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THERON GROUP OF TUTORS
AN OVERVIEW OF THE SOUTH AFRICAN MACROECONOMIC ENVIRONMENT
MODULE: ECS2602
Prepared and presented by UK, Welly @ 071 950 7447
Introduction
According to ECS 2602 STUDY GUIDE, Macroeconomics deals with the economy as a whole and not the
behaviour and decisions of individual consumers, households and firms, as in microeconomics. Furthermore,
macroeconomics involves determining and exploring the relationship between aggregate concepts (variables),
and not determining the prices of individual goods and services through the interaction of demand and supply.
As per study guide, in this course we are going to focus on understanding on how different models determine
the level of output and income, as well as the impact of fiscal and monetary policy on the level of output and
income. Instead of focusing on the structural policies this module concentrates on the stabilisation policies.
Overview of the South African Macro-Economic Environment
The economic crisis – the 2008 to 2010 is the example of the worst economic crisis that has ever
happened. Economic crisis includes different economic conditions that include decline in economic
growth, accompanied by increase in the level of unemployment, falling business confidence as well as
increase in price level or deflation depending on specific country conditions. The down grading of the
credit rating of the South African economy is one of the good reasons of a country to fall into a recession.
Economic growth – economic growth refers to the increase in the total output, which is sometime called
the total income of the economy. Put in another way, economic growth is the increase in the gross
domestic product of the country, which must be the real gross domestic product after taking inflation
into account. Since increase in GDP without taking inflation into account might lead to misleading
results. Real GDP can be calculated using the following formula, which state that GDP of the current
year minus GDP of the base year divided by the GDP of the base year, multiplied by 100.
𝑮𝑫𝑷𝒕−𝑮𝑫𝑷𝒕−𝟏
∗ 𝟏𝟎𝟎
𝑮𝑫𝑷𝒕−𝟏
Gross Domestic Product – this is the total value of goods and services produced within the boundaries
of a country, during a specific period. Besides being country specific GDP calculations can be provincial
based, like the Gauteng GDP. According the ECS2602 study guide, GDP is the broadest, best-known
and most frequently used measure of economic activity. Calculation of GDP as we know from the
previous studies only include the final goods produced, which also includes goods produced to replace
worn out facilities. This implies that intermediate goods are not included in the GDP calculations.
Intermediate goods are goods used in the production of other goods, all the inputs required in the baking
of bread, oil in the manufacturing of petrol. We can conclude and say that GDP only measure new goods
, and services produced, therefore goods produced last year and sold this year cannot be included in the
calculation of GDP. There are several ways which economists use when measuring GDP, GDP at factor
prices can be used, or GDP at market prices, as we studied in ECS1601.
Nominal GDP versus real GDP – normal GDP is the GDP measured at current prices. The nominal
GDP of the country may increase due to increase in the quantity of goods produced in the country or
due to increase in the price levels in the economy. Increase in quantity of goods and services have the
potential of improving the quality of life, while increase in GDP due price increase may lead to decline
in the quality of life.
Real GDP – real GDP is the GDP of the country that has been adjusted to the level of inflation. This
implies that the effects of inflation have been removed in the calculation of GDP, in order to get to real
GDP. ECS2602 study guide defined real GDP as GDP measured at constant prices, rather than current
prices. By removing the effects of inflation real GDP measures the exact increase in the production
volumes. Often, the GDP deflator formula we have above is used in calculating the real GDP from
nominal GDP. The previous year is used as the base year, in the calculation of GDP deflator, where t-1
means GDP the previous year, however, take note that the previous year can be number of years away
from now.
Real per capital GDP – this measure of economic growth seeks to identify if the general population of
the economy is benefiting from the increase in GDP, and thus tend to incorporate increase in population
into account. Real per capita GDP is measure of economic welfare, in the South African economic
context, the cake of the economy is not well distributed, such that only the 5% of the economy takes the
90% of the increase in GDP. Besides this as the measure of GDP, there are other various problems
associated with the use of GDP as the measure of economic welfare. For example, increase in GDP,
maybe a result of increase in defence expenditure which does not have a direct impact in improving the
lives of people.
Inflation – this is the consistent increase in the general prices in the economy, such that increase in
prices which is not consistent does not equate to inflation, also increase in prices in one sector of the
economy does not explain inflation. In the AS-AD model the effects of expectations on future price
levels on the price level in the economy is analysed. However, take note in the IS-LM model price levels
are assumed to be fixed and a short-run period is assumed, implying that there is no inflation in this
analysis.
Stabilisation policy - this module emphasise the use of monetary policy and fiscal policy in stabilising
the economy rather than analysing the determinants of economic growth. Two main polices are used in
the stabilisation of the economy, namely the fiscal policy or the monetary policy.
