11:The

Chapter South African Economy, Circular flows and economic limitations.

 Public
goods
non-excludability ->
everyone benefitsonce it
comes into existence.

·non-rivalry
↳ ifI
benefit, doesn't
it rake from
away someone benefit.
else's

(street lighting, GPS, national defence)

Role Players in the

economy

Households
·
Business Enterprises
·
Government

foreign
·

secron.

THE flow
Economic ofRESOURCES:Goods, services and money

⑰
product
market
⑮
sell goods and services

households buy
-services
goods

Households Businesses

households supply
production factors

- Resource
buy production
⑮
market factors.

>
services market
goods Production
+

on
services T Income
Expenditure ofgoods
+

supply received.
goods I
consumption
-
services

Household firms

ration;
-
factors a
apply of production factors
production
production
income
received.
factors Resource market
⑱
expenditure
on
 Product
expenditure
income
market
ofgrs ↳
supply
of
consumption
consumption:3
ofgoods ↓ M expenditure
grS
9/S

* ~
services
services --
- Government
house holds - Firms
->

↑ ↓
Taxes
taxes

expenditure
on A
M
utilization
of
supply pf
of PF
of
pf Resource
S Market
abilization
Income L expenditure
 D
financial market
M

savings financial flows

3
Rest ofthe world
7

exports r imports Investments

L
expenditure on goods i services
⑮
Income received

↑
-

of ProductMarket
consumption gis supply goods, services

I
expenditure on
goods o services

mon
services e services
⑲ ⑨ AA
⑲
Households Government X
-

raxes paid S
taxes paid Firms
B
⑤

↑
production factors.
gov utilizalion expenditure on

ofpf.

*
factors

Produsi
utilization ofproduction factors

supply
ene
⑧ Resource market

⑧
expenditure on production factors
Economic resources ->
land, labour, capital and entrepreneurial ability
(production factors.)
innovate and improve
·nitiativening ForProducingen

repreneurship

/S
decision making.
strategic)
bearisk.

Production
possibilities model
full employment employing
!
all available resources

fixed resources:quannly and quality of ofare fixed

fixed technology: production methods are constant.
·Two
goods capital is consumer
goods.

·y-altainable yet no full employment

·
w- unattainable

Unattainable

Capital ·
W

goods
altainable
·
Y

Consumer
goods.

MB

Marginal benefit ⑧ C

Marginal Cost

MC

of
Quantity
pizza
 expenditure ⑱

Resource Markel D
Income

supply
utilization of
pf
⑰
④

⑭ firsts Households
S

supply gis yr3

consume
D Product market
revenue
⑲
expenditure
 Chapter 12: domesticoutput
Measuring and national income

GDP:Gross domesticproduct

↳ Total market value ofall final

goods,services
produced borders
annuallywithin South African even
foreign-supplied
if resources.

GNI -> Gross national income

↳ [GDP+ PrimaryIncome receipts) -

Primaryincome receivements.

"Total marker value ofall final goods.

"value added"-> value sold for-value cost for production.

3 Types ofGDP:

0 & factor cost

o & Basicprices
o oh Market prices

I I
faclor Cost Basic prices Market value.

+other raxes on production Taxes +

on products
-other subsidies on producLion-subsidies on products.

* GDP is a monetary measure -> allows comparisons

↓ Es with
orang orangeS
a final values to double
avoid
counting

GDP excludes non-production transactions

3
public transfer payments:social security, welfare, velevan payments
↳
purelyfinancial transaction-
S
-private
- noproductionIncludea
transfer payments:child allowance, cash gifts
↳ second-hand sales
stock market transactions:buy
and sell stocks.

I approaches to GDR:Income approach aexpenditure approach

Expenditure approach:adds all expenditures made for all final
goods and services to measure the GDP

Income approach:adds production offinal to calculate

all income
generated from
goods GD.

Expenditures approach Income approach

Household consumption expenditures ~Wages
·

+ Investment expenditures by businesses + Rents

byForeigners Interest
+
Expenditures
+

-Profits

-laxes on production
-

subsidies on
production
+Statistical adjustment.
taxes
+
Serpenditures approach:
Personal
·
consumption expenditures (c)

expenditures durable, non-durable

↳ on consumer
goods. consumer
I
expenditures on services.

