is caused by rigidities in the structure of the economy.
These include structural changes caused by closure of an industry due to
depletion of critical raw materials, for example, minerals and adverse climatic
conditions, such as drought and floods which affect agricultural production
cause structural unemployment. Also the imposition of economic sanctions
which would cause closure of some companies leads to structural
unemployment.
3.3.4 Technological unemployment

Technological unemployment arises from the introduction of better methods
of production which require the use of machines instead of humans. The
invention of new machines which will do the work of many labourers will lead
to technological unemployment. For example, the introduction of automated
teller machines in banks led to some bank tellers losing their jobs. In countries
like Zimbabwe which boast of labour intensive industries the adoption of capital
intensive methods of production can also lead to technological unemployment.
This shows that as much as a country would want technological advancement
there are costs of unemployment that are associated with such a move.
3.3.5 Frictional unemployment

Frictional unemployment is the form of unemployment which results from the
fact that there exists open vacancies, but people seeking similar positions are
unable to be engaged in those jobs. This may be stemming from poor or lack
of coordination as a result of insufficient information about the availability of
those jobs, travel costs and social ties which may restrict people from moving
to new locations.
 Voluntary unemployment
Voluntary unemployment is part of unemployment where able-bodied people

decide not to seek for employment even if there are plenty of job vacancies.
Sometimes this type of unemployment is caused by laziness or inheritance of

wealth that causes the able-bodied individual to quit their jobs or not to seek
for employment.
3.4 Effects of Unemployment

Unemployment has significant costs to the individuals who become unemployed
and to the society at large. The effects of unemployment includes
 The individuals who become unemployed suffer a loss of income. This
usually frustrates them resulting in committing suicide or engaging in
anti-social behaviour like committing crime.
 The unemployed suffers psychological costs. Enforced joblessness is
demoralising and results in a loss of confidence and self-esteem. In
some cases, unemployment adds to the social problems of loss of friends,
psychological disorders, divorces and even suicides.
 Unemployment leads to loss of skills. Unlike other factors of production
like capital, land and entrepreneurship, labour is a factor of production
that cannot be saved and used later. This is why unemployment is always
a loss to the society. If labour is not used when it is available, the skill is
lost.
 Unemployment leads to social and political unrest. Unemployment leads
to increased crime rates and other forms of unrest.
3.5 Solutions to Unemployment Problems

The diversity of causes of unemployment means that there is no single policy
to combat the problem of unemployment. The ideal scenario is to develop
strategies that are specific for each particular form of unemployment.
(a) Seasonal unemployment can be minimised through the diversification
of skills such that during off season people can gainfully engage
themselves in other line of production. Seasonal unemployment can be
solved or reduced by development of micro-enterprises that are labour
intensive that cater for the processing of the products that are produced
in the previous season.
(b) Voluntary unemployment can be reduced by increasing wages and
salaries and providing workers with additional packages such as holiday
packages.
(c) Demand deficiency unemployment by raising the aggregate demand
for goods and services. The result of this is an increase in labour intensive

Unit 3 Unemployment
production. If more goods and services are produced more job

opportunities will be created. The government can also stimulate demand
for goods and services by spending more or reducing taxes and interest
rates.
(d) Technological unemployment can be reduced by adopting efficient labour
intensive technologies. However the attempts to stimulate labour intensity
will only have sustained benefit if the relative price of labour is kept
within certain limits. The major reason companies shift from labour
intensive production to capital intensive is the continued rise in wages
and salaries above the cost of capital. This trend is strengthened when
there is a high incidence of strikes by workers.
(e) Functional unemployment can be solved through improvement of
transport and communication networks of the economy. Development
of transport and communication in the economy would minimise the
chances of lack of coordination between job seekers and the employers.
Many information centres responsible for the broadcasting of information
should be opened and made easily accessible by the public both in
urban and rural areas.
(f) Structural unemployment can be solved by industries rationalising their
operation. Sometimes structural unemployment may be as a result of
eruption of natural catastrophes such as droughts, floods, wars and
earthquakes which may lead to changes in the structure of the economy.
As the economy forges ahead with economic reform more emphasis
should be put on promoting investment expenditure aimed at stimulating
the informal sector. In Zimbabwe, the introduction of the Structural
Adjustment Programme (1990-1995) saw the government reacting to
this by introducing the Social Dimension Fund which gave retrenched
workers seed money to start income generating projects. However,
this did not help much because workers lacked entrepreneurial skills.
Activity 3.1
? 1.
2.
Discuss the five kinds of unemployment.
What are the major causes of unemployment in Zimbabwe today?
3. What do you think are the major effects of unemployment in Zimbabwe?
4. Discuss the policy measures that can be undertaken to control
unemployment in Zimbabwe? Give reasons

3.6 Relationship between Inflation and

Unemployment
For a number of decades now economists and politicians have debated
whether a relationship exists between inflation and unemployment. They have
debated whether low inflation or higher employment should receive the higher
priority. Phillips, an economist at the London School of Economics, suggested
that a stable relationship existed between unemployment and money wages.
This work was developed to suggest a trade-off between unemployment and
inflation as measured by changes in money wages. This relationship is illustrated
by the Phillips curve.
Inflation %
0 Unemployment %
PC
Figure 3.1 The Phillips Curve

Source: Lipsey, R.G.(1992)
The Phillips Curve shows that when unemployment is low, inflation is high and
vice versa. What this means is that there is an inverse relationship between
inflation and unemployment. The curve implies that the government can choose
its preferred combinations of unemployment and inflation. For example it can
decide to reduce unemployment if it is prepared to pay the price of higher
inflation.

Unit 3 Unemployment
Activity 3.2
? With the aid of a diagram discuss the trade-off between inflation and
unemployment
3.6 Summary
We examined the various causes of unemployment such as the seasonal,
technological cyclical structural and frictional unemployment. Ways of reducing
these kinds of unemployment were also discussed. The Phillips curve was
used to explain the relationship between inflation and unemployment.

References
Public Choice. Sydney: Harcourt Brace Jovanovich College Press.
Henderson, J.V. and Poole, W. (1991). Principles of Economics.Toronto:
D.C. Heath and Company.
McConnell, C.R. and Brue, S.L. (2002). Economics 15th Edition Irwin:
McGraw-Hill.
Stanlake, G. and Grant, S. J. (2000). Introductory economics.7th Edition.
Essex: Longman.

Unit Four
Inflation
4.0 Introduction
I
nflation and unemployment are the most important macroeconomic sensitive
problems of modern day economies. The unit will deal with inflation issues.
A distinction between demand push inflation, cost push inflation and
structural inflation will be examined.
4.1 Objectives
 define inflation
 describe the causes of inflation
 discuss the effects of inflation
 explain the policy prescription at the disposal of the government to
combat inflation
 explain the causes and types of unemployment
 discuss the effects of unemployment
 identify policy prescriptions at the disposal of the government to combat
the different types of unemployment
 illustrate the relationship between inflation and unemployment using
the Phillips Curve
4.2 Definition of Inflation

Inflation is one of those economic concepts that can easily cause great confusion
if it is incorrectly defined. Many people define inflation as simply too much
money chasing too few goods. This is a description of inflation. Inflation is an
increase in the prices in general. An increase in the price of a particular good
is not inflation. Even when the overall level of prices remains constant some
prices will increase while others will decrease in response to supply and
demand. There is inflation only when the prices of goods and services in the
country are increasing. The general increase in the price level leading to the
reduction of the purchasing power of the domestic currency is described as
inflation. This happened in Zimbabwe in 2007-2008 when the inflation affected
Zimbabwe dollar could only purchase very few items. The general price level
of goods and services were increasing. Some commodities and services prices
changed over a period of a day. Generally inflation is measured in terms of
price indices such as the Consumer \Price Index and the Production Price
Index.
4.3 Causes of Inflation

Causes of inflation in Zimbabwe are too many and easy to find. If you ask any
group of people today, what causes inflation; a horst of culprits will be identified
and blamed. Some believe inflation is caused by the government, while others
will say that the problem is the Central Bank (RBZ) which prints too much

Unit 4 Inflation
money. Consumers will blame manufacturers and retail shops for increases in
price to make exorbitant profits. Hoarding of goods to reduce their supply on
the market can also be called the cause while the business will blame the trade
unions for pushing up wages and salaries without increased productivity. The
fact of the matter is that inflation is a complex, dynamic process which cannot
be ascribed to a single cause. We can, however, explain some elements of
this process by examining two basic types of inflation which are demand-pull
and cost-push inflation.
4.3.1 The Monetarist theory of inflation

This school of thought developed by Irvine Fischer, argues that inflation is a
monetary phenomenon in the sense that sustained high rates of monetary
growth cause high inflation and that low rates of monetary growth will eventually
produce low inflation. According to this theory excess money pushes prices
of goods and services upwards. Comparing, the growth of money and output,
money supply will be greater than the growth in gross domestic
product. In particular, the growth of money supply per se is not inflationary

but what is inflationary is the relationship of money supply growth to output.
This view is based on the Quantity Theory of Money. The Quantity Theory of
Money is attributed to Irvine Fischer who developed the equation of exchange
MV = PY
Where M = money supply
V = Velocity of circulation
P = Price level
Y = Output of goods and services
This equation (MV=PY) links the product of the price level and the level of
real output to the money supply. Output is assumed to be constant. This will
mean that the price level will only change if money supply changes, that is, if
M increases P will also increase. Thus according to the Monetarists, inflation
is a monetary phenomenon.
4.3.2 Demand- pull inflation

Demand pull inflation occurs when the aggregate demand for goods and
services increases while aggregate money supply remains unchanged. The

excess demand pulls up the prices of goods and services caused by a

combination of increased consumption spending by households, increased
investment spending, government spending and export earnings.
S0
P1 E1
P0 E0
D1
D0
0 Y
Y0 Y1
Figure 4.1: Demand Pull Inflation
Source: Lipsey R.G. (1992)
Demand pull is illustrated by a rightward shift of the demand curve from D0 to

D1. An increase in demand leads to an increase in the price level and an
increase in production and income (Y) from Y0 to Y1. Demand pull inflation
thus has a positive impact on production and employment. This only occurs
provided that there are still some unemployed resources and scope for increases
in income.
4.3.3 Cost-push inflation

Cost push inflation is triggered by increases in the cost of production such as
increase in the price of raw materials, oil, wages, cost of electricity and water,
cost of imported capital and intermediate goods. Depreciation of the domestic
currency may lead to inflation especially in Zimbabwe where the local firms
depend on imports of some raw materials for production. Firms affected by
and increase in the cost of production either reduce their production or to
shift the burden to the consumers by adjusting prices upwards.
Cost push inflation is illustrated with the aid of the Aggregate Demand –
Aggregate Supply in Figure 4.2. Cost push is reflected by an upward leftward
shift of the aggregate supply curve .

