Professional Documents
Culture Documents
ECONOMICS
PAPER 1
MACROECONOMICS
&
ECONOMIC PURSUITS
CORE NOTES
1
Table of Contents
GUIDELINES IN ANSWERING THE ECONOMICS EXAMINATIONS .................................................................................... 3
STRUCTURE OF THE FINAL EXAM PAPERS: ...................................................................................................................... 8
MACROECONOMICS ....................................................................................................................................................... 10
TOPIC 1: ECONOMICS: BASIC CONCEPTS, POPULATION AND LABOUR FORCE ....................................................... 10
TOPIC 2: CIRCULAR FLOW AND QUANTITATIVE ELEMENTS – ECONOMIC GOODS AND SERVICES ..................... 23
TOPIC 3: ECONOMIC SYSTEMS .................................................................................................................................. 35
TOPIC 4: BASIC ECONOMIC PROBLEM, BUSINESS CYCLES AND PUBLIC SECTOR: ECONOMIC STRUCTURE ....... 41
ECONOMIC PURSUITS .................................................................................................................................................... 50
TOPIC 8: ECONOMIC GROWTH: WEALTH CREATION PROCESS AND PATTERNS OF DISTRIBUTION ......... 50
TOPIC 9: ECONOMIC DEVELOPMENT ........................................................................................................................ 62
TOPIC 10: MONEY AND BANKING ........................................................................................................................... 69
2
GUIDELINES IN ANSWERING THE ECONOMICS EXAMINATIONS
The instructions tell you what is required and if you deviate from them, it can count against you and thereby
causing you to miss out on marks.
Use the 10 minutes Write only with a blue Always write neatly
READ
INK
WRITE
reading time (as provided and / or black ink pen. and legibly.
to you) at the beginning Do not write in pencil.
Any pencil answers
Marks are forfeited if
of the examination / test handwriting is
to decide which are considered an
examination illegible.
questions you will answer
in Section B and C – irregularity. Use only a If the marker cannot
Remember, these are pencil to draw graphs, decipher your
‘choice questions’. sketches, illustrations, handwriting (and
curves, etc. to draw makes sense of it),
(captions must be in the answers are
pen). marked as incorrect.
SECTION A COMPULSORY
QUESTION 1
This question is compulsory and must be completed by all candidates.
To answer this question, it is essential that the candidates know the economic concepts / terminology
and the definitions and/or descriptions.
Attempt an answer for all the questions, even if you do not know the answer.
If you are uncertain about the answer, continue writing the examination and return to the question at the
end of the examination. It may be that you can find clues for the unanswered question as you proceed with
the test/examination. (Remember to leave lines open for this – this also makes it easy to see where you
need to complete answers if you need to return.
If you do not know the answer, take an educated guess.
It is important to note the following: If you leave questions unanswered, you will get no marks. However,
if you write an answer which makes economic sense and answers the question, you can be awarded
marks.
Only ONE option / possible answer per question will be accepted. If more than one option/answer is
written, both will be marked as incorrect.
3
First cover the possible answers to the question.
Formulate / anticipate the correct possible answer in your mind.
Open the possible answers / options given.
See if your choice to the answer is one of the options / answers.
If your answer is not available, then you must use a method of elimination.
Eliminate the answers which you know are totally wrong / nonsensical.
Select the best answer from the remaining possible answers.
If you are uncertain, go ahead with writing the examination and return to the multiple-choice questions at
the end of the examination. It may be that you can find clues to the answers as you proceed with the
examination.
It is sometimes good to make an educated guess if you do not know the answer – but never leave the
question unanswered.
Learners are expected to provide the description in COLUMN B next to the TERM in COLUMN A.
Only ONE choice / option / possible answer is accepted per term. E.g., Q1.2.1 A and not Q1.2.1 A or G –
Only ONE choice from COLUMN B is accepted for the match against the term in COLUMN A.
If two answers are chosen, both will be marked as incorrect.
4
SECTION B - APPLICATION QUESTIONS
(INCLUSIVE OF AND NOT LIMITED TO DATA-RESPONSE QUESTIONS)
Candidates are given THREE questions of which they must only answer TWO.
If learners answer ALL THREE questions in this section, then only the first TWO questions will be marked
even if it appears that the learner did better in the third question. Learners must be told to follow to the
instruction
When candidates answer more than the expected number of questions, a red line is drawn through the
excess answer and the words “TOO MANY QUESTIONS” will be written at the excess question.
It is important to note that the questions may sometimes have very little to do with the extract, especially
the first question or it could also be directly related to the data response.
The extract / picture / cartoon / table / diagram, etc. is merely a means to give the context of the content
covered to candidates. It merely serves as an introduction to the topic or a stimulus.
QUESTION: 2.2.1 & 2.2.2 / 3.2.1 & 3.2.2 / 4.2.1 & 4.2.2
These are lower order and may or may not come from the extract.
The answers to the questions may or may not come from the extract / graph / cartoon, etc.
Candidates must write their answers in full sentences.
These questions are usually descriptive-type questions, testing your knowledge of terminology.
Candidates are normally expected to briefly describe a term / concept.
Candidates must write their answers in full sentences.
5
Candidates must write their answers in full sentences and give their own opinion / understanding of the
question.
Many marks are lost because of the misinterpretation of the question or not responding at all.
Candidates must avoid the following when answering this question:
Candidates must not list their answer – will only be awarded 1 mark
Giving examples only – will only be awarded 1 mark
If the example is explained in a full sentence = 2 marks will be allocated
TWO questions are given to learners and they must only answer ONE.
If the candidate does both essays, then only the first essay will be marked even if the candidate scores
more marks in the second essay.
Candidates will score no marks for writing an incorrect essay, even if that essay is substantial.
When candidates answer more than the expected number of questions, a red line is drawn through the
answer and the words “TOO MANY QUESTIONS” will be written at the excess question.
Check and practice all the possible essay- type questions that may appear from every topic as indicated in
the examination guideline.
Take Note:
Answer the question as stated, e.g., with graphs, without graphs, with diagrams, without diagrams.
Candidates who answer essays have a higher probability of passing the paper than those who do not
answer an essay.
Candidates who do not attempt the essays tend to perform poorly in the examination.
Candidates must structure their essays properly and write the following words as part of their answer:
o Introduction
o Body: Main Part
o Additional Part
o Conclusion
INTRODUCTION
A description or the definition of the topic examined is an example of a good introduction.
The description / definition must be a full sentence to obtain 2 marks.
CONCLUSION
The conclusion is a summary related to the main part or additional part of the essay
The conclusion is a higher-order aspect of the answer and must be treated as such.
6
What is expected when learners are asked to “Evaluate” or “Analyse”
Evaluate
When you evaluate something, you're making a judgment, one that most likely results from some degree
of analysis.
Positives
GDP is the most commonly used statistics to measure the economy.
As a member country, South Africa is adhering to the call by the United Nations to keep a record of its
national accounts.
South Africa is successful in using three methods to calculate its economic activity, the income method, the
expenditure method and the production method.
Measuring the economic activity, South African successfully determine whether there is economic growth
occurring or whether there is a negative economic growth rate.