Fiscal policy – an expansionary or contractionary fiscal policy maybe used by the government
to influence or stabilise the economy. Fiscal policy involves the use of tax and government
spending and borrowing to alter the economic activities. It is important to remember that, budget
of the country, from the treasury is the main fiscal policy instrument, while taxation and
government spending are the main policy variables. Expansionary fiscal policy which involves
, those policy variables aiming at increasing economic performance through increase in
consumption, production and investment. Expansionary fiscal policy variables include reduction
in taxes and increase in government spending, while in contractionary fiscal policy the aim is on
calming an overheated economy through the use policy variable instruments like increase in
taxation and reduction in government spending. Sometime the fiscal policy is called the demand
management policy, instead of stabilisation policy, both can be used interchangeably.
Monetary Policy – this is the deliberate action by the monetary authorities to influence the level
of economic activities, using interest rates, exchange rates, availability of credit. Monetary policy
will either increase or decrease the demand of money which will also either increase or decrease
the demand of goods and services in the economy and altering the balance of payments. There
is a difference between expansionary or contractionary monetary policy. Expansionary monetary
policy will involve reduction in interest rates and increasing monetary policy to increase
aggregate output. While on the other hand, contractionary monetary policy involves increase in
interest rates and reduction in the money supply with a goal of cooling an overheated economy.
Unemployment – among other economic objectives, unemployment tends to be a major or
number economy problem. Unemployment is the number of people who don’t have a job but are
actively looking for one. The labour force of the economy involves those who are employed and
those who are unemployment. 𝑳𝒂𝒃𝒐𝒓 𝒇𝒐𝒓𝒄𝒆 = 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅 + 𝒖𝒏𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅. the
unemployment rate of the economy is the ratio of the number of people who are unemployed to
the number of people in the labour force. The following equation can be used to calculate
unemployment rate.
𝒖𝒏𝒆𝒎𝒑𝒍𝒐𝒚𝒎𝒆𝒏𝒕
𝒖𝒏𝒆𝒎𝒑𝒍𝒐𝒚𝒎𝒆𝒏𝒕 𝒓𝒂𝒕𝒆 =
𝒍𝒂𝒃𝒐𝒖𝒓 𝒇𝒐𝒓𝒄𝒆
Two conditions need to be met in identifying who is unemployed, first the person should not
have a job and should be actively looking for a job. A person is considered unemployed if he or
she does not have a job and has been looking for a job in the last four weeks. Therefore, those
who do not have a job and are not looking for one are counted as not in the labour force. Those
who gave up in looking for a job, and discouraged ones cannot be counted as unemployed.
The Goods Market
Chapter Two: learning unit 2
Introduction
This part of the module seeks to study the theoretical model that influences the demand for goods through the
fiscal policy, using the policy variables that includes changes government spending and taxation. The demand
of goods is important to a country like South Africa, because it is the source of employment opportunities, that
arise from consumer spending, investment spending, government spending and increase in exports. The barriers
in addressing the problem of unemployment using the fiscal policy will also be discussed in this chapter as well.
The chain of events will be in analyzing how the fiscal policy can be used as a stabilizing policy, how fiscal
, policy can be used in increasing the level of employment in the economy. Lastly limitations of the goods market
will be explained, as well as the factors that limit the use of stabilization policies in addressing the
unemployment in the South African context.
The Demand for Goods
The demand for goods components refers to the components that we use in determining the level of income in
an economy, or used when calculating GDP, and these include consumption, government spending, investment
and net exports. Therefore, the demand for goods not only consider the local demand, rather it takes into account
foreign demand through exports. Here the demand for goods refers to the total demand for goods and services
in the whole economy put together in the goods market, this is differentiated from individual demand we studied
in micro-economics.
The goods market is sometimes called the real sector, because it is composed of with the study of real things of
the economy, namely production and consumption. This is the area of economics where the economic questions
from first year are answered. The questions which states what to produce, how to produce, and how consumers
decide what and how much to consume. Taking for instance, in an unemployment environment consumption
levels with be dampened, and inventories will rise and firms will be forced to cut production. On the other hand,
in inflation environment the consumer purchasing power will fall at a faster rate, and thus force consumers to
cut their levels of spending, don’t production will fall as well. Thus, answering what to consume and how much,
what to produce and for whom.
The general theory of employment, interest and money that has been advocated my Keynes provides us with
the basics point of departure in analysing the how the level of income and output is determined in the real sector
(the goods markets). In this theory of employment, interest and inflation we are going to acknowledge that there
are several factors that influence the different components of demand for goods and services, and thus influence
the level of national income and output. In analysing the goods market, it is importance to release that demand
for goods involves demand from foreign counties on top of local demand. From this arise the differences
between the GDP and gross domestic expenditure (GDE).
Differentiating GDP from GDE
The between GDP and GDE is that, GDP is the total level of spending on goods and services produced within
the borders of South Africa, and tend to include the exports but excludes imports, while GDE refers to total
value of income from spending within South African boarders excluding exports but including imports. By
looking on the word expenditure we can acknowledge that, in order to reach GDE from GDP we have to remove
exports, since they resemble expenditure by foreigner on our goods, (but these is expenditure by foreign
consumers). The formula below is used to calculate South African GDE.
SA GDE = C + I + G
From the above equation, C represents consumption spending by households, I investment expenditure from
firms, (private sector), and G government spending (the public sector). These three components include imports
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