Unit 4 Inflation
P
AS1
P1 E1
AS0
P0 E0
Y
0
Q1 Q0
Figure 4.2: Cost Push Inflation

Source: Lipsey R.G. (1993)
When the firms decide to reduce production from Y0 to Y1 due to an increase
in the cost of production, the supply curve shifts from AS0 to AS1 and, as a
result, the price increases from P0 to P1. The increase in the price level is
called the cost push price.
4.3.4 Structural inflation

This is a type of inflation caused by a combination of three interrelated set of
factors which are the underlying factors, initiating factors and the propagating
factors. As far as underlying factors are concerned it has been recognised that
a wide range of non-economic factors such as social political and historical
have to be taken into account in an meaningful analysis of inflation. To
understand inflation, structuralists argue that one has to understand how wages
and prices are determined. So we have to analyse the structure of both the
goods and the labour market. Increases in prices and costs are required to
initiate a particular inflationary episode. The immediate increases in costs and
prices can cause cost-push and demand –pull inflation. Once prices or costs
have risen in certain sectors of the economy, these increases are transmitted
to the rest of the economy. Thus we can conclude that the structuralists believe
that inflation emanates from bottlenecks in the production system. It is caused
by temporary shortages in the economy. Where there is shortage in the
economy, production is lagging behind demand.

4.4 Effects of Inflation

Certainly everyone is perturbed by inflation. In this section, we consider three
sets of effects of inflation which are the distributional, economic and socio-
political effects.
4.4.1 Distributional effect

Inflation affects the distribution of income and wealth among the various
participants in the economy. Below, we highlight some of these cases.
 Redistribution of income between creditors and debtors. Inflation
benefits debtors/borrowers at the expense of creditors (lenders). The
fact behind this notion is that the purchasing power (real value) of money
falls when prices increase. For example, households with hire-purchase
and mortgage debts pay less in real terms if inflation increases. The
creditor receives less. Thus income is transferred to the debtor.
 Money in bank accounts: this money losses value due to rising inflation.
Inflation discourages people from saving.
 Redistribution of income between the private sector and the government:
During inflation the government gains via the tax system. Zimbabwe
has a progressive personal income tax which means that marginal and
average rates increase with each income level. The higher an individual’s
income is the greater the percentage income tax they pay. When there
is inflation taxpayers’ nominal incomes rise even when their real incomes
remain unchanged. If income tax schedule remain unchanged, inflation
raises the average rates of personal income tax. This is affected by the
increasing tax thresholds resulting in a redistribution of income from
taxpayers to the government leading to increased government revenue
from taxation though inflation (fiscal dividend).
4.4.2 Economic effects of inflation

Inflation has various economic effects which may result in lower economic
growth and higher unemployment. Decision makers in the private sector tend
to become more concerned with anticipating inflation than with seeking new
and profitable production opportunities. The efforts of entrepreneurs are
diverted from innovation and risk taking. Inflation also stimulates speculative
practices. People try to outwit each other by speculating. Inflation discourages
saving in traditional forms such as fixed deposits, life insurance policies and
pension contributions. As wages and salaries lose value due to rising inflation,
workers may engage in strikes or higher wages increases the production of
exporting industries. For example, if inflation in Zimbabwe is higher than our

Unit 4 Inflation
major trading partners and international competitors, the result will be a loss
of international competitiveness, that is, Zimbabwean goods become expensive
on the international market.
4.4.3 Socio-political effects of inflation

Rising inflation makes people unhappy and different groups in society start
blaming one another for increase in the cost of living. Inflation leads to:
 High levels of poverty;
 Corruption;
 Increase in crime rates, for example, armed robberies, burglaries;
 Increases in cases of prostitution; and
 Social and political unrest. Inflation creates a climate of conflict and
tension which is not conducive to economy stability and development.
Activity 4.1
? 1. Define the term inflation

2. Outline the causes of rising inflation
3. Provide a trend of inflation in Zimbabwe following the introduction of
the multi-currency system in 2009.
4. Discuss in detail the effects of inflation
4.5 Possible Solutions to Inflation

Solutions to inflation are closely linked to the causes of inflation.
 Demand pull inflation can be solved by reducing money supply growth
until it matches the growth of output. This is according to the monetarist
approach.
 The Keynesian Theory explains that a reduced aggregate expenditure
can term inflation. Consumption, which is the largest component of
aggregate demand, is reduced by an increase in tax rates so that the
consumers are left with less to spend. On the part of investment, an
increase in corporate tax rate reduces investment propensity. Businesses
would be discouraged to increase investment projects because of
increased corporate tax. On the part of the government a reduction in
spending can help to reduce inflation. This can be done by reducing
the size of the civil service.

 Cost-push inflation can be termed by following wage guidelines principle.

This is a voluntary measure that is taken between employers and
workers. Employers and producers are asked to keep their prices and
wages within the limits provided. In most cases inflation is perpetuated
by the wage-price spirals. Such increases in wages will push inflation
upwards.
Activity 4.2
1. Discuss the possible solutions to inflation
? 2. Distinguish between cost push inflation and demand pull inflation. In
the process explain how you will deal with each case of inflation.
4.6 Summary
Inflation and unemployment are the most important macroeconomic sensitive
problems of modern day economies.We dealt with inflation issues. A distinction
between demand push inflation, cost push inflation and structural inflation were
examined.We also looked at the possible solutions to the problem of inflation
in the economy.

Unit 4 Inflation
References
Henderson, J.V. and Poole, W. (1991). Principles of Economics. Toronto:
McConnel, C.R. and Brue, S.L. (2002). Economics (15th Edition) Irwin:
McGraw-Hill.
Stanlake, G. and Grant, S. J. (2000). Introductory economics. 7th Edition
Essex: Longman,


Unit Five
Money and Banking
5.0 Introduction
I
n the unit, a definition of money will be provided. The major characteristics
and functions of money will be outlined and discussed. An outline of the
functions of the financial system in Zimbabwe will be given. In addition
different ways of measuring money supply willbe discussed. This is an important
section of the study as it relates to the concept of inflation and monetary
policy.
5.1 Objectives
 define "banks" and "money"
 explain the disadvantages of barter trade
 explain the characteristics and functions of money in an economy
 describe the Zimbabwean financial system
 outline ways of measuring the supply of money
 discuss ways of controlling the growth of money supply
5.2 The Functions of Money

Money is any item which is generally acceptable in exchange of goods and
services. It enables the exchange of goods and services to take place more
easily. Because of this, it encourages specialisation, for example one person
can concentrate on producing wheat and then exchange the wheat for money.
Without money, exchange has to take the form of barter. Barter is the direct
exchange of goods and services. The barter system can work if people
produce for themselves most of the goods and services they need and rely on
market exchanges for only a small number of items. However, barter has the
disadvantage that it depends upon a double coincidence of wants and, also, it
is time consuming in terms of the exchange system. Therefore, money
smoothen the exchange of goods and services in the economy. Below are the
functions of money;
5.2.1 Money as a medium of exchange

Our economy is based on specialisation and division of labour. People use
money to exchange goods and services. Money enables trade to take place.
Without money our economy would not function well.
5.2.2 Money as a store of value

Money is a useful way to store purchasing power or wealth. You can keep
money until you decide to spend it without loss of value. To perform this
function money must have a stable value. This function is only offset during
periods of high inflation rates where purchasing power of money is eroded.

Unit 5 Money and Banking
5.2.3 Money as a measure of value (unit of account)

Goods are valued in terms of money. Money makes it possible to measure
and record economic stocks and flows. Economic planning is made possible
because we use money as a unit of account.
5.2.4 Money as a standard of deferred payment

Money acts as a liquid reserve. Liquidity refers to the speed and the possible
cost of turning a financial asset into cash; saving and time deposits requiring a
short time of notice of withdrawal are said to be liquid. Rising inflation
complicates money’s role as a standard of deferred payments as it causes a
fall in the value of money. Money is used to pay contracts extending over a
period of time, for example, hire purchase, mortgage or bonds and promissory
notes.
5.3 Characteristics of Money

Money should have specific attributes or properties which would facilitate it
to perform the above functions.
(a) Acceptability: In the olden days money was wanted in its own right
irrespective of its value as money. We say money had an intrinsic value.
Today money has no intrinsic value. It is valuable because it is acceptable
as means of exchange. People have confidence in it. During the
economic meltdown during 2002-2008 in Zimbabwe, people lost
confidence with the Zimbabwe dollar. Money ceases to be money if
people refuse to use it.
(b) Stability in value
Money should have stable value if it is to facilitate trade, production
and distribution of goods and services. If the value of money is stable,
people can postpone purchases until a convenient time arrives. Inflation
erodes the value of money and this compromises its functions as a
medium of exchange and standard of deferred payments.
(c) Portability
Money must be easily carried from one place to another. This
characteristic of money was violated in Zimbabwe during the peak of
the economic down turn in 2007-2008 where people had to carry
large quantities of money for shopping. This inconvenienced the
shoppers.

(d) Durability
Money must last long. Bank notes should be used for long before they
get torn. This is essential if money is to act as a store of value.
(e) Divisibility
Money should be able to be divided into smaller denominations. This
will enable small payments to be made and provide change. If money is
divisible, the value of goods and services can be measured or expressed
accurately.
(f) Recognisable
Money must easily be identified. People must not mistake money for
something else. For example, $100 should look alike. This prevents
dishonest people from making their own money.
5.4 Official Definitions of Money in Zimbabwe

Each country has a way of defining money within its boundaries.
 Narrow money: This refers to money balances which are easily available
to finance day to day spending that is, transactions.
 Broad money: These are money balances that are held as a store of
value in addition to those held for transaction purposes. It is money
held both for transaction purposes and as a form of saving.
M1 is defined as notes and coins in circulation plus demand deposits with the
banking system.
M2= M1 plus savings deposits plus under 30 day deposits with the banking
system
M3= M2 plus over 30 day time deposits with the banking system. This is a
broad definition of money in Zimbabwe.
Activity 5.1
? 1. What are the advantages of barter trade?

