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ECS2602 - Summaries-and-notes.
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ECS2602 - Summaries-and-notes, lOMoARcPSD|9469290
Learning unit 1: An overview of the South African Macroeconomic
Environment
Economic growth - Economic growth takes place when the total output
(production) of goods and services in an economy increases. It is
traditionally defined as the annual rate of increase in total output
(production) or income in the economy. This definition has to be qualified
in two important respects.
1. Production, or income should be measured in real terms – that is,
the effects of inflation should be eliminated.
2. The figures should also be adjusted for population growth. In other
words, they should be expressed in per capita terms.
Real GDP growth rate = t is the second value and
t-1 is the first value
Gross domestic product
The GDP is the total value of all FINAL goods and services (refer to those
goods and services that are consumed by households and firms) produced
within the boundaries of a country during a particular period (usually one
year). GDP is an official measure of how much output was produced in a
country or region during a specified time period. It is also the broadest,
best-known and most frequently used measure of economic activity.
Nominal GDP or GDP at current prices is the sum quantities of final goods
and services produced, multiplied by their current price. An increase in
nominal GDP might increase over time as a result of
- An increase in the quantity of goods and services produced
- An increase in the prices of goods and services produced
, lOMoARcPSD|9469290
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 instead of at
current prices. Real GDP therefore measures the actual physical volume of
production. A base year is used to overcome the problem of price changes
by expressing the prices of goods and services in terms of prices in a
particular year.
Real per capita GDP
Positive economic growth actually occurs only when total real production
or income grows at a faster rate than the population. If population growth
rate exceeds the economic growth rate, a decline in real GDP per capita
occurs
Inflation – inflation is defined as the sustained rise in the general level or
prices. In the goods market, financial market and IS-LM model we are
looking at the short run and assume that the price level is fixed. However
in the labour market we look at the relationship between workers’
nominal wage demands and the price level. This comes together is the AS-
AD model where we see that expectations about the future price level can
influence the actual price level in the economy
Fiscal policy
Fiscal policy is the government’s policy is 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 spend and taxation.
A distinction can be made between and 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 contractionary fiscal policy entrails a decrease in the demand
for goods in the economy by decreasing government spending and/or
, lOMoARcPSD|9469290
increasing taxes. A result of such a policy is that the budget deficit
decreases
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.
Unemployment is the number of people who do not have a job but are
looking for one.
The unemployment rate is the ratio of the number of people who are
unemployed to the number of people in the labour force
Formula: u = U/L
Unemployment rate = unemployment/labour force
Learning unit outcomes
Describe economic growth and its measurement
Economic growth takes place when the total output (production) of goods
and services in an economy increases. It is traditionally defined as the
annual rate of increase in total output (production) or income in the
economy. This definition has to be qualified in two important respects.
Firstly, production, or income, should be measured in real terms – that is,
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