The country has been successful thus far in determining whether South Africa is entering a recession,
depression, recovery of prosperity phase.
These national account figures together with indicators are used by the South African Reserve Banks’
Monetary Policy Committee to determine the repurchase rate (repo rate) to control inflation.
Negatives
GDP is the most commonly used statistics to measure the economy.
National income figures are NOT 100% accurate.
All the sectors are not fully included in the calculation of National accounts – e.g., the informal sector.
National accounts focus on production of goods and services and how the economy performed but the
values do not include the contribution of production towards environmental degradation.
Analyse
Analysis requires candidates to assess how successful or unsuccessful a specific policy, e.g., industrial
development zones, were.
It requires candidates to bring in research findings (including current statistics) and the impact of such
policies on economic growth and development.
It requires candidates to include such statistics and additional information in their answers.
7
STRUCTURE OF THE FINAL EXAM PAPERS:
ECONOMICS GRADE 11
Paper 1 Paper 2
150 Marks – 2 hours 150 Marks – 2 hours
MAIN TOPIC MAIN TOPIC
MACROECONOMICS MICROECONOMICS
TOPICS TOPICS
• Factors of production, economic • Markets – utility of goods and services
importance and its remuneration • Relationships between markets
• Circular flow of goods/services • Effects of cost & revenue
• Economic goods & services – main • Market structures
aggregates • Price elasticity
• Economic systems
• South Africa’s economic structures
NOTE:
Section B & C
If your preferred topic is Macroeconomics, choose questions: 2, 4 and 5 for Paper 1
If your preferred topic is Economic Pursuits, choose questions: 3, 4 and 6 for Paper 1
8
- factors that influence the price of natural
resources:
- supply and demand
- climate
- location
- quality of resources
- technology
PAPER 1
MACROECONOMICS
Vocabulary List
Learners must first give a description of the following words in their notebook:
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FOUR FACTORS OF PRODUCTION:
Labour: Labour is all human effort, mentally and /or physically, provided by
people to earn a remuneration.
Capital: Capital are man-made resources that are used to produce more goods
and services.
Capital makes the production process easier.
Entrepreneurship: The entrepreneur is the person who takes the initiative to start the
business, organize its production and take risks.
NATURAL RESOURCES:
Definition:
Natural resources refer to the naturally occurring living and non-living elements of the Earth system – such
as water, land, plants, animals, ecosystems and minerals – that drive the economy and other human
activities.
The possession and use of free goods do not The possession and use of economic goods
indicate wealth or prosperity. indicate wealth and prosperity.
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Examples of natural resources: Land, fishing, forestry and mining.
Mining:
• S.A. has a large variety of mineral resources of high quality and in substantial quantities.
• Gold provides the country’s largest mineral income – S.A. earns millions.
• Coal is the next most important and the mining industry employs thousands.
• According to the World Economic Forum (WEF), the mining sector must be seen as the most
important role-player in the future economic development in Africa.
Rent:
The minimum amount of money that an owner of land, labour or capital must receive in order to let
someone else use that land, labour or capital.
Economic rent:
The extra amount earned by a resource (e.g., land, capital, or labour) by virtue of its present use.
Royalties:
A royalty is a payment to an owner for the ongoing use of their asset or property, such as patents,
copyrighted works, franchises, or natural resources. ... In most cases, royalties are designed to
compensate the owner for the asset's use, and they are legally binding.
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Factors that influence the price of rent:
location quality of
resources
technology
LABOUR
Definition:
• Labour includes all the work done by people, whether they are skilled or unskilled and whether they
provide physical or mental (thinking) work.
• Nothing can be manufactured without the inputs from people.
• Unemployed people are also considered to be part of a country’s labour force provided they are
willing and able to work.
• Intellectual property - When a person or company hires a designer, computer programmer, artist or
other independent contractor, the party that is hiring will own whatever work is created, including all
rights under any trademark, patent or copyright. Intellectual property examples would
include books, music, inventions and more.
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Classification of Labour
CHARACTERISTICS OF LABOUR:
Income as a goal:
• When people work, their goal is usually to earn money and secure an income.
• They need the money to buy goods and services to satisfy their needs and wants.
• The work learners do at school is not regarded as labour, as they are not getting paid for it.
Not storable:
• Labour cannot be stored or kept.
• If a worker is unemployed for 3 years, he/she has lost 3 years of providing labour.
• If a worker goes on strike for 3 days, then 3 days of labour are lost.
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ECONOMIC IMPORTANCE OF LABOUR
REMUNERATION OF LABOUR
CAPITAL:
Definition:
• Can be defined as the money invested in machines and equipment that will be used in the
production process to change the form of materials into useful goods and services.
• Wealth in the form of money or other assets owned by a person or organization or available for a
purpose such as starting a company or investing.
CLASSIFICATION OF CAPITAL:
Money Capital:
• Entrepreneur needs money to buy the machinery or tools needed in the production process.
• The money to buy these capital goods is called money capital.
Real Capital:
• Includes the actual tools and machinery bought with money capital to use in the production process
to manufacture useful goods and services.
• Real capital can be divided into fixed capital and working capital.
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• Fixed capital includes land and buildings, vehicles, equipment and furniture – also called durable
goods because they are used more than once in the production process.
• Working capital is used only once in the production process and consists of items like raw materials
and semi-finished goods – also called non-durable capital goods.
CHARACTERISTICS OF CAPITAL:
Capital is expensive:
• Buying machine and other capital goods is very expensive.
FUNCTIONS OF CAPITAL:
REMUNERATION OF CAPITAL:
• People, organisations or banks lend their money (money capital) to other people or organisations
and charge a price - this price is known as interest.
• If you borrow money from a financial institution, you pay interest.
• If you save/invest money at a financial institution, you earn interest.
ENTREPRENEURSHIP:
Definition:
• It is the process of bringing together natural resources, capital, and labour and using them to
produce or sell products or services.
• Are people who start, manage and control business – they take risks and make daily decisions to
ensure the successful running of the business.
• Start businesses to make money, and in the process, they create jobs, influence growth in the
economy and raise the standard of living.
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CHARACTERISTICS OF ENTREPRENEURSHIP:
Demonstrates initiative:
• The entrepreneur does things without being told. They are able to spot and take advantage of
opportunities that others pass by.
Takes risks:
• The entrepreneur is responsible for all losses if the business idea fails or if the business goes
bankrupt.
Makes decisions:
• Make decisions on what to produce, where to set up the business and who to produce for
• On quality and quantity, buy land or lease premises, buy stock or raw materials and which form of
ownership to choose.
REMUNERATION OF ENTREPRENEURSHIP:
• Profit is the remuneration that the entrepreneur receives for taking the risk to start and run a
business.
• Two types of profit, namely, gross profit and net profit.
- Gross profit – the difference between sales and cost of sales.
- Net profit – gross profit plus all other income minus all expenses the business had to pay to
keep it running.
-
Factors that influence profits:
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the demand for the product:
• will have an impact on the profit.
• If demand is high, sales will be high and profits will be large, and vice versa.
• profit on an expensive item will be large if only a few are sold.
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COMMUNITY PARTICIPATION IN LOCAL ECONOMIC PLANNING AND ACTIVITIES:
• Community forums, together with local government, can play an important role in development of
entrepreneurs through skills development, financial assistance and making the best use of natural
resources.