2. Discuss five attributes of money that allows it to perform its functions

5.5 The Demand for Money

John Maynard Keynes divided the demand for money into three categories
which are the transactions demand, precautionary demand and the speculative
demand.
(a) The transactive demand for money
This is the demand for money by firms and households for financing day to
day transactions. This arises because individuals are paid at weekly or monthly
and yet they have to pay for many goods and services on a day-to-day basis.
The amount of money one keeps for transactions purposes depends on the
level of income and the time period it takes before one receives the money.
(b) Precautionary demand for money
This arises out of uncertainty and the desire to meet unplanned expenditures.
We often have unexpected expenditures, for example, if one falls sick they
must get cash to get treatment, motorists need cash when their cars break
down and to meet funeral expenses in the event of death in the family. Interest
rate may also influence the precautionary demand for money. The rate of
interest is the opportunity cost of holding money. If interest rates increase,
consumers and firms may be tempted to reduce their precautionary demand
of money and hold interest-bearing assets. However, for simplicity the
precaution demand for money is assumed to be completely interest inelastic.
(c) Speculative demand for money
This is the demand for money as a financial asset and therefore as part of a
wealth portfolio. The money is held for speculative purposes. This is meant to
take advantages of future changes in interest rates. There is an inverse
relationship between the price of bonds and the rate of interest. An increase in
the interest rate reduces the saleable value of a bond. Similarly, a fall in the
interest rate means a potential gain for investors.
Keynes argued that individuals would have some expectations of the normal
rate of interest. If the rate of interest were greater than an individual’s
expectation of the normal rate, that individual would expect the rate of interest
to fall in the near future. The higher the rate of interest the more people will
anticipate that the next change would be a downward movement. A fall indicates
capital gains for bond holders. The theory predicts that high interest rate will
lead to a large demand for bonds and as a result a small demand for speculative
money balances.

Interest rates
r1
r2
MDs
O L1s L2s Money balances
Fig 5.1: Speculative Demand for Money

Source:Lipsey, R.G. (1992)
At very low interest rates the speculative demand for money is perfectly elastic.
At high interest rates, there is a large demand for bonds and, consequently, a
small demand for speculative money balances. This is because at very low
interest rates bonds become so unattractive because the prices are high and
expected to fall.
5.6 Zimbabwe’s Monetary System

Zimbabwe’s monetary system is made up of the central bank, the commercial
banks and the building societies.
5.6.1The functions of Reserve Bank of Zimbabwe

In the monetary and banking setup of a country, central bank or apex bank
occupies a central position. The central bank’s main objective is to control
and regulate the monetary system of the country. In Zimbabwe, the central
bank is called the Reserve Bank of Zimbabwe (RBZ). The RBZ is governed
by the RBZ Act Chapter 22:15.
Issuer of notes and coins: The function of the RBZ is to issue the bank
notes and coins. The issuance of currency is the primary function of a central
bank.

Banker, agent and advisor to the government: As the government’s

banker, the RBZ maintains accounts of the government, receives deposits
from government, makes short term advances (overdraft) to the government,
provides foreign exchange resources to the government for repaying external
debt or purchasing foreign goods and other payments. The RBZ has the
responsibility to advise the government on economic policy matters.
Custodian of cash reserves of commercial banks: All banks are required

to keep some of the reserves with the RBZ. These are called reserve
requirements ratio. It provides security to their cash reserves, gives them loan
at the time of need, gives them advice on financial and economic matter and
work as clearing house among various member banks.
Custodian of nation’s foreign reserves: The RBZ is the custodian of the

foreign currency obtained from various countries. This will help it to stabilise
the external value of the domestic currency.
Lender of last resort: The Central bank works as lender of the last resort
for commercial banks because in the time of need it provides them with short
term advances (accommodation), that is, when a commercial bank faces
liquidity problems the central bank as the lender of last resort comes to its
rescue by advancing loans.The main advantages of the central bank’s
functioning as the lender of the last resort are;
 It increases the elasticity and liquidity of the whole credit structure of
the economy.
 It enables the commercial banks to carry on their activities even with
their limited cash reserves.
 It provides financial help to the commercial banks in times of emergency.
 It enables the central bank to exercise its control over banking system
of the country.
Clearing house function: All commercial banks have their accounts with the
central bank. The central bank settles the mutual transactions of banks and
thus saves all banks controlling each other individually for settling their individual
transactions.
Credit control: The Central bank controls the volume of credit in the
economy. A central bank can adopt various quantitative and qualitative methods
for credit control such as bank rate, open market operation, changes in reserve
ratio selective controls and moral suasion. These are going to be explained in
detail under the monetary policy relating to economic aspects of money supply
and general price level, credit, foreign exchange and banking. Also the RBZ

buys gold and silver. All gold and silver in Zimbabwe are sold through the
RBZ.
Activity 5.2
?
1. Discuss the motives for holding money
2. Discuss the role of the Central bank in an economy. Use a central
bank of your choice.
5.7 Other Financial Institutions in Zimbabwe

There are other financial institutions in Zimbabwe such as the commercial
banks, building societies, merchant banks and development banks. These
have various roles to paly in the economy. The financial institutions are discussed
below.
5.7.1 Commercial banks

The main function of commercial banks are accepting deposits from the public
and advancing them loans. Accepting deposits is the main function of the
commercial banks. Keeping the needs and interests of the various sections of
society, commercial banks formulate deposit schemes. Basically deposits
accepted by commercial banks are current deposits, fixed deposits and savings
deposits. In addition, commercial banks offer loans. They charge interest from
borrowers and this is the main source of their income. The forms of loans
which commercial banks advance to the public are cash credit, demand loans
and short term loans. Commercial banks also offer overdraft facilities,
discounting bills of exchange, investment of funds facilities an also perform the
agency function.
Examples of commercial banks in Zimbabwe are First bank, Metropolitan

Bank, Trust Bank, CBZ, Barclays Bank, Stanbic, Z.B.Bank, T.N.Bank,
Ecobank, African Development Bank, African Banking Corporation, NNB,
Standard Chartered and Kingdom Bank.
5.7.2 Merchant banks

Examples are the Interfin and MCBA Bank. The merchant banks specialize
in the following areas.

 trade finance;
 investment advice; and
 Provide working capital through overdraft facilities as well as short and
medium term lending.
5.7.3 Discount houses

Discount houses are intermediaries between the RBZ and the rest of the banking
sectors promoting an orderly flow of funds between the authorities and banks.
Examples of the discount companies are Discount Company of Zimbabwe
and NDH Ltd. In the system we have to mention the building societies and
development banks.
5.7.4 Development banks

Development bank is a bank established for the purpose of financing
development. It can be a national or regional financial institution designed to
provide medium and long term capital for productive investment, often
accompanied by technical assistance in less developed countries. Development
banks fill a gap left by undeveloped capital markets and the reluctance of
commercial banks to offer long term financing. Examples of development
banks are the Infrastructure Development Bank, Agriculture Development
Bank and the African Development Bank.
Activity 5.3
? 1. Explain the demand for money.

2. Discuss how commercial banks create and control money.
5.8 Monetary Policy

Monetary policy is an attempt by a Central bank of a country to control the
growth of money supply. In Zimbabwe money supply is measured by M1,
M2 and M3. The central bank uses a number of monetary instruments to
control the growth of money supply. These instruments are outlined below.

5.8.1 Open market operations

Open market operations (OMO) refer to sales and purchases of government
securities (bonds) on the open market by the RBZ. If the RBZ wishes to
reduce the money supply in the economy, it will sell securities on the open
market and vice versa. The buyers will withdraw money from their deposits in
banks and pay for the securities. The RBZ then debits the accounts of the
commercial banks affected. The cash reserves of the banks then fall. The
bank’s ability to lend is curtailed. Willingness determines the success of this
policy. If the RBZ wishes to expand money supply, it will buy securities on the
open market. The RBZ will pay them with cheques drawn from it. The sellers
of securities will then deposit their cheques with commercial banks. The
commercial banks present the cheques for payment and their accounts are
then credited enabling banks to lend more to their customers.
5.8.2 Reserve ratio

Commercial banks are required to keep a certain fraction or percentage of
their deposits called reserve ratio requirement with the RBZ. This required
reserve ratio can be used as an instrument to control the supply of money. If
the RBZ wants to reduce money supply it will increase the required reserve
ratio. This increase in the reserve required ratio reduces the ability of banks to
lend more money. If the ratio is decreased then the banks’ cash reserves will
increase, thus increasing their ability to lend.
5.8.3 Discount rate

Discount rate represents the cost of borrowing (rate of interest) from the
central bank by other banks facing liquidity problems. It is altered from time
to time in line with the RBZ’s objectives and changing conditions in the money
market. An increase in the discount rate is restrictive. It makes it expensive
for banks to borrow from the central bank leading to reduction in money
supply while a reduction of the discount rate encourages banks to borrow
from it and this increases the money supply.
5.8.4 Direct control of money supply

 Quantitative controls (credit ceiling): Limit on the amounts banks can
lend.
 Qualitative controls (selective credit controls): Instruct banks to lend to
certain customers.

5.8.5 Moral suasion or persuasion

The RBZ persuades bank managers to conduct their business in some
particular way. For example in 2011 year the banks were encouraged to offer
credit to farmers (particularly new farmers).
5.8.6 Special deposits

The RBZ may force banks to have special deposits with it. The special deposits
reduce the banks’ ability to increase credit and hence the money supply.
5.9 Summary
We started by giving a brief definition of money and highlighted the major
conflicting views of the importance of money in an economy.Then we outlined
and discussed the major characteristics and functions of money. An outline of
the functions of the financial system in Zimbabwe was discussed. There are
different ways of measuring money supply. This is an important section of the
study as it relates to the concept of inflation. We conducteda discussion on
monetary policy.

References
Gwartney, J.D. and Stroup R.L. (1992). Microeconomics. Private and Public
Choice. Sydney: Harcourt Brace Jovanovich college press.
Henderson, J.V. and Poole, W. (1991). Principles of Economics. Toronto
McConnell, C.R. and Brue, S.L. (2002). Economics (15 thEdition)
Irwin:.McGraw-Hill.
Stanlake, G. and Grant, S. J. (2000). Introductory Economics.(7th Edition)
Essex: Longman.

