, Chapter 1: The circular flow, national accounts, and the multiplier:
GNP: (gross national product) the total value of the final goods and services produced by the
permanent citizens of a country in a specific period, usually one year.
GDP: (gross domestic product) the total value of all final goods and services produced within
the borders of a country in a specific period, usually one year.
Other definitions:
o A model: is a simplified representation of reality. Eg: an illustration, diagram etc
o A closed economy: is an economy without participation from abroad therefore, no
imports or exports.
o An open economy: is an economy that includes participation from abroad –
therefore it has imports and exports.
The circular flow:
Monetary flow: is the flow of money and or capital
Real flow: is the flow of goods and services, production factors and services
The financial sector is the enabler between all the participants in the economy, eg:
banks, insurance companies, JSE, reserve bank etc
o Capital market is for long term loans, eg) mortgage, shares, bonds
o The money market is for short term loans, eg) debentures, treasury bills
The 4-sector circular flow model: (5 if the financial sector is included)
1. Households
2. Firms(businesses)
3. Governments
4. Foreign sector
5. (Financial sector)
Leakages and injections:
Leakage (L): is money that flows out of the system, e.g.) savings, taxes and imports
Injection (J): is when money flows into the system, e.g.) Investment, government
spending and exports
If leakages = injections, the economy will be in equilibrium
If leakages are more than injections, economic growth will slow down
If leakages are less than injections, economic growth will increase
GDP Calculations:
1. Production method:
i. Production takes place in the primary, secondary and tertiary sectors
of the economy
ii. We calculate only the value added by each sector
Formula: Primary + Secondary + Tertiary + Taxes on goods - Subsidies on goods =
GDP at market prices
2. Income method:
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