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Economic growth
Economic growth takes place when the total production of goods and services in an economy
increases. It is traditionally defined as the annual rate of increase in total production or income in the
economy under 2 conditions namely production, or income should be measured in real terms, (effects
of inflation should be eliminated). Secondly, the figures should also be adjusted for population growth.
Gross domestic product
GDP (Gross Domestic Product) is an official measure of the FINAL goods and services produced inside
the borders of a country by both the citizens and foreigners during a specified time period (usually one
year). It is also the broadest, best-known and most used measure of economic activity. GDP measures
the production of new goods and services known as current production during a specified period and
is a flow which reflects the level of economic activity that is taking place in the country.
Nominal and real gross domestic product
Nominal GDP or GDP at current prices is the sum of the quantities of final goods and services produced
multiplied by their current price. An increase in nominal GDP might increase over time due to an
increase in the quantity or prices of goods and services produced.
Real GDP or GDP at constant prices is a measure of GDP in which the quantities produced are valued at
the prices in a base year rather than at current prices. Real GDP therefore measures the actual physical
volume of production, and thus over comes the problem of price changes.
Real per capita GDP
Positive economic growth occurs when the total production or income is growing at a faster rate than
the population. Real GDP per capita is used as the measure of the economic wellbeing of the residents
of a country. A rise in the real GDP per capita implies that people are better off. However there are
factors that could give rise to an increase in the real GDP per capita without people becoming better
off. An example is where the increase in real GDP results from an increase in government spending on
defense.
STABILISATION POLICY
The following two policies constitute the stabilization policy:
Fiscal policy
Monetary policy
Fiscal policy
Fiscal policy is the government's policy in respect of the nature, level and composition of government
spending, taxation and borrowing, aimed at pursuing particular economic goals. The main instrument
of fiscal policy is the budget, while the main policy variables are government spending and taxation. It
is presented by the Minister of Finance.
A distinction can be made between an expansionary and contractionary fiscal policy. An expansionary
fiscal policy entails an increase in the demand for goods in the economy by increasing government
spending and/or decreasing taxes. A result of such a policy is that the budget deficit increases. A
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,contractionary fiscal policy entails a decrease in the demand for goods in the economy by decreasing
government spending and/or increasing taxes. A result of such a policy is that the budget deficit
decreases.
At the macroeconomic level, fiscal policy is one of the main elements of demand management or
stabilisation policy. In the models you will be studying in this module fiscal policy has a vital impact on
the equilibrium level of output and income.
Monetary policy
This involves all deliberate actions by the monetary authorities to influence the monetary aggregates,
the availability of credit, interest rates and exchange rates, with a view to affecting monetary demand,
output, income, prices and the balance of payments.
A distinction can be made between an expansionary and contractionary monetary policy. An
expansionary monetary policy entails an increase in the money supply to bring about a decrease in the
interest rate in order to increase the demand for goods in the economy. A contractionary monetary
policy entails a decrease in the money supply to bring about an increase in the interest rate in order to
decrease the demand for goods in the economy.
Inflation
Inflation is defined as a continuous and considerable rise in prices in general. Note that this is a
neutral definition of inflation since it does not tell us what the causes of inflation are. The most
commonly used indicator of changes in the general price level (inflation) is the consumer price
index (CPI).
Unemployment
Unemployment occurs when economically active people who are willing and able to work, does not
have paid employment.
The strict definition of unemployment used by Stats SA regards unemployed people as being 15
years and older, who,
are not in paid employment or self employed,
were available for paid employment or self employment during the seven days preceding
the interview, and,
took specific steps during the four weeks preceding the interview to find paid employment
or self employment.
Balance of payments
The balance of payments is a systematic statistical record of all economic transactions between
residents in the reporting country (e.g. South Africa) and the rest of the world during a particular
period (quarter or year). The South African balance of payments summarizes the transactions
between South African households, firms and government and foreign households, firms and
government.
The balance of payments consists of the following five sub accounts:
Current account (Exports versus Imports): A surplus indicates that the value of the
country‟s exports exceeded the value of its imports during the period under review,
Financial account: A surplus indicates that more funds flowed into the country than flowed
out during the period under review. A net inflow of foreign capital thus occurred.
Capital transfer account
Unrecorded transactions
Official reserve account
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, In principle the balancing item in the balance of payments is the change in the country’s gold
and other foreign reserves.
Stability in the balance of payments exists where there is some balance between exports and
imports. When a country has to repay foreign debt and cannot borrow funds on the international
financial markets, it has o maintain a surplus of exports over imports to offset the outflow of
capital.
Distribution of income
Distribution of income refers to the way in which income is distributed between a country‟s
residents (women, men and races). Who earns the most Money? South Africa has a highly skewed
distribution of personal or household income. Income distributions are difficult to measure and are
therefore not estimated regularly. Moreover, the estimates are subject to a significant margin of
error. In some countries the distribution of income among individuals or households has never
been estimated, while in other countries such estimates are made only infrequently. The Gini
coefficient is used as a measurement to determine the distribution of income in a country.
Unit 2
The composition of GDP
Consumption = C goods and services purchased by consumers.
Investment = I sometimes called fixed investment
Government Spending = G
Foreign Trade: Exports>Imports (trade surplus); Export<Imports (trade deficit)
o Imports = IM
o Exports = X
The Demand for Goods and Services
‘Z’ represents the demand for goods and services where:
Z Ξ C + I + G + X - IM
Goods Market
The Goods Market is the combined market for all goods and services, consisting of all producers and consumers
including the Public sector (government), and the Foreign sector. It is in the goods market where producers
decide how much to produce and consumers decide how much to purchase.
Total Demand for Goods, (Z) (total = aggregate)
The total amount of goods and services demanded in the goods market. This total demand for goods and
services determines the level of income and output in the economy.
Total amount of goods: (total = aggregate)
All goods and services produced even if they replace depreciated or worn out products.
Gross domestic expenditure (GDE)
The total value of spending within the borders of a country including imports but excluding exports, since
spending on exports takes place outside the borders of the country.
Consumption
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