Unit Six
International and Regional

Trade
6.0 Introduction
T
his unit will define international trade and examine the trade theories put
forward. The benefits of and barriers to trade are also looked at. Regional
integration will be defined and forms of integration presented.
6.1 Objectives
 define;
(i) international trade
(ii) balance of payments
(iii) regional integration
 explain the benefits of international trade
 describe classical theories of international trade
 distinguish international trade from domestic trade
 explain equilibrium and disequilibrium in the balance of payments
 describe forms of protectionism and forms of regional integration
6.2 Definition of International Trade

International trade is the purchase and sale of goods and services across
national borders (Wild, Wild and Han 2006). International trade is also called
foreign trade or external trade. Since international trade involves the exchange
of goods and services across national boundaries, it involves the use of different
currencies unlike domestic trade where the local currency is used.
6.3 Benefits of International Trade

 International trade allows the free movement of factors of production,
capital and labour between countries.
 Prices of imported goods are competitive.
 International trade allows choice of goods and services.
 Domestic firms enjoy the priviledge of expanding into foreign markets.
 With trade opening up, developing nations enjoy technology transfer.
 Trade allows countries to specialise in product and services that they
have comparative advantage (Ricardo) and absolute advantage (Adam
Smith).
6.4 Difference between International and Domestic

Trade
International trade is, in principle, not different from domestic trade as the
motivation and the behaviour of parties involved in a trade do not change

Unit 6 International and Regional Trade
fundamentally regardless of whether trade is across a border or not. The main

difference is that international trade is typically more costly than domestic
trade. The reason is that a border typically imposes additional costs such as
tariffs, time costs due to border delays and costs associated with country
differences such as language, the legal system and culture.
Another difference between domestic and international trade is that factors

of production such as capital and labour are typically more mobile within a
country than across countries. Thus international trade is mostly restricted to
trading in goods and services and only to a lesser extent to trading in capital,
labour or other factors of production. Trading in goods and services can serve
as a substitute for trading in factors of production.
The third difference is that international trade involves the use of different
currencies unlike domestic trade where one currency is used.
6.5 Protectionism in International Trade

Protectionism is the economic policy of restraining or regulating trade between
states through methods such as charging high tariffs on imported goods,
restrictive quotas and a variety of other government regulations designed to
allow “fair competition” between imports and goods and services produced
domestically. We briefly explain five protectionist barriers below:
6.6.1 Forms of Protectionism

 Tarriffs: These are imposed on imported goods. Tariff rates usually
vary according to the type of goods imported.Import tariffs will increase
the cost to importers and increase the price of imported goods in the
the local markets, thus lowering the quantity of goods imported , to
favour local producers.
 Import quotas: These are government regulations that specify quantities
of imports per year.The economic effects of an import quota is similar
to that of a tariff, except that the tax revenue gain from a tariff will
instead be distributed to those who receive import licenses.Economists
often suggest that import licenses be auctioned to the highest bidder, or
that import quotas be replaced by an equivalent tariff.
 Administrative barriers: These include various administrative rules,
example, regarding food safety, environmental standards and electrical
safety) as a way to introduce barriers to imports.

 Export subsidies: These are often used by governments to increase

exports.Exporters are given cheap loans or direct subsidies to reduce
their production costs so that their products become cheaper on the
international market.
 Exchange rate manipulation: A government may intervene in the
foreign exchange market to lower the value of its currency by selling its
currency in the foreign market. Doing so will raise the cost of imports
and lower the cost of exports, leading to an improvement in its trade
balance.
 Anti-dumping Legislation laws: Prevent dumping of cheaper foreign
products that would cause local firms to close down.
6.6.2 Reasons for protectionism

Protectionists believe that there is a legitimate need for government restrictions
on free trade in order to protect their country’s economy and its people’s
standard of living. Some of the reasons for erecting protectionist barriers include
the following:
 Infant industry argument: Protectionists believe that infant industries
must be protected in order to allow them to grow to a point where they
can fairly compete with the larger mature industries established in foreign
countries. They believe that without this protection, infant industries
will die before they reach a size and age where economies of scale,
industrial infrastructure, and skill in manufacturing have progressed
sufficiently to allow the industry to compete in the global market.
 Strategic industry argument: Industries whose goods are required
for national defense may be protected.
 Fiscal revenue argument: There is fiscal benefit by government
imposing high tariffs on imports.
 Anti-dumping argument: Quality of products and welfare of the nation
improves where restrictions are imposed on sub-standard products.
 Regulating the foreign exchange market argument: Open Market
Operations(OMO) to maintain the local currency at a desirable rate.
6.6.3 Arguments against protectionism

Protectionism is frequently criticised by mainstream economists as harming
the people it is meant to assist. Protectionism results in deadweight loss, that
is, loss to overall welfare which gives no one any benefit, unlike in a free
market, where there is no such total loss.

Another argument against protectionism is that it promotes inefficiencies.
Activity 6.1
? If free trade has enormous benefits to trading partners, why do countries

impose protectionist barriers? Support your answer by citing specific
examples.
6.6 Theories of International Trade

6.6.1 Mercantilist Theory
Wild (2000) of the trade theory states that nations should accumulate financial
wealth, usually in the form of gold, by encouraging exports and discouraging
imports. Great Britain, France, the Netherlands, Portugal and Spain used
mercantilism during the 1500s to the late 1700s.These reserves could be
expanded by maintaining an excess of exports over imports. Mercantilists
believed in trade barriers in the form of high tariffs and low import quotas.
They also kept domestic prices artificially low in order to increase exports. If
a nation artificially keeps exports higher than imports there will be less choice
on the domestic markets leading to inflation. Trade barriers lead to retaliatory
behaviour by trading partners leading to decrease in international trade.
6.6.2 Doctrine of Absolute Advantage

The Scottish Economist Adam Smith developed the trade theory of Absolute
Advantage in 1776. A country that has an absolute advantage produces greater
output of a good or service than other countries using the same amount of
resources. Adam Smith stated that tariffs and quotas should not restrict
international trade, it should be allowed to flow according to market forces.
Contrary to mercantilism, Adam Smith argued that a country should concentrate
on production of goods in which it holds an absolute advantage. No country
would then need to produce all the goods it consumed. The Theory of Absolute
Advantage destroys the mercantilistic idea that international trade is a zero-
sum game (a one nation gains trade at the expense of another). According to
the absolute advantage theory, international trade is a positive-sum game,
(each trading nation offers good product and everybody gains something)
because there are gains for both countries to an exchange. Unlike mercantilism,

this theory measures the nation’s wealth by the living standards of its people
and not by gold and silver. There is a potential problem with the theory of
absolute advantage. If there is one country that does not have an absolute
advantage in the production of any product, will there still be benefit to trade,
and will trade even occur? The answer may be found in the extension of
theory absolute advantage and the theory of comparative advantage.
6.6.3 Theory of Comparative Advantage

The most basic concept in the whole of international trade theory is the theory
of comparative advantage, first introduced by David Ricardo in 1817. It
remains a major influence on much international trade policy and is, therefore,
important in understanding the modern global economy. The theory of
comparative advantage states that a country should specialise in producing
and exporting those products in which it has a comparative, or relative cost
advantage compared with other countries and should import those goods in
which it has a comparative disadvantage.
The theory of comparative advantage is based on the following assumptions:

 No transport costs;
 Costs are constant and no economies of scale;
 There are only two economies producing two goods;
 Traded goods are homogeneous(that is, identical);
 Factors of production are perfectly mobile;
 No tariffs or other trade barriers; and
 There is perfect knowledge, so that all buyers and sellers know where
the cheapest goods can be found internationally.
Table 6.1 shows how countries gain through trade using the theory of
comparative advantage:
Country Tobacco Mobile
Zimbabwe $3/kg $18
China $2/kg $14
In Zimbabwe, a kilogram of tobacco costs the same amount to produce as 6

units of mobile phones. Production of an extra kilogram of tobacco means

foregoing 6 units of mobile phones (that is, the opportunity cost of a kilo of
tobacco is 6 units of mobile phones). In China, a kilo of tobacco costs 7 units
of mobile phones to produce (that is, the opportunity cost of a kilo of tobacco
is 7 units of mobile phones). Because relative or comparative costs differ, it
will still be mutually advantageous for both countries to trade even though
China has an absolute advantage in both commodities. Zimbabwe is relatively
better at producing tobacco than mobile phones: so Zimbabwe is said to have
a comparative advantage in the production of tobacco. China has a relative
advantage in producing mobile phones: so China is said to have a comparative
advantage in producing mobile phones.
6.6.4 Heckscher-Ohlin Theory of Comparative Advantage

In the early 1900s an international trade theory called Factor Proportions
Theory was developed by two Swedish economists. The Heckscher-Ohlin
Theory stresses that countries should produce and export goods that require
resources (factors) that are abundant and import goods that require resources
in short supply. This theory differs from the theories of comparative advantage
and absolute advantage since these theories focus on the productivity of the
production process for a particular good. On the contrary, the Heckscher-
Ohlin Theory states that a country should specialise production and export
using the factors that are most abundant, and thus the cheapest. Factor
abundance can be explained in two ways;
 Factor abundance explained by factor prices.
 Country X is capital rich compared to country Y if capital relatively
cheaper in country X than country Y. Thus country X is said to be
capital-abundant.
 Factor abundance is actual physical amounts of the factors of production.
 7 assumptions;
 Consumption is determined by identical preferences.
 Technology is identical across countries.
 Constant returns for each product but diminishing returns for each factor.
 Goods differ in their factor inputs.
 Perfect competition exists in all factor and product markets.
 No barriers to trade but migration of factors of production is impossible.
 There are two factors, two goods, and two countries identical but fixed
in supply.

Activity 6.2
? 1. State and explain five international trade theories.

2. Differentiate between David Ricardo Theory of Comparative
Advantage and Hecksher/Ohlin Theory.
3. Discuss the benefits and costs to Zimbabwe as a result of free trade.
6.7 Summary
We defined international trade and stated trade theories. Benefits of
international trade were given, and reasons for imposing protectionist barriers.
We also examined regional integration and possible forms of integration were
presented.

References
Bhagwati, J. and A. Krueger. (2001). The Dangerous Drift to Preferential
Trade Agreements.Washington, DC:AEI Press.
Bharadwaj, K. (1989). Marshall on Pigou’s Wealth and Welfare. In
Bharadwaj K. (ed.), Themes in Value and Distribution. Delhi: Oxford
University Press.
Bhattacharjea, A. (2004). Increasing Returns, Trade and Development in
Bhattacharjea, A. and Marjit, S. (eds), Globalization and the
Developing Countries. Delhi: Manohar.
Black, J. and Winters, L.A. (1983). Policy and Performance in
International Trade, London: Macmillan.
Brander, J.A. and B.J. Spencer. (1985). Export Subsidies and International
Market Share Rivalry. Journal of International Economics 18 (1-
2):83-100.
Braun, O. (1983). International Trade and Imperial NewJersey and The
Hague: Humanities Press Inc. and Institute of Social Studies.
Chacholiades, M (1981) Principles of International Economics, NewYork:
McGraw Hill.
Ethier, W.J. (1984). Higher Dimensional Issues in Trade Theory. in R.W.
Jones and E.B.