• Can help reduce unemployment, alleviate poverty and turn around a low regional growth rate –
Expanded Public Works Programme (EPWP), the Small and Medium Business Development
Corporation (SMBDC) and local chambers are examples.
• Local Economic Development (LED) create job opportunities and thus reduce poverty in local
communities.
Empowerment:
• Since 1994 laws have been put in place to protect rights of all employees e.g., law of Black
Economic Empowerment and the Employment Equity Act of 1998.
• Affirmative action plays an important part in empowerment.
• Skills development with help of SETAS (Sector education and training authorities) in primary,
secondary and tertiary sector.
Preferential procurement:
• Procurement is the purchasing of goods or services.
• Preferential procurement creates opportunities for the marginalised by giving them preference
during the awarding of tenders.
• Small and medium business can enter the market as suppliers to larger companies and
government.
• Procurement decisions have social, economic and political implications, such as distributing wealth
to the marginalised.
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MAIN TOPIC: MACROECONOMICS
Gross fixed capital formation (I) Briefly describe gross fixed capital
- Definition formation.
- Classification Discuss the classification of gross
- Importance fixed capital (I)
Briefly discuss the importance of
gross fixed capital formation (I)
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GRADE 11 ECONOMICS
PAPER 1
MACROECONOMICS
- classification
- importance
Vocabulary List
Learners must first give a description of the following words in their notebook:
National Aggregate
Balance of payment
Closed economy
Durable goods
Final consumption expenditure
Government spending
Gross domestic product (GDP)
Gross fixed capital formation
Intermediate goods and services
Non-durable goods
Open economy
Parastatals
Semi-durable goods
Services
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Useful goods and services are created through production. These goods and services are used to satisfy
the needs and wants of all participants in the economy.
REVISE the four-sector open economy circular flow model as discussed in Grade 10.
Description:
• The circular-flow model of the economy is a simplification showing how the economy works and the
relationship between income, production and spending in the economy.
• The circular-flow model of an open economy shows the workings of an economy that is open to
foreign trade.
• It is different to a closed economy because it includes the foreign sector.
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Households:
• There is a flow of money and goods and services between the household sector and business
sector.
• Households are the owners of the services of factors of production and they place their factors of
production on the market so it can be bought.
• Households earn income in the form of wages by selling their factors of production to business.
Business Sector:
• Business uses factors of production to produce goods and services on which the household sector
spends their income.
• Businesses place goods and services on the product market which is bought by households to
satisfy their needs.
• Business receives an income.
State:
• There is a flow of money and goods and services between the household sector and state.
• Household sector provides the state with labour and receive income.
• The state provides the household with public goods and services (e.g.) parks, hospitals
• Households pay taxes to the state.
• This is income for the state.
There is a flow of money and goods and services between the business sector and state.
The business sector provides the state with goods and services for which the state pays.
The state provides the business sector with public goods and services (e.g.) Roads, Electricity, harbours,
etc.
Business pays taxes to the state.
Foreign Sector:
• There is a flow of goods (imports) to the business from the foreign sector.
• Businesses that import these goods, pay for it.
• This will be regarded as expenditure for the business.
There is also a flow of goods (exports) from the business in the country to the foreign sector.
Businesses export their goods and services to other countries and earn money for it.
This will be income for the business.
Financial Sector:
• The financial sector consists of banks, insurance companies and pension funds.
• They act as a link between households and firms who have surplus money and others in the
economy who require funds.
• The money which households and firms provide to the financial sector is known as savings.
• Businesses can borrow money from the financial institutions and use it to purchase capital goods.
• This spending on capital equipment by firms is regarded as investment.
Real flow:
• Consumers render production factors to producers and government via the factor market.
• Goods and services are supplied by producers via the product market to government and
consumers.
• Government provides public goods and services to consumers and producers.
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• Producers receive goods and services (imports) from and deliver goods and services (exports) to
the foreign sector.
Money Flow:
• Consumers earn an income for their production factors via factors market from businesses.
• Business sector earn an income for goods and services via the product market from consumers and
government.
• Government earns an income from consumers and businesses.
• Businesses earn an income for exports from the foreign sector and make payments to the foreign
sector for imports.
LEAKAGES (L):
• A leakage represents the withdrawal of money from the economic cycle (local economy).
• It does not give rise to a further round of income.
• Domestic purchases on goods and services decrease.
• In an open economy, the leakages are taxes (T), the expenditure on imports (Z) and savings (S).
In other words:
L = S T + M
Leakages = Savings + Taxes + Import expenditure
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INJECTIONS (J):
• Injections represent the injection of money into the economic cycle (local economy).
• It refers to the flow of any spending which is not derived from income. (Y)
• Additional money enters the economy and it increases income.
• Domestic purchases on goods and services increase.
• In an open economy, injections are government spending (G), the revenue earned from exports (X)
and investment spending (I).
In other words:
J = I + G + X
Injections = Investments + Government expenditure + Export Income
MARKETS:
Product market:
• These are markets for consumer goods.
• Buying and selling of goods that are produced in markets.
Factor market:
• On this market the services for factors of production are traded.
• Natural resources, Labour, Capital, and Entrepreneurship are traded on this market.
Money market:
• Here short-term loans and very short-term funds are saved and borrowed by the consumers and
business enterprises.
• Banks, Insurance companies are examples.
• Bank debentures, treasury bills, government bonds are traded here.
• SARB is the key institution in the money market.
Capital markets:
• Here long-term funds are borrowed and saved by consumers and business enterprises.
• E.g., mortgage bonds.
• The Johannesburg Stock exchange is a key institution in the capital market.
• Shares are traded here.
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ECONOMIC GOODS AND SERVICES:
• The ultimate aim of any good economy is to satisfy its population’s wants and needs.
• The welfare and prosperity of a country depend largely on the volume of production within it.
• When better and services are produced in a country, it leads to more people being employed.
• This in turn increases the level of income of the population.
• A higher income level leads to an increase in the standard of living.
• Include all manufactured goods and services that satisfy human wants and needs.
• Have form utility.
• Are ready to be consumed.
• Final goods and services are divided up into:
- durable goods e.g., house, furniture and cars
- semi-durable e.g., clothes and domestic appliances
- non-durable goods e.g., food, petrol and gas
- services e.g., medical services
Definition:
• Households constantly buy goods and services from businesses that produce these goods and
services. Households spend money trying to satisfy their unlimited wants and needs.
• Total of expenditure in a given year is known as consumption expenditure.
Classification:
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FINAL CONSUMPTION EXPENDITURE BY GOVERNMENT (G):
Definition:
• Indicate how government uses its income to finance goods and services needed by the public
sector.
• Includes the spending of all departments of central, provincial and local government.
• Includes consumption expenditure on services rendered to the communities like salaries and
wages, well as investment expenditure, where government must pay for capital goods like roads
and building.
Classification:
Definition:
Classification:
• If we study the circular flow in a closed economy, investment takes places mainly in three areas:
Private Households:
Family savings in banks are borrowed by firms for investment purposes.
Business sector:
Businesses invest their profits in the production process.
