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Economics 1B: ecs1601 SUMMARY NOTES
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Ranga 0618441387FACTOR AND GOODS MARKET
In a market economy the household determine what to produce and firms determine how they
are produced
Labour is owned by CUI
TWO Fundamental markets goods and factors market
we assume consumers are rational, means they always want to maximize their satisfaction given
the means at their disposal
Households
own their factors of production and in turn sell them to the firms in the factors market for income
and as an exchange they spend this income in the goods market.
GOVERNMENT
Spending is an injection to the flow of income and spending
Taxes are a withdrawal
The government purchase
the factors of production from households and goods from firms. Provides public goods and
services to households and firms
Government spending is financed
by taxes paid by households and firms
FOREIGN SECTOR
Exports are an injection
Imports are leakage
Goods and services are imported
by firms from the rest of the world and payment constitutes as a leakage from the flow income
and spending, goods and services are exported to the rest of the world and payment constitutes
as an injection into the flow of income and spending.
FINANCIAL INSTITUTIONS
Act as linkage between firms or households with surplus funds and other participants that need
funds.
Savings = leakage
Investment= injection
Households and firms
don’t spend all their income, part of the income is saved the saving flows to the financial sector
which lends funds to firms to finance investment spending
TOTAL PRODUCTION, SPENDING AND INCOME
C+I+G()+X-Z
Exports , investment, government expenditure is injection
Imports, taxes, savings all withdrawals
C-households consumption
I-investments capital formation by firms
G- government spending
X-exports
Z-imports
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UNIT 2
MONETARY SECTOR
What is money
• Used and generally accepted as a medium of exchange
Factions of money
Money as medium of exchange
Money serves as a lubricate to smooth the process of exchange and to make it more
efficient. Thus generally acceptable means of payments.
Money as a unit of account
Enables us to calculate and obtain measures of the total value of all goods and
services produced in the economy
Money can’t lose some of its usefulness in this form during inflation.
Money as a store of value
Serves as a standard of deferred payment
Meaning that money is the measure of value of future payments
Income -reward earned in the production process/ earnings per period
Wealth -consists of assets that have been accumulated over time.
DIFFERENT characteristics OF MONEY
• Intrinsic value of money is based on confidence
• Durable
• Uniformity
• Divisibility
• Can be carried
Kinds of money
M1-Near money/narrow/Quasi money
the conventional measure
Includes coins and notes and demand deposits, in circulation outside the monetary sector
And all the demand deposits of the private domestic sector with monetary institutions.
M2-broader definition of money(quasi money- near money)
M2= M1 + medium-term deposits of the domestic private sector with monetary institutions its
more than 1 /2 of M1
M3-Comprehensive definition
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M3=M2+ long -term deposits
Most reliable indicator of development in financial sector
A reflection of the store of value function not only the function of money as a medium of
exchange.
SOUTH-AFRICAN RESERVE BANK
Is a monetary authority
Functions
• Formulation and implementation of monetary policy
Instruments used
✓ Through the repo rate, refinancing system or accommodation policy
✓ By providing daily liquidity needs to private banks and ensuring they borrow a substantial
amount to ensure the system remains effective
✓ Cash reserve requirements and open market
✓ Both used to drain excess liquidity from money market in order to ensure a liquidity shortage at
all times.
• Service to the government
✓ Banker for the government and
✓ advises on monetary and financial matters,
✓ Financial transactions
✓ Custodian of gold and foreign exchange reserves
responsible for the formation of exchange rate
Used as One of the main barometers of the state of the economy and prospects for the future
economy
• Administration of exchange control
Responsible for exchange control that restricts the movement of foreign exchange, to protect an
economy from disruptive fluctuation in capital movements and international economic shocks
• Maintaining financial stability
✓ Bank supervision
✓ Purpose to achieve a sound efficient banking system, by issuing banks with licenses and
monitoring their activities
✓ Aim is reduce interbank settlements risk with the objective of reducing the potential of
systematic crisis emanating settlement default from banks.
✓ Banker to other banks
✓ Lender-of-last-resort banks experiencing liquidity problems.
✓ print notes and coins
THE SUPPLY OF MONEY
Is demand driven
∆M=∆C+∆D
Demand deposits can be created in the following ways
Cheque books
Overdraft facilities create a credit and keep a fraction of the customers deposit in a form of cash
reserves, which increase money supply in the country.
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CREDIT MULTIPLIER
Cash reserves available to provide for cash withdrawals
Which is 2 and half of their total liabilities to the public demand deposits in an non-
interest bearing account with the reserve bank
∆R=b(∆D)
b=required cash reserves ratio
Increase in D =increase in reserves
Increase in cash reserves =reduction in the credit multiplier
Factor that influence the money supply
Government and foreign countries transactions
Foreign trade and international capital movements
So a country's money supply generally increases wen its gold and foreign exchange reserves
increase and falls when they decrease.
THE DEMAND FOR MONEY
FUNCTION MOTIVE ACTIVE/PASSIVE MAIN DETERMINANT
Medium of exchange Transactional demand for Active Income
(idle) balances
Store of value Speculative Passive Interest rate
balance
The demand of money is the amount that the various participants in the economy plan to hold in
the form of money balances
Components of demand for money
a. The transactions demand is a function of national income
b. The demand for money as an asset
MOTIVE for keeping money
Transactionary-participate in transactions/ demand for active balance
• Income
Speculative-
there is a negative relationship between the quantity of money demanded for speculative purposes and
the level of the interest rate.
The demand of money is a function of the income level and the rate of level.
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