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Summary ECS2602- South African Macroeconomics study notes
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ECS2602- South African Macroeconomics study notes
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STUDY UNIT 1: AN OVERVIEW OF THE SOUTH AFRICAN MACROECONOMICENVIRONMENT
MACROECONOMICS
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.
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
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.
STUDY UNIT 2 – GOODS MARKET
Goods Market
,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
The usage and purchases (demand) for goods and services by consumers, firms, the
government and foreign sectors. Households are the biggest consumption sector.
Consumption C is a function of disposable income YD, as the disposable income YD
increases the ability to consume C increases (Induced Consumption). Therefore:
C = C(YD),
But, there are other types of consumption, namely Induced consumption (cYD) and
Autonomous consumption (c0). Therefore:
C = c0 + c(YD),
, Autonomous Consumption, (c0):
This type of consumption indicates what people would consume if their income (YD) was
zero.
Autonomous consumption is financed by means other than income such as inheritance,
credit, past savings and gifts.
Induced Consumption, c(YD):
Induced income causes a change in consumption as the result of a change in disposable
income.
Marginal propensity to consume, (c)
The marginal propensity to consume (c) is always less than 1 because people are likely to
consume only part of any increase in disposable income and save the rest.
If a consumers’ disposable income increases, consumers’ will increase their consumption
(spending) but not as much as their increased income level
Higher income increases consumption (less than one), and higher taxes decreases
consumption (also less than one).
Financial investment, (I):
Investment in bonds, stocks etc. This type of investment produces a return by means of
interest, dividends.
Endogenous variables: Variables that are explained, and which depend on other
variables.
Exogenous variables: Variables that are not explained, but taken as a given.
Consumption is an example of an endogenous variable; Investment, Government spending
and taxes are examples of exogenous variables.
I=Ī
Placing a bar above the ‘I’ in investment, refers to the investment as a given, and does not
respond to changes.
Real investment:
Spending on capital such as machinery, buildings, inventories etc with the hope of a making
a future profit. This increases the production capacity.
Government spending, (G)
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