State:
Government purchases of goods and services are intended to create future benefits, such as infrastructure
investment or research spending.
If we study the circular flow in an open economy, the foreign sector can also contribute.
Foreign sector:
Contributions are called injections.
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Gross fixed capital formation:
• Classified by the kind of economic activity and by type of organisation:
• Capital formation can also be classified by type of organisation, for example, general government,
public corporations and private business enterprises.
Factor cost:
Factor cost is used with the income method of measuring economic activity.
GDP at factor cost plus other taxes on production minus other subsidies on production = GDP at basic
prices.
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Basic prices:
Used with the production method.
Includes taxes on production and excludes subsidies on production.
Taxes on production are payroll taxes (SITE and PAYE), recurring taxes on land & buildings, business
licenses.
Subsidies on production include employment subsidies and subsidies paid to prevent pollution.
Market prices:
Used with the expenditure method.
Net figures:
Net operating surplus = surplus after taxes.
Net income = income after taxes.
Net fixed capital formation = After consumption of fixed capital (depreciation).
Net exports = exports – imports.
Nominal figures:
• It is also known as market or money value.
• It is also known as national product at current prices.
• Nominal value of production is calculated by multiplying the volume of the final goods and services
by their prices.
• Inflation has not yet been taken into consideration.
Real figures:
• It is also known as national product at constant prices.
• The rate of inflation as expressed by the consumer price index (CPI) has been taken into account.
• Real values of production are the nominal values of national product adjusted for price increase.
• Real national product is the national product expressed in prices which applied in a certain base
year.
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METHODS TO CALCULATE GDP/GVA:
The production method is a method whereby we determine the Gross Domestic Product at basic prices by
adding the final values of all goods and services produced in the primary, secondary and tertiary sectors.
In the national accounts Gross Domestic Product at basic prices is usually referred to as Gross Value
Added (GVA) at basic prices.
Primary sector
+ Secondary sector
+ Tertiary sector
= Gross value added at basic price
+ Taxes on products
- Subsidies on products
= Gross domestic product at market price
The income method is a method whereby we determine the gross domestic product – GDP at factor prices
(factor cost) by adding all the income earned by the owners of the factors of production (gross domestic
income).
In the national accounts this is referred to as Gross Value Added at factor cost.
GDI = wages + profit + interest.
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The expenditure method: - GDP (E) / GDE
The expenditure method is a method whereby we determine the gross domestic product – GDP – at market
prices by adding the spending of the four main sectors of the economy – households (C), government (G),
businesses (I) and foreign sector (X – M).
Differentiate between GDE and Expenditure on GDP: GDE = C + I + G
Expenditure on GDP = C + I + G + (X – M).
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MAIN TOPIC: MACROECONOMICS
34
GRADE 11 ECONOMICS
PAPER 1
MACROECONOMICS
The methods used by countries to allocate their resources are known as economic systems. Many different
economic systems exist in the world and South Africa follows a particular system, which is known as a
mixed economy.
Vocabulary list
Learners must first give a description of the following words in their notebook:
Resource allocation
Economic systems
Socio-economic
Free-market economy
Centrally planned economy
Mixed economic system
Poverty line
Monetary policy
Fiscal policy
• The most important reasons for countries following a particular economic system are:
• The stages of development of a country.
• The system of government in a country.
• The preferences of the inhabitants of the country.
• Language, culture, tastes, customs and environmental factors such as what crops can be grown.
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FREE MARKET SYSTEM:
Definition:
• A free market is a system in which the prices for goods and services are determined by the
open market and consumers, in which the laws and forces of supply and demand are free from any
intervention by a government, price-setting monopoly, or other authority.
• Also known as Capitalism.
Characteristics:
• Market forces of demand and supply determine what, how and for whom.
• Prices act as signals in the free market – prevents shortages and surpluses.
• Individuals can act on own initiative and have freedom of choice.
• Factors of production are privately owned and controlled.
• Profits, private ownership and private freedom are at the heart of the system.
• Business cycles are characteristic of free-market systems.
• Zero government intervention in the market.
Advantages:
• Private ownership are most important advantage and backbone of free market.
• Factors of production are managed and organised by the individual.
• Individuals can use the profits they make to enhance their personal welfare.
• Freedom of entry into markets results in competition.
• Businesses are not able to dominate market and exploit consumers.
• Huge profits and economic progress are features of upswing phases in the economy.
Disadvantages:
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CENTRALLY PLANNED ECONOMY:
Definition:
• The government determines what, how, and for whom to produce goods and services.
• Other terms used are communism and socialism.
• An economic system in which factors of production are viewed as communal property.
Communism, also known as a command system, is an economic system where the government owns
most of the factors of production and decides the allocation of resources and what products and services
will be provided. The most important originators of communist doctrine were Karl Marx and Frederick
Engels.
Characteristics:
• The state is the biggest economic entity in the economy, employing vast amounts of labour to
execute its economic policies from a central position.
• Bureaucracy is evident.
• Private initiative and free choice of the individual is limited or even non-existent.
• The state dictates to individuals what occupations they need to follow.
• Factors of production NOT privately-owned and controlled by individuals - state controls all.
• The state guides the needs and wants of the consumer by providing essential goods and services
for all in equal quantities.
• Limited access to most essential goods and services.
Advantages:
• System serves needs of community and not of individual.
• State works hard for equal distribution of income and resources.
• Long-term planning – economy can be controlled and steered in a particular direction.
• Less exploitation of natural resources.
• Environment experience less deterioration.
• Full employment as the state creates jobs for all.
Disadvantages:
• Leads to inefficient allocation of resources.
• Central planning requires a huge amount of administration by civil servants.
• Absence of private initiative results in low productivity and overall economic growth rate.
• Long-term planning may result in large surpluses and shortfalls.
• Limited scope for private initiative that leads to low productivity and low quality of output.
• Variety of goods and services may be too limited to satisfy customer’s tastes and preferences.
• Products standardised and luxury goods regarded as unnecessary.
37
SOUTH AFRICA’S MIXED ECONOMY:
Definition:
• S.A. has a mixed economic system, combining the advantages of both market economy and
centrally-planned economy.
• A mixed economy is defined as an economic system consisting of a mixture of either markets
and economic planning, public ownership and private ownership, or markets
and economic interventionism.
Characteristics:
• Most of the factors of production are privately owned, but government regulates it, meaning the
state will intervene when market inefficiencies occur.
• People use own initiative to manufacture and sell products and render services to satisfy
consumer’s needs and wants.
• Profit motive plays an important role.
• Extent to which economic activities are market-orientated depends on level of government
involvement.
• Public sector provides infrastructure and public services as there is little profit motive for these to be
provided by the free market.
Advantages:
• Private ownership is one of the most important advantages of this system.
• The size of the government does not have to be bigger than what is necessary.
• Individuals have the freedom of choice to buy whatever he/she wants leading to a wide variety of
choice available to consumers.
• Entrepreneurship and freedom of choice creates competition between businesses.
• State still provides essential public goods and services.
Disadvantages:
• Market failure occur when scarce resources are wasted or exploited due to incorrect production
decisions or greed by private businesses.
• Environmental deterioration is a problem and labour are often exploited.
