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ECS1601 SUMMARY
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- ECS1601 - SUMMARY
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- University Of South Africa (Unisa)
ECS1601 - SUMMARY ECS1601 - SUMMARY
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1ECONOMICS 1B – NOTES FOR 2010 JANUARY SEMESTER
CHAPTER 1: INTERDEPENDENCE OF THE MAJOR SECTORS, MARKET AND FLOWS IN A
MIXED ECONOMY
PRESCRIBED SECTION: 3.1 AND BOX 3.1 OF TEXTBOOK, 3.2, 3.3, 3.4, 3.5, 3.6,
Production is not pursued for it own benefit the ultimate aim is to use or consume the products to
satisfy human wants. Production creates income and this income is then spent to purchase
products. This process contains 3 major elements – production, income & spending. One problem
is how the income is distributed among the various participants in the economy. Production,
income and spending are all FLOWS. Stock variable – can only be measured at a particular point
in time and has no time dimension (wealth, assets, liabilities, capital, population, and balance on
savings account). FLOW VARIABLE – can be measured over a period of time (income, profit,
loss, investment). In mixed economy households, firms, government and foreign sector are all
participants. Exchange is an important economic activity that links all the various sectors.
Households can be defined as all the people who live together and who make joint economic
decisions. Can be an individual, whole family. These members are called consumers.
Consumption – the act of using or consuming goods and services. Symbol C = total consumption
or consumer.
In a market economy it is the households or consumers that largely determine what should be
produced. In a mixed economy most of the factors of production are owned by households.
Households sell their factors of production to firms that convert them into goods and services
Firm can be defined as the unit that employs FOP to produce goods and services that are sold in
the goods market. Different types of firms are – individuals or sole proprietorship, cc, companies,
partnerships.
Profit = difference between revenue and cost. Investment or capital formation = the act of
purchasing capital goods. Firms are responsible for spending on capital goods.
Goods market – in macroeconomics we treat the goods market as if there were only one market
for all goods and services.
Factor market – FOP are purchased and sold in many markets. Called factor markets.
Circular flow of goods and services – the households offer FOP for sale on the factor market
where these factors are purchased by the firms. The firms combine the FOP and produce
consumer goods and services. These goods and services are offered for sale on the goods
market where they are purchased by the households.
The circular flow of income and spending – flow of income and spending is usually a monetary
flow. Firms purchase the FOP in the factor market. This spending by firms represents the income
of the households. The households in turn spend their income by purchasing goods and services
in the goods market.
Government – includes all aspects of local, regional, provincial and national government. Public
sector – everything that is owned by the government. Government includes all politicians, civil
servants, government agencies and other bodies belonging to or under the control of
government. G = government expenditure, T = taxes, transfer payments – transfer of income and
expenditure from certain individuals and groups.
Foreign sector – 4th major sector of the world. S.A economy is an open economy with strong links
with the rest of the world. Balance of payments = various flows between S.A and rest of the world.
, 2
Exports = X, injection into economy, are goods produced within the country and sold outside the
country. Imports = Z, withdrawal from economy, produced outside and purchased locally.
Financial institutions in the circular flow of income and spending – surplus units = individuals in a
position to save because they spend less (savings is a withdrawal), deficit units = individuals that
spend more than they earn (investment is a leakage.
MULTIPLE CHOICE:
The 3 major flows in the economy as a whole are total production, total income and total
spending.
2 basic participants are households and firms.
Stock variable – eg balance in a savings account on a particular day.
Consumption is a flow variable.
Capital a stock variable.
Members of a household are called consumers.
Consumers are rational in other words they will always try to maximize their satisfaction
given the means at their disposal.
Households responsible for the spending on consumer goods.
Capital goods are purchased by firms.
2 sets of markets in the economy – goods markets (market for tomatoes) and factor
markets (labour market).
Firms purchase in the factor markets and sell in the goods market.
Households sell in the factor markets and purchase in the goods markets.
Major flows associated with the government are – government spending , taxes and
transfer payments.
Taxes = leakage from circular flow of income and spending.
Government spending = injection into the circular flow of income.
The foreign sector is linked to the domestic flow of income and spending through imports
and exports.
Savings , imports , taxes = withdrawal.
Investment , exports ,government spending = injection .
C = spending by households on consumer goods and services.
I = spending by firms on capital goods.
G = spending by government on goods and services.
X = Spending on foreigner on SA goods and services - (minus) S.A imported goods and
services.
TOTAL EXPENDITURE = C + I + G + X – Z.
.
