Economics grade 11

Chapter 2

Circular and quantitative elements: Economic goods and services

1. Final consumption expenditure by households

• The aim of production is to manufacture useful goods and services that will satisfy
consumer needs and wants. Hence, consumption is the final goal of the production
process. Economic goods are divided into final consumer goods and intermediate goods
and services.

Final consumer goods and service

• These include manufactured goods and services
• They have reached the final stage of the production process
• They are ready to be consumed
• They are divided into durable goods, semi-durable goods, non-durable goods and
services
Capital or intermediate goods
• These are goods that are not directly consumed but are used to manufacture other
goods.
• They include machines, tools used in the production process
• They are usually bought by manufacturers

Final consumption expenditure by households (C)

• This is the total spending of households on final consumer goods and services
• It indicates how households spend the national income on national production

Importance of final consumption expenditure by households

• Households don’t only consume goods and services but they also provide their factors of
production
• There is a positive relationship between households’ consumption and national income
in the economy because when households earn more, they will spend more and
national in the economy increases.
• The consumption expenditure by household’s accounts for about 65% of the total
spending in the economy therefore this makes it the largest contributor to the GDP of
the country
• Consumption is positive even if income is negative.
2. Final consumption expenditure by government
• This indicates how government uses its national income to finance goods and services
needed by the public
• It includes spending of all departments of central, provincial and local governments
 • It includes consumption expenditure on services rendered to the communities, like
salaries and wages, investments where the government has to pay for capital goods
such as roads and building
Classification of final consumption expenditure by government
Functional division-which is based on the nature of services performed.
• Social services e.g. education and health
• Economic services e.g. research where the state will operate as an entrepreneur
• Government debt services
• Protective services
Administrative division- which deals with the departmental expenditure which has to be
controlled and organised.
Financial division- which records the states expenditure according to the accounting terms in
the country’s budget
Importance of final consumption expenditure by the government
• The government provides a legal framework for the economy to operate efficiently. This
enables the market economy to function well, drive economic growth and create jobs.
• The government is responsible for important injections into the circular flow of income.
• Government spending is important for reducing poverty and redistribution of wealth.
3. Goss fixed capital formation
• Gross fixed capital formation is also known as investment and it takes place when there
is an increase in the country’s capital stock.
• It happens when money is contributed towards the economy’s ability to manufacture
consumer goods and services
• The main purpose for investment is to promote economic growth and development
Classification of gross fixed capital formation
• In private households- family savings in banks are borrowed by businesses for
investment
• In business sector-businesses invest their profits in the production process with a
purpose of expanding their production capacity
• By the state-government purchases goods and services that are intended to create
future benefits such as infrastructure, research spending
• The foreign sector also plays a vital role the country’s growth possibility
Importance of gross fixed capital formation
• Capital formation is important for economic growth. An increase in capital formation
expands the production of goods and services.
• The government can help to increase the capital formation by lowering the interest
rates to make it less costly for the private sector industries to borrow money to buy new
machines.
• Investment in capital infrastructure of the manufacturing sector is the key to economic
growth and job creation
 • The government needs to invest in education and training so that we can have the
necessary skills to produce all the required final goods and services and reduce our
reliance on imports. This will also improve our balance in the current account of the
balance of payments.
• Increase in capital formation through investment in the private sector will reduce the
unemployment rate in the country. This will increase the income and welfare of the
workers resulting in an increase in the economic growth rate of the economy.
• Improved infrastructure like roads, transport, electricity and water will ensure that the
goods and services are distributed efficiently.
The main aggregates
The national account aggregates are methods used to measure the level of economic activity
over time. These methods are the production method, income methods and the expenditure
method.
Production method
Primary sector
Secondary sector
Tertiary sector
GVA@BASIC PRICES
Plus taxes on products
Less subsidies on products
GDP @ MARKET PRICES

Income method
Compensation of employees
Net operating surplus
Consumption of fixed capital
GVA@ FACTOR COST
Plus taxes on production
Less subsidies on production
GVA@ BASIC PRICES
Plus taxes on products
Less subsidies on products
GDP@ MARKET PRICES

Expenditure method
Consumption by households
Gross fixed capital formation
Government expenditure
Residual item
Plus exports
Less imports
GDP@MARKET PRICES
NB!!

GDE- is the total value of spending on goods and services within the borders of the country.

GDE= C+G+I

GNE is derived from the GDE and it is expenditure by the permanent residents of the country.

GNE= GDE+ income from the rest of the world- income to the rest of the world.

GDI- is the sum of all income of factors of production within the borders of the country

GDI= compensation of employees + net operating surplus + consumption of fixed capital

GNE= GNI + income from the rest of the world – income to the rest of the world.