• Too much state intervention hampering business activities or free markets failing when the state
lacks authority.
• Taxes are high to fund public goods and services.
• Most factors of production are privately owned.
• Individuals face risk of losses and bankruptcy.
• Quality of goods may be inferior.
38
EFFICIENCY IN DELIVERING SOCIO-ECONOMIC SERVICES:
More than 55% of the S.A. population can be categorised as a marginal group because they are living
below the poverty line (the minimum amount of money needed to satisfy the basic needs for survival)
The government’s socio-economic programmes to improve the situation, namely housing, education,
economic growth to lower unemployment, medical services like water and electricity, are examined every
year to try and improve this situation.
The state acts as an entrepreneur, lawmaker and organiser in cases where the private sector does not
have enough capital or where the area of production is not regarded as profitable.
The SABC, Post Office, museums, schools, state hospitals, Eskom and the transport services are typical
examples of government enterprises.
Government provides social services to promote individual welfare and enhance the economic prospects of
the country.
Includes welfare functions, as well as public and merit goods such as education and healthcare.
The housing function, which includes the provision of housing for the needy.
According to the Government Communications report (GCIS) of 2010, more than 4 million
subsidies to build houses were approved during 2010.
Regulating the economy to ensure economic stability by making use of monetary and fiscal policies.
Maintaining economic order by means of economic policies and legislation
Providing and maintaining infrastructure, like roads and telecommunication services.
39
MAIN TOPIC: MACROECONOMICS
40
GRADE 11 ECONOMICS
PAPER 1
MACROECONOMICS
The economic structure divides all economic activities into different categories or sectors. The three major
sectors are the primary, secondary and tertiary sector. These sectors contribute to the national income of
the country.
Vocabulary list:
Learners must first give a description of the following words in their notebook:
Primary sector
Secondary sector
Tertiary sector
Genetic operations
Exploitative operations
Manufacturing
Infrastructure
Communication
Energy
Transport
41
Types of industry:
Economists classify industry into three types or sectors: Primary, Secondary and Tertiary sectors.
They use this classification to distinguish between different complexities of the production process, as well
as other aspects, such as the inputs and outputs or the resources and the products of the particular
process.
Definition:
• Primary sector industries are industries that get raw material from nature.
• Primary means that it is the first stage of production.
• The products supplied by this sector can be delivered to the consumer just as they are, or they can
undergo processing in the secondary sector.
Cultivation of products –
agriculture
Exploitation of minerals –
mining
Collection of products –
forestry and fisheries
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Economic importance of the primary sector:
Contribution to GDP:
• Despite the decline in the contribution of the agricultural sector to the GDP, it still provides job
opportunities.
• Agriculture, forestry and fishing contributes to 2,3% to the GDP in 2009, mining accounts for 6% of
GDP.
• SA is the second largest producer of gold in the world.
43
THE SECONDARY SECTOR:
Definition:
• Secondary sector industries are those industries that change natural resources into a form that is
suitable for human use.
• The process that takes place to transform raw materials into consumer goods are known as
manufacturing.
• Examples of industries in the manufacturing sector are car-manufacturing industries and food-
processing industries.
Manufacturing industries:
Construction:
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Earns foreign exchange:
• Sector is diverse and many of our industrial outputs are exported.
Definition:
• Tertiary sector distributes goods (makes goods available) and provide services.
• Also referred to as the service sector and activities include public, commercial and professional
services.
• Examples include transport services and financial services.
Transport services Used to take goods from places where the consumer wants
to buy or use them.
Transport services provide place utility to products and
services.
45
Banking and financial services Plays an important part in the finance of transactions
between buyer and seller.
Includes loans, hire-purchase, mortgages, underwriting of
shares, etc.
Contributes to GDP:
• Tertiary sector contributes 62% to the overall GDP of SA.
• With technological changes it is predicted that the growth in the tertiary sector will play a bigger role
in the GDP contribution in the future.
Communication, transport and other infrastructure are the backbone of economic activity in any country.
The infrastructure of a country ensures that the factors of production, as well as consumer goods and
services, will be available at the right place and the right time.
Three infrastructures: Communication, Transport and Energy
Communication:
• Advances in communication technology have done for world economies what jet travel did in the
1960’s.
• The world has become an increasingly smaller place.
• The use of superfast internet, satellite communications technology and cheap, reliable mobile
phones has made it possible for people to do business from anywhere in the world – without having
to physically be at the point of sale or negotiation.
46
Economic importance of communication:
• Cell phones and wireless technology have enabled entrepreneurs in remote and rural parts of the
country to set up small businesses.
• Knowledge is gained through communication, which helps entrepreneurs to make the correct
business decisions.
• The sector makes an important contribution to the gross domestic product of the country.
• It is a source of employment for all levels of labour.
Transport:
• Transport sector in any growing economy is the driving force for all economic activity, and therefore
needs constant upgrading.
• This means investing in roads, rail, harbours and airports.
• Transnet provides an extensive rail commuter system to the South African business world.
• Economist often see transport as the firth factor of production.
Energy:
• Most people’s energy needs are met by the provision of electricity, which is generated from coal
fired power stations.
• Eskom is South Africa’s major provider of electricity.
• Task is to provide electricity to households and business sectors in South Africa.
• The policies of the previous government resulted in inequalities in society especially in terms of the
exclusion of Africans from full participation in the different sectors of the economy.
• Many Africans were disadvantaged where the provision of services and infrastructure was
concerned.
• Communities were often living in poverty, mostly without running water and electricity.
• Since 1994, government has aimed to correct the social and economic injustices of the past by
implementing several black empowerments programmes and affirmative action in the workplace,
with a focus on needs of the previously disadvantaged.
47
Following are examples of programmes:
• RDP (Reconstruction and Development Programme) has set out to correct the service provision
backlogs including the provision of electricity, water, housing, roads, education and health services.
• The newly established Job Fund managed by the Development Bank of South Africa aims to create
150 000 jobs over three years
• In areas of South Africa where electricity had traditionally not yet been provided, state subsidised
solar panels and solar powered hot water cylinders have been installed on houses to harness the
power of the sun to electricity houses.
48
MAIN TOPIC: ECONOMIC PURSUITS
PAPER 1
ECONOMIC PURSUITS
ECONOMIC PURSUITS
Vocabulary List
Learners must first give a description of the following words in their notebook:
Wealth BBBEE
Physical wealth Progressive income individual tax
Financial wealth Wealth tax
National wealth Estate duties
Tangible / real assets Cash grants
Intangible / monetary assets Natura benefits
Savings Land restitution and redistribution
Income Property subsidies
Discrimination Economic growth
Income distribution Economic growth rate
Wealth distribution Real GDP
Gini Coefficient Productivity
Gini index Standard of living
Lorenz curve Per-capita income
Area of inequality
50
WEALTH CREATION PROCESS
Definition of wealth
Wealth is …
• all the accumulated physical and financial assets which enable people and businesses to earn an
income.
• related to the monetary value of what you own at a particular point in time.
• assets that are owned by individuals, businesses and the government.
Physical wealth – are tangible or real assets, such as clothes, furniture, houses, vehicles, trading stock,
land and buildings.