, 3
CHAPTER 2: THE MONETARY SECTOR
PRESCRIBED SECTIONS OF TEXT BOOK: 15.1 TO 15.8 & 15.10 AND BOXES 15.1, 15.4,
15.2,
Money can be defined as anything that is generally accepted as payment of goods and services
or that is accepted in settlement of debt. (Money is what money does).
Barter economy is an economy that operates without money where goods are exchanges for
other goods.
The functions of money:
1. Medium of exchange - Money serves as a lubricant or intermediary to smooth the
process of exchange and to make it more efficient.
2. Money as a unit of account – is an agreed measure for stating the prices of goods and
services.
3. Money as a store of value – most common for holding wealth is money. It’s convenient
and can be used immediately in exchange for other assets. Most liquid form in which
wealth can be kept.
4. Income = reward earned in the production process, wealth = consists of assets that have
accumulated over time.
Legal tender – means that old notes or coins cannot be refused if they are tendered as payment.
M1 = the conventional measure – is defined solely on the basis of the function of money
as a medium of exchange – includes coins, and notes as well as all demand deposits
including cheque and transmission deposits.
M2 = M1 plus all other short term and medium term deposits of the domestic private
sector with monetary institutions.
M3 = M2 – plus all long term deposits of the domestic private sector with monetary
institutions.
Monetary in S.A are – SARB, corporation for public deposits, the land bank, postbank, private
banking institutions, and mutual building societies.
Demand deposits – are deposits that can be withdrawn immediately by means of cheque.
M = C + D – (QUANTITY OF MONEY = CASH + DEMAND DEPOSITS.
FINANCIAL INTERMEDIARIES –
One main function is to act as an intermediary between the surplus units and deficit units in the
monetary economy.
SARB
Most important financial institution. Primary function is to protect the value of the currency in the
interest of balanced and sustainable economic growth in the republic. Must also perform its
function independently and without fear, favour or prejudice but there must be regular
consultation between the bank and the cabinet member responsible for national financial matters.
Their 4 functions are:
1. formulation and implementation of monetary policy – repo rate tender system main
instrument.
2. Service to the government (banker and advisor, custodian of gold and foreign exchange
reserves, administration of exchange control.
, 4
3. provision of economic and statiscal services.
4. maintaining financial stability – (bank supervision , the national payment system , banker
to other banks , banknotes and coins.
The reserve asset position and the credit multiplier:
Each bank has to ensure that it always has sufficient cash reserves available to provide for cash
withdrawals, must provide for the claims of other banks, which may exceed its own claims.
Confidence of creditors must be maintained. To maintain confidence in the banking system, the
monetary authorities lay down legal requirements stipulating the amount of cash reserves to be
held against the total liabilities of a bank. Any increase in the banks demand deposits increases
the amount that the banks has to hold in the form of cash reserves with the reserve bank.
R = cash reserves.
D = demand deposits.
Any increase in demand deposits will raise the required minimum cash reserves.
Increase in cash reserve requirements = reduction in credit multiplier.
The present system of monetary control in SA seeks to control the amount of demand deposits by
influencing the cost of additional cash reserves rather than by variations in the cash reserve
ration or by seeking to control the actual amount of the banks aggregate cash reserve holdings.
Any increase in demand deposits as a result of an increase in the provision or use of overdraft
facilities forces banks to acquire additional reserves which have to be borrowed from the SARB at
the repo rate.
The higher the repo rate the more expensive credit becomes and the smaller the demand for
credit will be. As the credit falls so too will the size of M1.
Other factors that can influence the money supply:
1. Transactions with foreign countries, government transactions, foreign trade, international
capital movements. . Payments for exports will have a negative impact on the quantity of
money.
Foreign transactions – a countries money supply generally increases when it’s gold and foreign
exchange reserves increase and falls when gold and foreign exchange reserves decrease.
The demand for money – is the amount that the various participants in the economy plan to hold
in the form of money balances. The opportunity cost of holding any money balance is the interest
that could have been earned had the money been used to purchase bonds instead. 2 basic
components of the demand for money are – the transaction of demand for money which arises
from the medium of exchange function, demand for money as an asset which arises from the
store of value function.
2 basic components of the demand for money:
2. transaction demand – for money which arises from the medium of exchange function.
3. Demand for money as an asset – which arises from the store of value function.
Reasons for holding money are.
1. Transaction motive – all participants in a money economy hold money as a medium of
exchange. Transactions demand for money is therefore a function of national income.
2. precautionary motive (for unforeseen expenditure).
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