Unit Seven
Economic Growth and

Development
7.0 Introduction
T
he unit will take a look at economic growth and development. It will
give the definition of economic growth and development and how they
are measured. In addition costs of economic growth are identified and
discussed. The unit will then take a closer look at characteristics of developing
countries. Policies to achieve economic growth and development will be
discussed.
7.1 Objectives
 define the terms economic growth and economic development
 explain how economic growth and development are measured
 explain theories of economic growth
 discuss factors that constrain economic development
 list the characteristics of developing countries
 evaluate the policies to achieve economic growth and development in
developing countries
7.2 Economic Growth

Economic growth is defined as the annual increase in real GDP or real GNP.
Economic growth can also be defined as an increase in real per capita GNP
over time.
Economic growth can be calculated using the formula

GNPn – GNPn-1 x 100
GNPn-1
Where GNPn is the real production in the current year and GNPn-1 is the
GNP figure in the previous year. Economic growth brings a number of
advantages, in particular higher living standards. More goods and services
will be available and these may be of higher standard. There are different
theories of economic growth which are then discussed in the section below.
7.2.1 Theories of economic growth

Economists’ view of growth and a country’s potential for growth wavers
between the pessimistic or the classical view and the optimistic or the modern
view. These theories of economic growth are explained.
 The classical view: The theory of economic growth is attributed to
Malthus’ theory of population. According to the theory, each country
has a fixed amount of natural resources which are subject to diminishing
returns of their use by the population. The classical view of growth is a
theory stating that population will expand by natural process, until the
value of the marginal product of labour is driven down to the subsistence
wage. Diminishing returns result from labour applied to the fixed natural
resources of the nation.

Unit 7 Economic Growth and Development
 The modern view: this theory attempts to cover up for the shortcomings
of the classical theory. It attempted to dislodge the fact that there is
natural process of population growth which the current theory says
reproduction is a choice. The classical theory also view demand as
something static when demand can shift as a result of a number of
factors. One such factor which is important in the modern theory of
development is capital deepening. Capital deepening is a result of a
process in which capital is accumulated faster than the population grows.
As a result, the capital per worker rises, and thus the marginal product
of labour also rises.
7.2.2 Determinants of economic growth

There are many determinants of economic growth which include:
Capital accumulation: Capital accumulation refers to the goods produced

for further production, for example, machinery. To invest in capital, present
consumption must be sacrificed. Part of the present incomes must be saved
and invested in physical capital stock such as new factories, machinery
equipment and materials. This makes it possible to expand output levels in
future. Investment in new factories, machinery and equipment needs to be
complemented by investment in social and economic infrastructure such as
roads, electricity, water and sanitation and communication which facilitates
and integrates economic activities. For example, investment in agriculture will
not help if there are no roads to facilitate transportation of inputs and outputs
to the market.
 Human capital formation: The size and quality of labour force is
crucial for economic growth. The quality of labour can be improved
through education and training. Formal schools, vocational and on-job
training programmes and informal education need to be supported as
they help to improve human skills. Training programmes help to give
skills which increase productivity of labour.
 Technical Progress: Technical progress is achieved through research
and development to come up with new technologies. Technical progress
results in new and improved ways of producing goods and services.
 Management and organisation: Even if capital accumulation is high
and much effort is put in human capital formation, economic growth
may still be low because of poor management and organisation. Effective
management may produce better output from given inputs. Management
should be able to allocate scarce resources to productive projects.
Scarce resources must be used efficiently. Management must be able

to identify opportunities and exploit them. Developing countries need

to develop entrepreneurship skills. One way to do this is to incorporate
entrepreneurship in the curriculum. Government policies should also
not act as barriers to entrepreneurship.
 Infrastructural development: Poor infrastructure is likely to lead to
low productivity in a country. Factories will hardly run effectively when
electricity and supplies of fuel are not enough. Good roads and efficient
railway system will enable raw material inputs to be transported to
factories and output to be transported to the markets. Foreign investors
will not be attracted to invest in countries where infrastructure is poor.
 Stable Political environment: Economic growth is likely to be high in
countries where there is peace and stability. This is because investment
in capital is likely to be high in these countries. Investors do not favour
unstable political environments where their investments are at risk. For
example, political disturbances in Zimbabwe during the period from
2000 to 2008 led the foreign investor to sideline the investment
expansion in the country. It is contentious, to Western countries like the
USA, Britain, Australia and their allies, that is, the ruling party (ZANU
PF) acquired land for redistribution purposes.
 Availability of foreign currency: Another major factor in the
determination of economic growth was availability of foreign currency.
Foreign currency was needed to import fuel, electricity, machinery and
raw material inputs before dollarisation. For example, during 2000-
2008, Zimbabwe experienced acute shortages of foreign currency and
could hardly import electricity and other raw materials for manufacturing
industries.
 Adequate demand: Economic growth also depends on there being
sufficient demand for goods and services. If there is no adequate demand
for goods and services then capital accumulation, human capital
formation and infrastructural development will not help. Adequate
demand motivates firms to produce more goods and services and, as
more goods and services are produced, economic growth increases.
Activity 7.1
1. State and explain two theories of growth.
? 2. Give five determinants of growth. State whether they are appropriate
for Zimbabwe.

7.3 Economic Development

Economic growth and economic development are not synonymous. Economic
growth refers to the increase in national or per capita income or product, that
is, an increase in the production of goods and services. Economic growth is a
component of economic development. Economic development can be defined
as an improvement in the quality of life of the citizens of a country. When
economic development occurs, there is provision of food, shelter, clean water
and health facilities. According to Gillis et al (1992), economic development
involves structural changes in the structure of the economy. The structural
changes are
 Rising share of manufacturing along with the falling share of agriculture
in national product; and
 An increasing percentage of people who live in cities rather than the
countryside.
Economic development is also characterised by changes in consumption
patterns. People move on to spend their incomes on consumer durables and
eventually more into leisure time products and services. Economic development
must benefit the majority of the people.
7.3.1 Indicators of economic development

The most important measure of economic development is the change in the
quality of life. The following are some of the measures of economic
development:
 Access to clean water
 Improved diet
 Improved health
 Lower mortality rates among children
 Better clothing and housing
 Increased literacy
 A better physical environment
7.3.2 Strategies to promote economic development

In trying to stimulate economic development, countries can adopt import
substitution industrialisation and/or export oriented industrialisation:
i) Import substitution industrialisation
Import substitution or inward looking strategies were typical of the general

approach to development which dominated thinking after the Second World

War. This approach is interventionist and protectionist. The general economic
strategy referred to as import substitution is the one that developing countries
can adopt for increased economic development. Zimbabwe adopted this
strategy in 1965-1979. Import substitution, means encouraging the
development of domestic industry under cover of protective barriers, such as
tariffs and import quotas. The industries targeted are those that provide the
largest quantity of imports, that is, the government will promote industries that
would produce substitutes of imports. Inward looking strategies involves the
heavy subsidisation of domestic producers as well as limiting imports through
high tariffs. Inward looking policies generate some short term benefits, such
as the protection of infant industries; job creation; increased income and
preserving traditional ways of life. The disadvantage of the import substitution
industry is that the industries it creates are inefficient.
ii) Export oriented development strategies
Strategy focuses on subsidies and investment on industries which would make

goods for exports. Countries that have adopted export oriented industrialisation
include South Korea, Taiwan, Singapore and Hong Kong. The benefits of
outward looking policies are derived from the benefits of free trade. For
example, free trade brings welfare gains from tariff removal, increased
competition and efficiency. In addition, outward looking countries may be
better able to cope with globalisation and with external shocks. However, the
financial crisis and its after-effects have forced many national governments to
re-think their policies and to minimise the risks of an outward looking approach.
7.3.3 Characteristics of developing countries

Developing countries face the following characteristics
 High population rates: Population growth is very high in some developing
countries. Women bear many children. The number of children is higher
in poor families compared to rich families.
 Low savings: The rate of unemployment is very high in developing
countries. For example, in Zimbabwe it was estimated to be about
80% by the end of 2008.
 Small and stagnant markets
 Low investment in physical capital and education
 Few economies of scale political instability
 Political instability
 Low levels of Productivity: Most developing countries are characterized
by low levels of labour productivity. This is caused by the use of less

advanced technologies. It is also caused by lower investment in education

and training which help in human capital formation.
 High dependence on primary and unprocessed products: Developing
countries depend on raw primary product exports. Zimbabwe for
example exports agricultural products such as tobacco and mineral ores.
Activity 7.2
?
Give five characteristics of developing countries how they impact on a
country like Zimbabwe.
7.4 Summary
We looked at economic growth and development. The definitions of economic
growth and economic development were presented. Theories of economic
growth were discussed namely classical view and modern view. We also looked
at policies and strategies to achieve economic growth and economic
development such as import substitution and export strategies.

References
Henderson, J.V. and Poole, W. (1991). Principles of Economics. Toronto:
McConnell, C.R. and Brue, S.L. (2002). Economics (15th Edition.) Irwin:
McGraw-Hill.
Stanlake, G. and Grant, S. J. (2000). Introductory Economics. (7th Edition.)
Essex: Longman.