Financial wealth – are intangible or monetary assets; such as cash, bank deposits, investment, shares
and loans.
Income Wealth
Income is the remuneration earned by the Wealth refers to the stock of both real and
factors of production for participating in monetary assets that have been accumulated
economic activities. over time.
Income can take the form of:
Wealth is anything that enables people to
Wages from an employer; yield an income.
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SOURCES OF WEALTH
Savings
• Wealth is created by means of savings
• Income (Y) – Consumption (C) = Savings (S)
Luck also plays a part in wealth as some people win money.
Inheritance- even if a person inherits wealth, it came originally from savings by a previous generation.
Income is the earnings people receive for the work they do or the assets they own.
DISTRIBUTION
INCOME DISTRIBUTION
Income distribution refers to the way in which income earned is divided amongst households.
Unequal ownership of wealth: wealth generates income in the form of profits, interests and dividends. A
difference in wealth creates differences in income.
Differences in skills and qualifications: those with advanced skills and qualifications earn higher income.
Discrimination: exists where income of some groups is adversely affected in terms of employment, pay and
promotion opportunities.
52
WEALTH DISTRIBUTION
There are THREE major reasons for the inequality in the possession of wealth in South Africa.
Inequality of income
• In South Africa during colonialism and apartheid, blacks were subjected to inferior education and
professions.
• They were also not allowed to do professional work in white areas and were barred from managerial
positions.
• Low income resulted in no or minimal savings, thus no wealth creation.
Inheritance
• Inheritance of wealth is only possible if people have a general right to own property.
• For many decades in South Africa only white people had property rights.
• Blacks were denied this right and were forcefully moved to homelands and lost the little wealth they
had.
53
HOW MUCH INEQUALITY?
The Lorenz curve is a graph which an American statistician, Max Otto Lorenz introduced in 1905.
To draw a Lorenz curve, we need data showing the distribution of income among portions of a population.
TABLE:
Lorenz curve
120 B
Cumulative % van income
100
80
60 d
40 c
b
20 a
0
20 40 60 80 100
Cumulative % of population
By plotting the cumulative income and population percentages, the points of intersection give a convex
curve along 0, a, b, c, d, B.
This show for instance, that at c the poorest 60% of the population earns 25% of the income.
The 45 ° line (diagonal) serves as a reference point.
It is called the line of equal distribution OR perfect equality.
It shows a perfect equal distribution of income.
Along this line the first 20% of the population receives 20% of total income; the first 40% receives 40%, etc.
Like the equal distribution line (curve), any Lorenz curve must start at the origin 0, (since 0% of the
population will earn 0% of the income) and ends at B (since 100% of the population will earn 100% of the
income)
The greater the distance between the lines of equal distribution and the Lorenz curve, the greater the
degree of inequality.
The area between the line of equal distribution and the Lorenz curve is called the area of inequality.
The greatest possible inequality will be where one person earns the total income.
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The Gini coefficient
The Gini coefficient is calculated from the information provided by the Lorenz curve.
The Gini coefficient measures the exact degree of inequality.
This is the ratio of (a) the area between the Lorenz curve and the line of equal distribution (0B, d, c, b, a, 0)
to (b), the total area below the line of equal distribution (triangle 0BA0)
The value of the Gini coefficient can range between 0 and 1.
If the income is distributed perfectly equally, the Gini coefficient is zero.
The other extreme is, if the total income goes to one individual or household (if the income is perfectly
unequal distribution), the Gini coefficient 1.
In practice the Gini coefficient usually ranges between 0.3 (highly equal) and 0.7(highly unequal)
In 2010, South Africa's Gini coefficient was 0.65 according to the SAIRR and it was estimated that of the
USA was 0.41, Brazil 0.65 and Malaysia 0.51.
The Gini coefficient is sometimes multiplied by 100 to get the Gini index, which ranges between 0
and 100.
The higher the value, the greater the inequality.
55
REDISTRIBUTION METHODS
In South Africa the government has introduced an arsenal of interventions in the economy to redress the
inequalities created by past policies. These redistribution methods are grouped under the following:
Cash (social) grants In South Africa, old-age pensions, disability grants, child support grants
and unemployment insurance are the most important cash grants.
Natura (free) benefits Poor households receive free health care, education, school meals,
municipal services and infrastructure.
Limited quantities of free electricity and water are also provided.
Labour market policy Minimum wages, antidiscrimination acts and training subsidies reduce
income inequality.
Macroeconomic policy These policies influence the distribution of income and wealth.
Expanded Public Works Programme (EPWP) create employment
which benefit low-income households
Regional development policies, such as SDI aim to reduce
geographical inequalities of income and wealth.
Broad Based Black The Broad Based Black Economic Empowerment Act, No.53 of 2003,
Economic Empowerment provides legal basis for transformation of SA economy so that number
(BBBEE) of black people that own, manage and control country’s economy can
increase significantly, and income inequalities will decrease
substantially
DTI published scorecard used to measure empowerment and
transformation progress of business and industries
Elements on scorecards include equity ownership, management and
control, employment equity, preferential procurement, enterprise
development and social responsibility
Land restitution and land The purpose of land restitution is to return land to those who lost it as a
redistribution result of racial discriminatory laws and practices after 19 June 1913.
Land redistribution focuses on land for residential and productive use.
Government’s aim was to redistribute 30% of agricultural land to
previously disadvantaged individuals and groups by 2014.
Although there were some successes since 1994, large tracts of land
still remain in the hands of very few people.
Property subsidies Subsidies are used to help beneficiaries acquire ownership of fixed
residential property.
The government housing scheme provides funding options to all
eligible people earning less than R3 500 per month.
In 2021 there is still a backlog of an estimate of 2 million homes
needed for 12 million people – average household of 6.
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ECONOMIC GROWTH
Achieving a high economic growth rate is one of the five major objectives of the macro-economic policy.
The significance of economic growth lies in its contribution to the general prosperity of the community.
GDP is important because it gives information about the size of the economy and how an economy is
performing. The growth rate of real GDP is often used as an indicator of the general health of the economy.
In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. When real
GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their
factories and people have more money in their pockets. When GDP is shrinking, as it did in many countries
during the recent global economic crisis, employment often declines. In some cases, GDP may be growing,
but not fast enough to create enough jobs for those seeking them. But real GDP growth does move in
cycles over time. Economies are sometimes in periods of boom, and sometimes in periods of slow growth
or even recession (with the latter often defined as two consecutive quarters during which output declines).
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METHODS OF ECONOMIC GROWTH
Increase in productivity. Productivity can be defined as the relationship between real output
(the quantity of goods and services produced), and one unit of factor
input.
Availability and utilisation of In terms of the labour force, economic growth occurs when the ratio of
production factors the working population to the total population increases.
If new ways are discovered, so that more goods and services are
produced with the same inputs, technology has improved.
E.g., cell phones, internet, computers etc.
Effective government Effective policies mean policies that will ensure that pre-set objectives
policies and administration are met.
Government should have policies in place that will realise for example
more exports, growth in tourism and the expansion of manufacturing
industries.
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CONSTRAINTS ON ECONOMIC GROWTH
1.2 Investment:
South Africa's fixed investment rate would have to increase from at least 15% to at least 25%, for
the economy to grow by more than 5% per year.