Gross
·
Private domesticinvestment (Ig)
↳
all final purchases of machinery, equipment,tools by businesses
↳ all construction
↳
changes in inventories
positive change:include (1)

(-)
investment capital goods regalize change:exclude
A
new
=

A Gross vs. net investment

↳ includes investment replacement capital
in and added capitalgoods.
includesonlyadded capital
new ->
goods.
Net investment Gross =
investment -

depreciation.
investment disinvesting
Negative
=
-

more
↳using capital than
producing

·
Government Purchases (G)

expenditures
↳
for
goods + services consumed toprovide public services

↳
expenditures for social capital (schools, highways)
A no transfer payments.

·
Net Exports (Xn)
↳
Exports (x) -

Imports (m)

GDP 2 =
I
+
=G An +
 Income approach:

Compensation ofemployees.
↳
wages,salaries to employees

·
Net operating surplus:
↳rents interest proprietors
+ +
income +
corporate profi

·
Rent
↳ Income received byhouseholds,businesses for the supplyofproperly resources.

Net rental income depreciation ofrental

↳ rent= Gross -

property.

·
Interest:"Moneypaidbyprivate businesses to the suppliers capital
ofmoney

received corporate bonds.

includes interest savings,certificates ofdeposits
↳ on +

ofsole, partners fother

Proprietorthe
income
unincorporated
·
Proprietor's income:profit

↳
Corporate income taxes:laxes levied to the
government.
↳ Dividends:part ofprofitpaid to stockholders andflow so households

↳ Undistributed: retained earnings

·
Consumption offixed capital:
on
depreciation (estimate ofamount of capital used up)

·
Statistical Discrepancy:
↳ issue ofprecision

factor
- new
foreign income
 Other national accounts:

·
New DomesticProductGDP -

Consumption offixed capital (depreciation)

(NDP)

·
Gross national income-(GDP Primaryincome
+
receipts) -
Primary income
payments.
(GN1)

·
Household +Disposable Income:o HI:all income received earned unearned.
+

·
Disposable income. Personal income received
-Taxespayable. rax
personal income

↳ Yd ·personal properly rax

c S
=
+ ·
inheritance raxes

↓ -

consumption savings.

NOMINAL US REAL GDP.

A
GDP inflate when prices fall

Nominal unadjusted for inflation/deflation (current price level) GDP deflate when rises
prices
=

Real-adjusted (adjusted for chosen price level)

figures.

GDP Price Index -> Real GBD adjustment.

↳
weighted price ofa good changes over lime.
ofmarker basker inspecificyear
Price
Price x 100
Indexin
-

a
given year-Price ofmarker basked in baseyear

NominalGDP
Real GDD Price index
=

Nominal GDP
Price Index= Real GDP

Shortcomings ofGDP:
·
Non-market theirown
activities:Carpenter repairing home (marker values measure

↳ Understates
↳ Exception:farmers eating
own produce.

·
Improved Product Quality:Since GDR is
quantitative and not
qualitative, itfails to value improvements.
↳ Understates.
·
Informal sector:Taxidrivers, street vendors not reporting
their
income No SARS.

A
nothingshows up in CoDD calculation. (10% 10 30% ofGBD)

A Undersbules.
0
GDP and the environment:Gross domesticby-products (pollution etc.)
↳ social
products
costs ofby reduce our economic
well-being.
↳
Overstates.
 Chapter 1 connect exercises.

GDP G 2
ly + An
+
=
+

100 =

30+60 (-10)
+
G
+

GDP = C 1g
+

+ G +An

16 =
10 +2 3.5
+
+0-S

GBP C =

1g
+ G
= An
+

IS =

NominalGDP 16 =

Real GDP =IS

16

Price Index 108 =

is "100 106.7
=

70000 Income

GDP 2
=

ly
r G+An
5

50
=

+20 25 + + (-10)

=83.

Income approach:
243 14+27 +
+8 13
+
33
+
16+ 223 18+21526
+
+

23) Income approach

194.2 +11.8-14.4 +40.5-2.2
=
229.9

Expenditures
S + (a G Xn
+ +

219.1 +59.4 +1.3 +1.8

=

+ 52.1

Price index Specific yeahear

=
100
x

C
lg +G An
+ +

=300 100 +SO

+

+SO
-

National Income = Price Index: al

20x 10
+ 10
+
60
=

x =
 Income approach moves

Compensation ofemployees

Rents
Interest
Proprietors income

Corporate profits
raxes on production and imports
-

foreign factor income.