Unit Eight
Balance of Payments
8.0 Introduction
T
he unit will look at the components of the balance of payments and
explain the make-up of the major accounts which can be found in an
annual accounting statement of the International Monetary Fund (IMF)
and the World Bank (WB). It also touches on basic concepts of the balance
of payments and how some of these concepts can assist in solving balance of
payments problems. Last but not least the foreign exchange market will be
looked at and the three regimes outlined.
8.1 Objectives
By the end of the unit you should be able to:
 define balance of payments accounts and foreign exchange market
 define the basic concepts of balance of payments and purpose
 recommend possible remedies to difficult current and capital accounts
 outline the three foreign exchange market rates
8.2 Definition of balance of payments

Balance Of Payments (BOP) accounts is an accounting record of all monetary
transactions between a country and the rest of the world during a specific
period. The transactions include payments of imports and receipts from
exports. Exports are goods and services sold to other countries by domestic
firms. For example, Zimbabwe exports diamonds to China. Exports bring in
foreign currency. Imports are goods and services bought from other countries.
For example Zimbabwe imports cars from Japan (Chidakwa A. and
Jubenkanda R.R. 2004).
8.3 Components of balance of payments

A balance of payments has two major accounts namely current and capital
account.
8.3.1 Current account

The current account records trade in goods and services as well as transfer
payments. Services include freight, royalty payments and interest payments. Services
also include the category net investment income, which represents interest and
profits on our assets abroad less the income foreigners earn on assets they own in
Zimbabwe. Transfer payments consist of remittances, gifts and grants. The trade
balance records trade in goods. Adding trade in services and net transfers gives us
the current account balance. Current account surplus occurs when exports exceed
imports plus net transfers to foreigners (receipts from trade in goods and services)
and transfers exceed payments on this account. Current account involves trade,
exports, imports, private transfers, official transfers, factor services, financial account,
foreign direct investment, portfolio investment, borrowing and lending, changes in
reserves, errors and omissions.

Unit 8 Balance of Payments
8.3.2 Capital account

The capital account records purchases and sales of assets such as stocks,
bonds and land. A capital account surplus, also known as net capital inflow
occurs when our receipts from the sale of stocks, bonds, land, bank deposits
and other assets exceed our payments for our own purchases of foreign assets.
Apart from occasional capital transfers, the first component of capital account
is investment, which includes direct investment, portfolio investment and certain
long-term official flows. Direct investment abroad occurs when a Zimbabwean
resident acquires direct ownership of real assets abroad while an in-flow of
direct investment represents the purchase of Zimbabwean assets by foreigners.
Portfolio investment arises from dealings in long-term financial investments

such as shares and government stock. The sum of the current and long-term
capital balances constitute the basic balance. The remainder of the capital
account considers short-term capital flows. These range from trade credits
through private loans and bank lending, to changes in foreign central banks
holdings of US dollars and government stocks. See Table 8.1 below

Table 8.1: Current Account Composition
Current account Amount
Export goods US700
Import goods -US1050
Balance on goods -US350
Exports of services +US270
Imports of services -US190
Balance on services +US80
Balance on goods and services -US270
Net investment income -US20
Net transfers -US5
Balance on current account -US340
Capital account Amount
Foreign purchases of assets in Zimbabwe +US750
Purchases of assets abroad -US340
Balance on capital account -US320
Official reserves account +US20
Overall BOP balance US 0

A balance of goods is also called a trade balance.
There are three possible outcomes from a balance of payments:

 BOP=0; it means exports are equal to imports.
 BOP>0 BOP surplus, means exports are more than imports. This will
lead to a build-up of a country’s foreign reserves. These foreign reserves
can be used to build infrastructure (for example, roads, dams, and power
stations) or can be lent to other countries experiencing balance of
payments problems.
 BOP<0, BOP deficit means exports are less than imports leading to a
balance of payments problems(borrowing from IMF, World Bank or
other countries).
Activity 8.1
?
1. What are the main components of the BOP?
2. How does a surplus or deficit occur?
8.4 Foreign Exchange Market

8.4.1 Definition of foreign exchange market
The foreign exchange market (forex, FX or currency market) is a form of
exchange for global decentralized trading of international currencies. Financial
centres around the world function as anchors of trading between a wide range
of different types of buyers and sellers. It was estimated as of April 2010 that
the average daily turnover in global foreign exchange markets is worth US$4
trillion.

8.4.2 Players on the foreign exchange market
Table 8.2: Top 10 Currency Traders’ % of Overall Volume, 2013
Rank Country Name Market share
1 Germany Deutschebank 15.18%
2 United States Citi 12.90%
3 Great Britain Barclays 10.24%
Investment Bank
4 Switzerland UBS AG 10.11%
5 Great Britain HSBC 6.93%
6 United States JPMorgan 6.07%
7 Great Britain Royal Bank of 5.62%
Scotland
8 Switzerland Credit Suisse 3.70%
9 United States Morgan Stanley 3.15%
10 United States Bank of America 3.08%
Source: JP Morgan (2013)

Unlike a stock market, foreign exchange market is divided into levels of access.
At the top is the interbank market (largest commercial banks see Table 8.2)
and securities dealers. From there, smaller banks, followed by global
commercial companies (which need to hedge risk and pay employees in
different countries). Central banks (control money supply, inflation, and or
interest rates). Hedge funds are speculators, investment management firms
(who manage large accounts for customers such as pension funds and
endowments). Retail foreign exchange traders, non-bank foreign exchange
companies, and money transfer/remittance companies and bureaux de change.

According to the 2010 Triennial Survey, the most traded currencies were US
dollar 84.9%, Euro 39.1%, Japanese Yen 19.0% and Pound Sterling 12.9%
and the most heavily traded bilateral currency pairs were as follows;
Table 8.3: Most Traded Commercial Currencies
Currency Percentage
EURO/USD 28%
USD/JPY 14%
GBP/USD 9%
Source: European Union (2013)
8.4.3 Determinants of exchange rates

a) Economic factors
-Economic policy (fiscal/monetary policy-supply and cost of money)
-Government budget deficits or surpluses.
-Balance of trade levels and trends.
-Inflation levels and trends-loss of currency value when inflation is high.
-Economic growth and health-the more healthy and robust a country’s
economy the better the performance of the currency.
-Productivity of an economy-in the traded sector (exports) positively
influence the value of the currency.
 Political conditions
Political upheaval and instability can have a negative impact on a nation’s

economy and/or currency.
 Market psychology
There will be a greater demand, thus a higher price, for currencies perceived
as stronger over their relatively weaker counterparts. Accumulated price
movements in a currency pair such as EUR/USD can form apparent patterns
that traders may attempt to use.

8.4.4 Foreign exchange regimes

It includes fixed exchange, flexible exchange and managed exchange (which
is a combination of fixed and flexible ones).
1) Fixed exchange rate regime through which governments determine
exchange rates and make necessary adjustments in their economies to
maintain those rates. These include currency interventions-selling part
of the reserves, protectionist policies-restricting imports-, and exchange
controls and rationing.
Controls and Rationing: bring about distorted trade, favouritism,
restricted choice and black markets due to shortages.
2) Flexible exchange rate regime
This regime is a system of fluctuating exchange rates determined by
private sector demand and supply in the complete absence of
government intervention.
3) Managed exchange rate regime or dirty float where governments
sometimes intervene with OMO (Open Market Operations) or simply
leave the rate to the market. This system is a combination of the other
two (fixed and flexible rates).
Activity 8.2
?
1. Compare and contrast the current and the capital accounts of the
Balance of Payments.
2. Trace the evolution of international exchange rate regimes from the
Bretton Woods era to the present.
3. Which exchange rate regime would you recommend for Zimbabwe
and why?
8.5 Summary
We looked at the balance of payments and its components, capital and current
accounts. Then the determinants of exchange rates were put forward. Lastly
the foreign exchange market was examined and the three possible rate regimes
namely fixed, flexible and managed exchange rate regimes.

References
Bhagwati, J.N. et al . (1971). Trade, Balance of Payments and Growth,
Amsterdam North Holland.
Dornbusch, R. and Fischer, S. (1986). Third World Debt.
Dornbush, R. (1986). Dollars, Debts and Deficits,Cambridge, Mass MIT
Press.
Edwards, S. (1983). The Demand for International, Reserves and
Exchange Rate Adjustment: The Case of LDCS, 1964-72,
Economica, Vol.50.
Edwards, S. (1984). The Demand for International Reserves and Monetary
Equilibrium: Some Evidence from Developing Countries, Economics
and Statistics.Vol. 66.
Frenkel, J.A. and Johnson, H.G. (1976). The Monetary Approach at the
Balance of Payments, London: Allen of Unwin.
Gabriele, G. Michael, M. (2004). Why has FX trading surged? Explaining
the 2004 triennial survey (http:/www.bis.org/publ/qtrpdf/
r_qt0412.pdf). Bank for International Settlements.
John, J.M. (1999). Technical Analysis of the Financial Markets. New
York: Institute of Finance.
Perce, E. and Steinherr, A. (1989). Exchange Rate, Uncertainty and Foreign
Trade, European Economic Review, Vol.33.


Unit Nine
Public Finance
9.0 Introduction
T
he role of government, the world over is often taken for granted by
citizens until austerity measures are introduced as in the case of Zimbabwe
in SADC and Greece, Ireland and Spain in the Eurozone. Citizens
complain when tax rates are increased but are pleased when social services
such as pensions, health, security, water, roads, electricity and other public
utilities are provided .Government raises revenue through taxation, debt, public
companies (parastatals) and offshore money to pay for the above-mentioned
services.
The unit will outline the components of public sector and define public finance.
It will define fiscal policy of government expenditures and how government
raises its revenue. The impact of fiscal policy on the economy will also be
examined.
9.1 Objectives
 outline components of the public sector
 define public finance
 apply fiscal policy of government expenditures
 explain how government raises its revenue
 discuss the impact of fiscal policy on the economy
9.2 Public Sector

Public sector refers to all production that is in public hands of entities owned
by the state. The public sector includes all production of goods and services
by central authorities plus all production by state owned companies that is
sold to consumers through ordinary markets.
9.2.1 Central government

Central government includes all public agencies or (Parastatals), government
bodies (all Ministries) and other organisations belonging to or owing their
existence to the government (for example Anti-Corruption Unit). It includes
such institutions as the central bank (Reserve bank of Zimbabwe), the civil
service, commissions( Zimbabwe Electoral Commission) and regulatory
agencies(Postal and Telecommunications Regulatory Authority (POTRAZ),
the cabinet, the police force, the judiciary and all other authorities that can
exercise control over the behaviour of firms and households.
9.3 Definition of Public Finance

Public Finance is the collection of taxes from those who benefit from the
provision of public goods by government and the use of those tax funds towards
production and distribution of public goods. It is the process of budgeting
government revenues and expenditures.