2.2 Learnerships
Although more candidates wrote in 2009 the learnership (apprenticeship) trade test, only 40% of them
passed.
The numbers who qualify is too low to meet the needs of the economy.
3 HIV / AIDS
South Africa is one of the largest HIV-infected populations in the world.
3.1 Population of working age
People in their economically active years are more infected than others.
Once they are infected, they become less productive and when they die, their knowledge and
experience is destroyed.
South Africa's economic growth averaged 2.2% per year between 2000 and 2011.
The highest growth rate was 2006, when it was 5.6%.
Higher growth rates are needed to improve the living standards of all people in South Africa.
In terms of the Accelerated and Shared Growth (Accelerated and Shared Growth - AsgiSA) program, a
sustained growth rate of 6% as the minimum was identified, to significantly reduce unemployment.
The South African economy grew by 1,1% in the first quarter of 2021 (January–March), translating into an
annualised growth rate of 4,6%.1 This follows a revised 1,4% (annualised: 5,8%) rise in real gross domestic
product (GDP) in the fourth quarter of 2020.
The finance, mining and trade industries were the main drivers of output on the production (supply) side of
the economy, while household spending and changes in inventories helped spur growth on the expenditure
(demand) side.
Despite this being the third consecutive quarter of positive growth, the South African economy is 2,7%
smaller than it was in the first quarter of 2020.
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STANDARD OF LIVING
Economic growth is desirable because it enables a society to consume more goods and services.
There are several factors that should be kept in mind regarding the standard of living, which include:
60
TOPIC 9 CONTENT CONTENT DETAILS FOR
TEACHING, LEARNING AND
ASSESSMENT PURPOSES
Economic Economic development. Briefly describe and explain the
development relevant concepts
Compare: Economic growth and Economic Compare economic growth and
Development economic development
Methods of development Briefly discuss the strategies to
increase economic development
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GRADE 11 ECONOMICS
PAPER 1
ECONOMIC PURSUITS
Vocabulary List
Learners must first give a description of the following words in their notebook:
Economic growth Underemployment
Economic development Open unemployment
Real GDP Human resources
Real per capita GNI Capital Formation
Per capita income NGP
Gini coefficient: NDP
Quintile ratio SDI
Poverty line income IDZ
Head count index SETA
Literacy rate IKS
Dependency burden
62
COMPARE ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT
Exists when there an increase in real GDP. Exists when there is an increase in real per
capita GNI (GDP)
Implies an increase in the capacity of the
economy to produce more goods and Implies an increase in the capacity of the
services. population to produce more goods and
services.
The emphasis is on increasing GDP, perfect
markets, maximum profit, etc. The emphasis is on higher standards of
living, more employment, less poverty, etc.
DEVELOPMENT METHODS
1. Attracting new businesses: more new businesses create employment opportunities that promote
diversity and growth of the local economy.
2. Building community capacity: by developing their own skills, people will be in a position to make
the most of available opportunities.
3. Expanding local markets: the local government should expand and promote local products and
markets (export promotion and import substitution)
4. Use of outdated facilities: be transformed so that they can meet the new needs of the local
community.
5. Promoting direct investment: government needs to upgrade infrastructure and build new facilities
to create more jobs
6. Natural resources: must be used effectively to improve the standard of living of local people.
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7. Attract new businesses: more new businesses create jobs that promote diversity and growth of
the local economy.
8. Build community capacity: by developing their own skills, people will be able to make the most of
available opportunities.
9. Expand local markets: local government must promote and market local products (export
promotion and import substitution)
10. Use of obsolete facilities: must be converted so that it can meet new needs of local community.
11. Promote direct investment: enable government to upgrade infrastructure and build new facilities to
create more jobs
12. Natural resources: must be used effectively to improve the standard of living of local residents.
Head count index: It is used to indicate the magnitude of poverty. This is the % of people with an
income living which is less than the poverty line income
Low life expectancy: many people in developing countries are fight a battle against malnutrition,
diseases etc.
Low levels of education: low living standards are related to low levels of education.
Adult literacy rate refers to the % of people aged 15 years and above who can read, write and
speak.
Literacy rates in developing countries are lower than in developed countries.
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4. High levels of unemployment
Underemployment: people who are working less than they are able.
Open unemployment (visible unemployment): people who are able to work, want to work but cannot
find work
Human resources:
• refers to the labour force.
• are the most important asset of a country.
Can be improved in various ways:
• Education and training: Improvement in literacy levels contribute to economic growth and
development.
• Health: Healthy people are more energetic and productive and contribute to economic development.
• Population planning: Unplanned families are often the main cause of poverty and unemployment.
• Motivation: Human resources need to be motivated and must strive towards self-improvement.
Natural Resources:
Land: Land ownership is a strong incentive to improve the quality of the soil.
Minerals and fuels: The establishment of secondary industries which can process the raw primary products,
and hence add value to labour.
Entrepreneurship:
For a country to be develop, entrepreneurship should be encouraged.
A country can only perform at its best if managers / owners are willing to take risks.
Capital:
When a country increases their stock of capital, it is known as capital formation.
Technology:
Technological development makes countries more competitive.
The expansion of communication, e.g., computers can improve productivity in developing countries.
Science training must be included in school curricula to train technicians and engineers.
65
SOUTH AFRICA'S EFFORTS
Macroeconomic policies
SA is a developing country and since 1994 the government followed an economic development policy:
• The Reconstruction and Development (RDP) was the original route map.
• This was followed by GEAR, which was reinforced by ASGISA.
• New Growth Path (NGP) was accepted and established in 2010, focusing on economic growth and
job creation.
• National Development Plan (NDP) was announced by the Planning Commission in 2011.
• Focus on the challenge of reducing poverty and income inequality in South Africa.
❖ Health Care
• The government focus on primary health care.
• Poor people receive free hospitalization, medicines, etc.
❖ Regional Development
• SDI's (Spatial Development Initiatives) - is spatial areas that offer particular advantages to mining,
manufacturing and other businesses.
• The advantages include the presence of existing or potential infrastructure and specialization of
products and / or services.
• Businesses in the SDIs can also qualify for a variety of financial assistance, which, for example.
based on establishment costs, number of people employed and skills training.
• SDIs are regarded as regional development programs because provincial and local authorities are
responsible for them.
❖ Export Industries
• IDZ (Industrial Development Zones) - it is industrial areas that were created for a specific purpose,
physically enclosed and linked to an international airport.
• Five (5) IDZ has been already approved: Coega (steel and auto components) East London (motor
vehicles) Gauteng (high tech and light industries) Richards Bay (coal) and Saldanha Bay (steel).
Analyse the marginalised people in South Africa and explain the effects of marginalisation.
Marginalisation describes both a process, and a condition, that prevents individuals or groups from full
participation in social, economic, and political life. As a condition, it can prevent individuals from actively
participating. There is a multidimensional aspect, with social, economic, and political barriers all
contributing to the marginalisation of an individual or group of individuals. People can be marginalised due
to multiple factors, sexual orientation, gender, geography, ethnicity, religion, displacement, conflict or
disability. Poverty is both a consequence and a cause of being marginalised.