+Statistical discream.
NDD-> GDDD -

Consumption of fixed capital

National Income calculations!

Method 1:NDP
approach:N) =
NDP -
Stat. Discrep =
foreign factor income.

Income,laxes approach:Nl=Compensation,rents a interest a

prop. income corporate profits
+ a raves on production.

Personal Income =National Income -

laxes on
production Social Security corporate income laxes undistributed c prof
payments
-
- -

transfer
I
payments

Disposable income Personal

=
Income -
Personal Laxes.

National NDP
Income = -
Statistical discrepancy:foreign factor income.

361
=
-
8 4
+

NDP 361 =

GDP 361 =

consumption
+ of capital goods
-

Personal Income:National Income -

laxes on
production and imports -
social contributions -
corporate income raxes - undistributed corporate profits transfer payment,

GDP using income

approach: 10 +2 0 +14 +19539 +22+229 24+so
-
+

GDP 2
1g G Xr
=

+ + +

219.1 (52.1 11.8) +39.412.3

=
+ +

NO NDD- St. D.
=

foreign factor
+

372.9-0
=
+ 22

Price

388
index-inspireeco
-

-
62.S
(16
3,
-
10

60%
=
 IMPORTANTCHAPTER 12

GDP (expenditures) 2 Ig =
+
G An
+ +

GDP (Income) Compensation Rents +Interest Statistical

+
Discrepancy Proprietor's
+ Income +Dividends laxes
+ on production & imports Corporate profits
+
+
=

+
Consumption offixed capital -
net foreign factor income.

NDP GDR
= -

Consumption offixed capital (depreciation)

N NDP factor
statistical discrepancy foreign income
=
- +

N Compensation
=

Rents
+
Interest =Proprietor'sincome
1
corporate profits
: + laxes on
production and imports.

4) N1-raxes=

on production and imports -

social securitypayments -

corporate income laxes -

undistributed corporate profits a transfer payments.

D1 P) =
-

personal raxes.

Price level for specific year

Price Index= Price level for base year

X 100

Nominal GDP
Price Index =
Real GDP.
Nominal GDP

Real GDP= Price Index

Net Exports Exports

=
-

Imports.
Gross investment Net =
Private domesticinvestment consumption
I offixed capital.
Chapter 13.

Assumptions and Simplifications

Stuck Price model ->
price level never changes

↑
Yd C S = +

254
Saving.
I - consumption

- ,

Real GDP

-
savings

- saving
'I
(dissaving GDP

&
Change in Consumption
MPC =

Change income
in
gradients
ofconsumptions savings
I schedule.
Change saving
in

MPS =

Change income.
in

MPC MPS +

1.
=

Exogeneous
10
=

then C Co =

10=

When C Co
=

and S = -
Co

>
dissaving.

C Yd =

S Yd-C
=

C cYd=

S (1 c) Yd
=
-

C Co =
+
CYd

S = -

Go (1 c)/d-
+
-

Wealth -> Realfinancial assets (feel wealthier spend more save less)

Household debt ->

More borrowing more
=

consumption

Expectation ->
high prices more
spending, low prices more
saving.

Real Interest rale -> fall-borrow more -> more

consumption. (vice versal
Expected return

Expected rale of return investment.

=

Real Interest rate:Nominal -

inflation

-
- Expected rate ofreturn < real interest rale

⑧ Investment
↳
good investment.

. demandrve.

Investment
intrave investment
S
20
Investment schedul

investment Real GDP

Equilibrium GDP(Y) 2 1
=
+
/5 1
=

yc =
1
+

y Co
=
cYd I
+ +

leakage ~ Injection
- I
=

- Co +(1 c)Yd I -
=

Equilibrium GDP: (C 1)+ GDP

=

(
aggregate
expenditures
-

G
At cE +

CO

Real GDP

E
& I
At

Domestic Product

C1
+
G
+
=
At
⑧

C +1

At Massend

y =
2 I
+

G
+

I
Co +cYd I
+

G
+

-
mp

S 1
=
G
+

-Co (1 + -
d)Yd
 Real GDP
Change in

Multiplier effect =

Change inspending.

Multiplier mos
=
mos.

HomeMuliblier=
ene
Recessionary ga

Ao

Al A2

Ao
Sgap.
At d

Real GDP

Oral In
No
Dressig
-

Cush
lynoves premature demand-pull
self-correction
fullemployment.