Unit 9 Public Finance
9.3.1 Local government

Local government, although part of central government through parent
Ministries, is quasi autonomous (Municipalities, for example, Harare or
Bulawayo). These manage their own affairs until there is a project that needs
undertaking (Nyamandlovu aquifer-water project), or a crisis(breakdown of
the Jeffrey Morton water works on lake Chivero), then central government
intervenes.
9.3.2 Public enterprises

These are entities where government is the sole shareholder (Parastatals), for
example, Zimbabwe Electricity Supply Authority-Zesa holdings (Pvt) Ltd.
9.3.3 Government owned companies

These are companies wholly owned by government but run on commercial
basis (for example, Zimbabwe United Passenger Company-ZUPCO, Hotels-
Rainbow towers)
9.4 Government Expenditures

Economists classify government expenditures into three main categories namely
 Government purchase of goods and services for current use are
classified as government consumption of recurrent expenditure.
 Government purchases of goods and services intended to create future
benefits such as infrastructure investment or research spending are
classified as government investment or capital expenditure.
 Government expenditure that are not purchases of goods and services
and instead just represent transfers of money such as social security
payments, pensions, salaries and wages are called transfer payments.
These are sometimes classified under recurrent expenditure.
9.5 Sources of Government Revenue

Government revenues come from different sources. These include:
 All taxes, for example, income and corporate taxes, VAT and road
vehicle tax.

 Non-tax revenue (from government owned corporations, sovereign

wealth funds, sale of assets, or seignorage.)
 Borrowing, for example, domestic (local banks, money market and
foreign borrowing (World Bank, IMF, foreign governments and
commercial banks.)
 Grants from foreign countries, for example, China.
 Aid from foreign countries, for example, U.K.
 Printing money especially for war purposes (Mozambique and DRC
conflicts and once off payment for war veterans).
 Privatization or proceeds from sale of parastatals, for example, Grain
Marketing Board,Dairibord Limited Zimbabwe,Cotton
company,National railways of Zimbabwe and Air Zimbabwe.
9.5.1 Seignorage
is the net revenue derived from the issuing of currency. It arises from the
difference between the face value of a coin or bank note and the cost of
producing it, distributing and eventually retiring it from circulation. This is a
small proportion of revenue in developed nations but a significant one in
developing nations. Zimbabwe used this method before dollarisation.
9.5.2 Printing money

This act is when governments deliberately print extra notes and coins to finance
their operations, usually armed conflicts (Zimbabwe printed money to finance
the Mozambican and DRC wars of liberation and the war veterans’ lump sum
and monthly pay outs). This contributed to inflation in the period 2005-2009.
9.5.3 Public Finance through Parastatals /Public

Corporations
Some state owned companies assisted government activities in the 90’s but
now most of them are incurring huge losses.
Activity 9.1
1. What are the components of the Public sector?
? 2. How does the government of Zimbabwe raise revenue and what are
its main expenditures?
3. List and explain any five ways of financing government expenditure.

9.6 Government Budget

A government budget is a legal document that is often passed by the legislature
and approved by the president and cabinet.
The two basic elements of a budget are the revenues and expenses. In the
case of the government, revenues are derived primarily from taxes (see
Section 7.5). Government expenses include spending on current goods and
services, called government consumption; government investment expenditures
such as infrastructure investment and transfer payments like pensions (see
Section 7.4).
Budgets have an economic, political and technical bias. Unlike a pure economic
budget, they are not entirely designed to allocate scarce resources for the
best economic use. They also have a political bias where different interests
push and pull in an attempt to obtain benefits and avoid burdens.
9.6.1 Role of the Treasury/Ministry of Finance

 Managing national finances.
 Collecting taxes, duties and monies paid to and due to the Zimbabwean
government and paying all bills of Zimbabwe.
 Printing currency and coinage.
 Managing government accounts and the public debt.
 Supervising national banks and other financial institutions.
 Advising on domestic and international financial, monetary, economic,
trade and tax policy.
 Enforcing finance and tax laws.
 Investigating and prosecuting tax evaders, counterfeiters and forgers.
9.6.2 Purpose of the budget

The national budget and the budgetary process is a social contract between a
people and its government. Despite its complexity, it is a document that shows
our societal preferences (for example, education versus agriculture) and
demonstrates that we do not live in a consensus political economy-interest
groups and class politics are a reality.
9.6.3 Budget preparation

A full understanding of the budget planning and preparation system is essential
to be able to advise policymakers on the feasibility and desirability of specific

budget proposals from a microeconomic and macroeconomic perspective. It

is much easier to control government expenditures at the beginning than later
during the execution of the budget.
One needs to know the following;

 What is the framework in which budget decisions are made?
 Who is responsible for planning and preparing the budget?
 What are the basic steps?
 What are the typical weaknesses in procedures and how can these be
overcome?
 How can changes in the budget plans be programmed and targeted?
Budgetary planning and preparation are at the heart of good public expenditure
management.
To be fully effective, public expenditure management systems require four

forms of fiscal discipline as follows;
 Control of aggregate expenditure to ensure affordability that is consistent
with macroeconomic constraints.
 Effective means for achieving a resource allocation that reflects
expenditure policy priorities.
 Efficient delivery of public services (productive efficiency).
 Minimization of the financial costs of budgetary management (that is,
efficient budget execution and cash and debt practises).
Budget preparation is the principal mechanism for achieving items 1, 2 and 3.
Item 4 is essentially an issue in budget execution and cash management.
9.6.4 Budget outcomes

B=0 balanced budget
B<0 budget deficit
B>0 budget surplus

 A balanced budget means that government revenues are equal to
expenditures.
 A budget deficit means that government expenditures exceed revenues
collected. This usually leads to inflation since the government will be
forced to print money in order to finance the deficit.
 A budget surplus means that government revenues exceed expenditures
hence it can finance recurrent and investment expenditure.

9.7 National Debt

National debt is broken down into two categories namely public debt (internal
debt) and external debt.
Public debt
What the government owes to its citizens.
External Debt
What the government owes to foreigners.
Four reasons why a government borrows

 A government wants to pursue economic growth and capital investment.
 Balance of Payments problems have forced government to borrow in
order to pay for essential raw materials.
 Where external debt has increased governments will be forced to borrow.
 Mismanagement and corruption that increases budget deficits forces
governments to borrow.
Activity 9.2
? 1. What constitutes the government budget?

2. List and explain four purposes of the government budget.
9.8 Taxation
Taxation is the central part of modern public finance. Its significance arises
not from the fact that it is by far the most important of all revenues but also
because of the gravity of the problems created by present day tax burden, for
example, VAT, Aids Levy, PAYE, and Toll tax .The main objective of taxation
is raising revenue. A high level of taxation is necessary in a country with high
unemployment and a large government like Zimbabwe, in order to fulfil its
obligations. Taxation is used as an instrument of attaining certain social
objectives, that is, as a means of redistributing of wealth and thereby reducing
inequalities. Taxation is also needed to draw away money that would otherwise
be consumed and cause inflation. In Zimbabwe the Zimbabwe Revenue
Authority (ZIMRA) collects taxes on behalf of the government.

9.8.1 Definition of tax and types of taxes

Tax may be defined as a pecuniary burden laid upon individuals or property
to support the government to meet its obligations (Lipsey, 1992).
There are various types of taxes, broadly divided into two categories as follows
in Tables 9.1 and 9.2 below;
Table 9.1: Types of Direct Taxes

Direct taxes Percentage
Personal tax (PAYE) 35%
Corporate tax 25%
Wealth tax 25%
Aids levy 3%
NSSA 3%
Source: Ministry of Finance (Zimbabwe) 2012
Table 9.2 Types of Indirect Taxes
Indirect taxes Percentage

VAT 15%
Vehicle licencing fee n/a
Toll tax n/a
Radio and television licencing fee n/a
Import tariffs n/a
Property transfer tax 15%
Withholding tax 10%
Royalties tax (paid by non -residents on 15%
royalties received )

During the period 2009-2012 contributions to Government revenues were as

shown in Table 9.3 below;
Table 9.3: Tax Contributions to Government Revenues
VAT 40%
Customs Duty 26%
PAYE 17%
Corporation tax 10%
Others 0.7%
Total 100%
9.8.2 Income tax systems

These tax systems can be progressive, proportional, or regressive.
 Progressive income tax system: Tax rate increases as a person’s taxable
income level rises. In Zimbabwe, the tax band is from 0-35%. This has
the effect of redistributing income from the rich to the poor.
 Proportional income tax system: The tax rate decreases as a person’s
taxable income level rises. This system punishes those with lower
incomes as they end up paying more compared to people with higher
income levels.
Generally most countries have a mixture of the three systems depending on
their desired fiscal policy.
Activity 9.4
?
1. Discuss the role of taxation in an economy.
2. Explain the differences among progressive, proportional, and regressive
tax structures.
3. What is an ideal tax system for Zimbabwe?

9.9 Fiscal Policy

Fiscal policy refers to changes in government expenditure and/ or taxation to
achieve particular economic goals such as low unemployment, price stability,
welfare of the population and economic growth.
9.9.1 Expansionary fiscal policy

Expansionary fiscal policy involves an increase in government expenditure
and or decrease in taxes in order to increase consumer spending and national
income and consequently reduce unemployment.
9.9.2 Contractionary fiscal policy

Contractionary fiscal policy involves a decrease in government expenditure
and/ or an increase in taxes in order to redistribute income, encourage
investment, employment and create a more equitable society.
Activity 9.5
·
? Distinguish expansionary fiscal policy from contractionary fiscal policy.
9.10 Summary
We outlined the components of the public sector and defined public finance.
We also looked at government expenditure and how government raises
revenue. Taxation and its various forms were examined. Lastly we looked at
fiscal policy and the impact it has on an economy.

References
Aitkinson, B. A. and Stiglitz, J.E. (1980). Lectures in Public Economics,
Arnold, R. A. (2008). Economics. 8th edition: Thomson South-Western.
Buchanan, J. M. and Musgrave, R. A. (1989). Public Finance and Public
Choice:Two Contrasting Visions of the State. MIT Press.
Green, J. E. (2011). Public Finance: An International Perspective.
Hackensack, New Jersey: World Scientific.
Lipsey, R. G. (1983). An Introduction to Positive Economics. Harper and
Row USA.
Ministry of Finance of Zimbabwe official website (16 June 2013)
Musgrave, R.A. (2008). Public Finance, The New Palgrave Dictionary
of Economics.http://www.dictionaryofeconomics.com/article (30th
June 2013)
Stiglitz, J. (2000). Economics of the Public Sector, (3rd ed.) Norton.