67
TOPIC 10 CONTENT CONTENTS DETAILS FOR
TEACHING, LEARNING AND
ASSESSMENT PURPOSES
The composition of South
Money & Banking Africa’s money and its Banking
68
GRADE 11 ECONOMICS
PAPER 1
ECONOMIC PURSUITS
Vocabulary List
Learners must first describe the following concepts and write it in their notebooks:
(Some of these terms may be found in your grade 10 notes)
Money Interest Rate
Store of value Repo Rate
Unit of account Micro Loan
Deferred payment Central bank
Deposit money Cash Reserve
Financial intermediary Monetary policy
Credit Instrument Open market transactions
Loan Liquidity
Exchange value Risk
Inflation Invest
Consumer Price Index (CPI) Capital
Credit Creation Credit
Deposit
Shareholder
Depreciation
Definition of money
Refer to money's exchange value. Money's value should remain relatively stable ...
Exchange value - refers to what money can buy. Depends on prices of goods and services. When prices
rise it decreases the value of money and the when the value of money rise it because the prices fall.
Quantity theory of money - According to the theory when the amount of money increases, ceteris paribus,
prices will rise and therefore the value of money will decline. In other words, if the amount of money
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increased by 15%, all other things equal, the value of money will fall by 15%. Is it described by the following
equation: M = P, where M = the quantity of money and P = the average (or general) price level.
Note: The general price level can be calculated by dividing the amount of money
(M) by the number of transactions in the economy (T)
M
P=T
The velocity of circulation of money - the rate at which money circulates. If the velocity of money doubles
the effect is exactly the same as when the quantity of money doubles.
Stabilising the value of money - Consumers and producers find it very difficult if the value of money
changes in big leaps because it leads to uncertainty.
The relationship between the value of money and prices - Implies when the value of money, ceteris
paribus, is expressed by the prices of goods and services. If prices rise, the value of money declines, and
vice versa. This is an inverse relationship.
Measurement of the value of money - Measure the value of money by looking in the real economy how the
prices change over time. Use price indexes. Of these, the most important is the Consumer Price Index
(CPI) and prepared by Statistics South Africa (SSA). The CPI measures the change in the average price of
goods and services purchased by a typical urban household. Specifically measure changes in the cost of a
basket purchased by urban households
Inflation - Inflation is defined as a continuous increase in the general price level over a specific period. The
CPI shows inflation for consumers. The lower the inflation rate, the better it is for the consumer and how
higher this is how disadvantageous for the consumer. It is the responsibility of the South African Reserve
Bank (SARB) to stabilize the inflation rate. The SARB has an inflation target of between 3% and 6%.
DEFINITION OF MONEY
• Is something that is generally accepted and serve as medium of exchange. Not only important for
people but also for banks.
FUNCTIONS OF MONEY
Medium of exchange –
➢ is the most important role.
➢ Workers exchange labour, shops exchange goods, factories, and farmers exchange products for
money.
➢ If there was not this medium of exchange, goods for goods would have to be exchanged - barter
Bearer of value –
➢ Individuals, businesses keep their money
➢ Income is held to make payments and buy goods and services
➢ Also used to store personal wealth
➢ If money keeps its value, it is served as value of money
Unit of account –
➢ Goods and services have always a price - expressed in terms of the standard of money in this case
rands and cents
➢ If price is awarded to something, money therefore serves as unit of account
➢ Also, when transactions are recorded in a business's books.
➢ Benefits:
♦ Trade simplified
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- avoid chaos in trade
♦ Relative values of goods and services are expressed
- If a shirt cost R120 and shoes R240 it means the shoes are 2 times more expensive than the shirt
Cards.
Consumer cards – issued by consumer organisations and retailers and gives consumers access to credit.
Bank transaction cards - used to withdraw cash or to deposit at cash ATM’s and to transfer deposit money
between accounts or to pay bills electronically
Credit Cards – given to creditworthy customers by banks
Debit cards - issued to clients who maintain cash balances in their accounts.
Internet Banking - Clients access their accounts through the Internet website of the bank. Can transfer
money to other accounts.
BANKING
Banking institutions deal in cash and credit. They lend the funds deposited with them, hold cash
reserves and investments.
When an accountholder deposits money into their bank account the banks money assets increase,
however, the banks liabilities increase by the same amount. Banks must hold cash reserves so that if the
accountholder wants to withdraw their money they can. The banks only keep a small portion e.g., 10% cash
reserve and most of the other percentage (90%) is used to lend out and invest. Banks must hold cash in
their safes and with the SARB.
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INTEREST RATES
Definition:
The price that borrowers must pay for the use of cash that is not their own, and the return (income) a lender
enjoy for deferring consumption, or in other words, by parting with their liquidity. Interest is usually
expressed as a rate (percentage).
Repo rate: is the rate at which the central bank of a country lends money to commercial banks in the
event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
Prime interest rate: The prime rate (prime) is the interest rate that commercial banks charge their most
creditworthy customers, generally large corporations.
Fixed interest rate: A fixed interest rate is an unchanging rate charged on a liability, such as a loan or
mortgage (home loan). It might apply during the entire term of the loan or for just part of the term, but it
remains the same throughout a set period.
Variable interest rates: A variable interest rate (sometimes called an “adjustable” or a “floating” rate) is an
interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark
interest rate or index that changes periodically.
MICRO-LENDING ACTIVITIES
Micro-lenders lent money over short periods and ask very high interest rates. Borrowers must make sure
that a micro-lending business is accredited.
Services:
Loans
Provides loans to R10 000 (36 months)
Two Type micro lending namely Cash Loans (1 to 6 months) and Term loans (6 to 36 months)
Insurance:
Insurance to cover loans on death and other types of insurance such as Costs and funeral cover
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CENTRAL BANKING
The South African Reserve Bank (SARB) was founded in 1920 with the primary function to protect the
value of the currency (the rand). Is a private company with limited liability and its independence is protected
by the Constitution.
BASIC FUNCTIONS
Bank of issue
• Sole right to issue notes and coins
• Notes are printed from 1963 by the
• South African Bank Note Company
• Coins coined from 1989 by the South African Mint Company
• Both of these companies are subsidiaries of SARB
Government’s banker
• Render services to the state as commercial banks do to their customers
• Government Departments deposit their funds at SARB and draw checks against their accounts
• Provide loans, foreign exchange and financial advice to the state
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MONETARY POLICY FUNCTOINS
Definition:
Monetary policy consists of decisions made by the monetary authorities to influence the interest rates and
the supply of money (or credit) in the economy.
Aim: Done to ensure economic growth, foreign exchange and price stability and full employment
Moral suasion
SARB can, through consultation and moral persuasion, influence the banks to act in a desired manner,
depending on the prevailing economic conditions.
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Consequences of bank failures
Depositors When a bank fails there, the bank will stop repaying deposits when it run
out of cash
Has no more assets to make use of the SARB's repurchasing facility.
SARB appoint a trustee to sell the bank's assets and pay the proceeds to
return to depositors.
Shareholders Depositors will or will not get back their full deposits
Shareholders come last to recover proceeds from a bank failure.
The board will attempt to sell the bank as a going concern when there are
signs of problems.
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