Unit Ten
Economic Structural
Adjustment Programme
10.0 Introduction
T
he unit will define Economic Structural Adjustment Programme (ESAP)
and evaluate the reasons ESAP. The unit will highlight the components
of ESAP and the results of ESAP. The unit will also look at the criticisms
of ESAP and possible alternatives.
10.1 Objectives
By the end of this unit, you should be able to:
 define ESAP
 outline the reasons for ESAP
 explain the components of ESAP
 state the results of ESAP
 discuss criticisms of ESAP
 evaluate possible ESAP alternatives
10.2 Definition of ESAP

ESAP is where a nation deliberately creates an environment which reduces
the role of government in the economy in order to bring about market friendly
policies or moving from state control to free enterprise (privatisation and
deregulation).
10.3 Why ESAP?

The Economic Structural Adjustment programmes were created by the World
Bank as measure of short-term lending and financial support needed for
developing countries after the shock oil price increases of the 1970’s.In these
countries budget overruns, corruption, high unemployment, run-away inflation,
low investment, low productivity, low domestic demand and stagnant prices
led to abject poverty and political instability. In Zimbabwe, foreign currency
shortages, low investment in the period 1980-1990 created the right
environment for ESAP (Chakaodza, 1993).
Activity 10.1
? 1. Define ESAP.
2. What led to the adoption of ESAP in Zimbabwe?

Unit 10 Economic Structural Adjustment Programme
10.4 Components of Economic Structural

Adjustment Programme
Components of the Economic Structural Adjustment Programmes have the
following elements:
 Reduce or remove subsidies.
 Tariffs and quotas on imports to be abolished to encourage trade.
 Income and wage controls discontinued in order to stimulate demand.
 Price controls lifted to increase productivity.
 Property rights and rule of law observed.
 Repatriation of profits allowed.
 Hiring and firing relaxed.
 Cutting expenditures,(reducing budget deficits) also known as austerity
measures by government.
 Devaluation to encourage exports (devaluation makes exports cheaper).
 Privatisation where government disinvests (sell equity in private and
public companies)
 Increase interest rates to encourage savings and investment.
 Observe human rights and good governance.
Activity 10.2
?
State and explain five components of the Structural Adjustment
Programme.
10.5 Economic Structural Adjustment Programme in

Zimbabwe (ESAP 1991-1995)
In the early 1990s, when it became clear that the economy was not generating
sufficient jobs, especially in the context of depressed investments, government
adopted a more market driven reform programme, the Economic Structural
Adjustment Programme (ESAP) in 1991.It needs to be pointed out that civil
society was not consulted in the design of ESAP, and in fact, most resented
the programme. The key targets of ESAP were as follows;
 Achieve GDP growth of 5% during 1991-1995.
 Raise savings to 25% of GDP.

 Raise investment to 25% of GDP.

 Achieve export growth of 9% per annum.
 Reduce the budget deficit from over 10% of GDP to 5% by 1995.
 Reduce inflation from 17.7% to 10% by 1995.
Sub-targets were as follows:
 Government to disinvest from private and public companies.
 Government to cut the civil service.
 Adopt robust monetary policy and financial sector reforms in order to
manage money supply and improve efficiency of intermediation.
 Create a market based foreign exchange system.
 Deregulate prices.
 Protect the poor and vulnerable groups through social programs.
Activity 10.3
?
Briefly explain five objectives of ESAP (1991-1995) adopted by the
Zimbabwean government.
10.6 Results of ESAP

 Real economic growth decelerated from an average annual rate of 4%
during the period before ESAP (1985-1990) to 1.4% during the ESAP
period.
 Inflation rose by an average rate of 27.6% during ESAP compared to
11.6% during the period 1985-1990.
 The budget deficit deteriorated from 10% of GDP at the onset of ESAP
to 12.2% by 1995. The target of reducing the budget deficit to 5% of
GDP by 1995 was therefore not achieved.
 Debt service ratio target was below 20% but during ESAP it averaged
27.5% peaking at 82.6% in 1993.
 Interest payments accounted for 12% of government expenditure in
1990/1991, its share had risen to 22% by 1994/1995.
 ESAP favoured the production of cash crops relative to food crops as
a result government imported staple food in three out of the five years
of ESAP.
 Inflation rose from 5% in 1990 to 22.5% in 1995.
 Manufacturing sector accounted for 20.5% of GDP and 17% of formal

sector employment on the eve of ESAP in 1990, and by 1996, the

respective shares had declined to 16.4% and 14.4%.
 Incidence of poverty in Zimbabwe rose from 40.4% in 1990/1991 to
63.3% in 1995/1996.
 Incidence of extreme poverty (households that cannot meet basic food
requirements) increased from 16.7% to 35.7% during the respective
periods.
 Levels of poverty were higher in rural areas (75% of households)
compared to urban areas (39% of households).
 The incidence of poverty was found to be higher in female, as opposed
to male-headed households with levels of poverty of 72% and 58%
respectively.
The above statistics were compiled by Central Statistical Office (1998),
Poverty Assessment Study Survey (PASS) of the Ministry of Public Services,
and Social Welfare (1995)
10.7 Criticisms of ESAPs

There are multiple criticisms that focus on different elements of ESAPs.
10.7.1 National sovereignty

ESAP threatens national sovereignty because an outside organisation is dictating
a nation’s economic policy.
10.7.2 Privatisation (selling of government equity in public

entities)
When resources are sold to foreign corporations and / or national elites, the
goal of public prosperity is replaced with the goal of private accumulation.
While state owned firms may show fiscal losses they fulfil a wider social role,
such as providing low-cost utilities and jobs.
10.7.3 Agriculture
A large portion of ESAPs policy focused on the increased use of fertilizers
and pesticides which harmed the health of local water bodies and fish
populations.

10.7.4 Environment
Rapid industrialisation, that is, global and local factories emitting effluent into
the atmosphere, impact negatively on climate change and other externalities.
10.7.5 Austerity
ESAPs emphasize maintaining a balanced budget which forces austerity
programmes and the casualties of that are often social programmes.
10.7.6 An alternative to ESAP

When ESAP was conceived and implemented, civil society was not consulted.
Future programmes need to involve those that will be affected the most and
other stakeholders (referendum on future programmes).
A stage approach to ESAP is also an alternative where tariff removal would

come first then protection across sectors.
Thirdly foreign exchange regime involves unbundling and effective balance of

payments management.
Activity 10.4
?
Name five features of the (1991-1995) Zimbabwean Economic
Structural Adjustment Programme and five reasons why it failed.
10.8 Summary
We defined Economic Structural Adjustment Programme and went on to look
at the components of ESAP. The specific example of ESAP in Zimbabwe
(1991-95) was examined and the criticisms of it. Last but not least we briefly
highlighted the alternatives to ESAP.

References
Amin, S.G., Arrighi, A.G., Frank, and Wallerstein, I. (1981). Dynamics of
Global Crisis. New York: Monthly Review Press.
Amin, S. (1977). Imperialism and Unequal Development.New York
Monthly Review Press.
Bhattacharjea, A. (2004). Increasing Returns, Trade and Development.In
Bhattacharjea, A. and Marjit (eds.), Globalization and the Developing
Countries. Delhi: Manohar.
Brander, J.A., and Spencer. B.J. (1985). Export Subsidies and International
Market Share Rivalry. Journal of International Economics 18(1-
2):83-100.
Braun, O. (1983). International Trade and Imperialism. New Jersey and
the Hague: Humanities Press Inc. and Institute of Social Studies.hi,
A.K. (1982). The Political Economy of Underdevelopment:
Cambridge, UK: Cambridge University Press.
Darity, Jr., and L.S. Davis. (2005). Growth, Trade and Uneven Development.
Cambridge Journal of Economics 29(1): 141-170.
Deraniyagala, S., and Fine. B. (2003). New Trade Theory versus Old Trade
Policy: A Continuing Enigma.Cambridge Journal of Economics 25(6):
809-25.
Helleiner, G. (1992). Trade Policy and Industrialization in Turbulent Times.
London: Routledge.
Helpman, E. (1981). International Trade in the Presence of Product
Differentiation Economies of Scale and Monopolistic Competition: A
Chamberlinean Heckscher-Ohlin Approach. Journal of International
Economics 11:305-340.


Bachelor of Commerce in Accounting Inter

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bachelor of Commerce in Accounting Inter

Uploaded by

Copyright:

Available Formats

Bachelor of Commerce in

Accounting, Internal Auditing,

Retseleng Martin Karonga

Content Reviewer: TavongaNjaya

P.O. Box MP1119

The Zimbabwe Open University is a distance teaching and open

Year: December, 2013

Cover design: B. Pillay

Layout and design: C. S. Nhari

Printed by: ZOU Press

Typeset in Garamond, 12 point on auto leading

© Zimbabwe Open University. All rights reserved. No part of this publication

The six hour tutorials should be so structured that the

Session I (Two Hours)

Session II (Two Hours)

Session III (Two Hours)

Conclusion for this course, but also to prepare yourself to

Unit One: Introduction To Macroeconomics

Unit Two: National Income Accounting

Unit Three: Unemployment

Unit Four: Inflation

Unit Five: Money and Banking

Unit Six: International and Regional Trade

Unit Seven: Economic Growth and Development

Unit Eight: Balance of Payments

Unit Nine: Public Finance

Unit Ten: Economic Structural Adjustment Programme

2 Zimbabwe Open University

1.2 Definition of Macroeconomics

1.3 Relationship between Microeconomics and

4 Zimbabwe Open University

1.4 Important Issues in Macroeconomics

? 1. Discuss the relationship between macro-economics and

Zimbabwe Open University 5

6 Zimbabwe Open University

National Income Accounting

2.2 Definition of National Income Accounting

2.2.1 Purpose of national income accounting statistics

8 Zimbabwe Open University

2.3 Gross Domestic Product(GDP)

2.3.1 Gross National Product (GNP)

GNP=GDP-Foreign factor payments+foreign factor receipts.

2.3.2 Net National Product (NNP)

2.3.3 Personal Income (PI)

Zimbabwe Open University 9

2.3.4 Disposable Personal Income (DPI)

? Briefly explain the following measures of macroeconomic activity; Gross

2.3.5 Consumer Price Index (CPI)

2.4 Methods of Measuring of National Gross

2.4.1 The Income Approach

10 Zimbabwe Open University

 Wages and salaries from employment;

2.4.2 The Output Approach

The second problem is double counting (or multiple-counting depending on

2.4.3 The Expenditure Approach

Consumer expenditure is all expenditures by households on durable consumer

In the following sections, each expenditure component of GDP is briefly

Zimbabwe Open University 11

Gross Domestic Investment (I)

Government expenditure (G)

Government expenditure is in two forms, namely capital expenditure, and

Net Exports (X-M)

International trade transactions are a significant item in national income

12 Zimbabwe Open University