Page 1 of 106
Table of ContentsTable of
Contents....................................................................................................................1
:TO MAKE :SHORTENED NOTES OF TO STUDY LATER AFTER EXAM FOR
FUTURE:& magazines/journals for economics-& questions for
lecturers still to ask................................5 Questions
&
answers:.......................................................................................................5
Shortened notes to
make:................................................................................................5
All Multipliers and index ratios:and Marginal propensty's to
Consume................................6 Chapter
1:.........................................................................................................................6
Chapter
6..........................................................................................................................6
Chapter
7..........................................................................................................................6
All
Formulas:........................................................................................................................6
Chapter
1:.........................................................................................................................6
Chapter
18:.......................................................................................................................6
Chapter
19:.......................................................................................................................6
IMPORTANT NOTES from LAST
SEMESTER..........................................................................9
CHAPTER 1
...........................................................................................................................10
: INTERDEPENDANCE OF MAJOR SECTORS, MARKETS AND FLOWS IN THE
ECONOMY..........10 Important
Boxes/concepts/graphs/pages:.........................................................................10
box 3.1 p48t Stocks and
Flows.........................................................................................11
3.1 p46 THE 3 MAJOR FLOWS IN THE ECONOMY: Production ,Income and
Spending........11 3.2 p47 The Interdependance between Households
and Firms.........................................12 TYPES OF
FIRMS:P50
BOX...............................................................................................13
Market
Types;.................................................................................................................14
The Circular flow of Goods and Services Diagram.(NOT
SPENDING+INCOME)...............14 The Circular flow of Income and
Spending.(NOT GOODS & SERVICES).........................15
Abbreviations of major
Terms:.......................................................................................15
3.3 pg 52 Introducing the
Government:............................................................................16
3.4 Introducing the Foreign
Sector....................................................................................17
Financial Institutions in the circular flow of income
andspending.3.5t..............................18 Total
Production,Income,Spending-Revisited....................................................................19
Abbreviations of major
Terms:.......................................................................................19
CHAPTER 2
...........................................................................................................................20
: MEASURING THE PERFORMANCE OF THE
ECONOMY..........................................................20
Important
Boxes/concepts/graphs/pages:.........................................................................20
1 . Macroeconomic
Objectives-2.1p9s,p61t.......................................................................21
5 Macroeconomic Objectives used to Judge the Performance of the
EcoEnomy............21 #1 Macroeconomic Objective :Econ.Growth :
GDP-Gross Domestic Product-Measuring the Level of Economic
Activity.4.2t,p63...................................................................................22
Aspects on the definition of
GDP....................................................................................22
About
GDP:.....................................................................................................................22
The 3 Methods of Calculating
GDP:...............................................................................23
Difference between the 3 Methods of calculating
GDP..................................................23 Measurement
at Market Prices,Basic Prices and Factor Cost(or
Income).......................24 GDP at Current prices & GDP at
Constant
Prices:...........................................................25
Other Measures of Production ,Income and
Expenditure...............................................25 GNI
(or GNP)- Gross National Income
............................................................................25
Expenditure on
GDP.......................................................................................................26ECS102-8
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GDE: Gross Domestic
Expenditure.................................................................................26
SUMMARY of national accounting
totals.........................................................................26
#2 MACROECONOMIC OBJECTIVE : Full Employment :Measuring Employment
and
Unemployment..................................................................................................................27
#3MACROECONOMIC OBJECTIVE:STABLE PRICES:Measuring Prices,the
Consumer Price
Index..................................................................................................................................27
The Consumer Price Index.
............................................................................................27
#4 MACROECONOMIC OBJECTIVE: Balance of
Payments...................................................28 #4
MACROECONOMIC OBJECTIVE:Equality in Distribution of Income: 3
Methods of Measuring Inequality.
.......................................................................................................29
Method #1 of 3 : Lorenz
Curve.......................................................................................29
#2Gini Coefficient:(or
RATIO).........................................................................................29
#3Quantile
Ratio............................................................................................................30
Extra
Notes:....................................................................................................................30
CHAPTER 3
...........................................................................................................................31
: THE MONETARY SECTOR.(MACROECONOMICS)ch
ch15t,pg353.........................................31 Important
Boxes/concepts/graphs/pages:.......................................................................31
INTRODUCTION:.................................................................................................................32
The Functions of
Money:....................................................................................................32
1-Money as a meduium of
exchange:.............................................................................32
2- Money as a unit of
account:......................................................................................32
3-Money as a Store of
Value:..........................................................................................32
4-What Money is
Not:.....................................................................................................32
Different Kinds of
Money...................................................................................................33
Money in
RSA.....................................................................................................................33
TERM 1-Coventional
measure:M1...................................................................................33
TERM
2-M2......................................................................................................................33
TERM
3-M3......................................................................................................................33
Financial
Intermediaries....................................................................................................34
THE SOUTH AFRICAN RESERVE
BANK................................................................................34
Issuing banknotes and
coins...........................................................................................35
Acting as banker for other
banks....................................................................................35
Acting as banker for the
government.............................................................................35
Acting as custodian of countries gold and other foreign
reserves..................................35 formulating and
implementing monetary
policy............................................................35
The Supply of
Money.........................................................................................................35
Banks: in the money creation process.(role in
supply)..................................................35
2-Reserve Asset position and Credit
Multiplier:..............................................................36
3-Other Factors in Supply of
Money...............................................................................36
EXTRA BOX:Bonds,the Bond market and
Capital...............................................................36
The Demand for
Money....................................................................................................37
Interest
Rates:................................................................................................................38
Equilibrium in the Money
Market.......................................................................................38
Simulaneous control over the supply of money andthe Interest
Rate-Authority Controlling Supply
.........................................................................................................39
The Instruments of Monetary
Policy..................................................................................39
1-Accomodation
policy...................................................................................................39
Open market
policy........................................................................................................40
Public Debt
management...............................................................................................40
Intervention in foreign exchange
markets......................................................................40
CHAPTER 4
...........................................................................................................................41ECS102-8
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: THE PUBLIC
SECTOR.(MACROECONOMICS)........................................................................41
Important
Boxes/concepts/graphs/pages:........................................................................42
1-Role of Government in the Economy : An Overview:
16.1p384......................................43 -2-Fiscal Policy
and the
Budget..........................................................................................43
-3-Government
Spending-16.8p401..................................................................................44
-4-Financing of Government Spending
16.9,p403.............................................................44
-5-Taxation
16.10..............................................................................................................45
-1-Criteria for a good
tax:...............................................................................................45
-2-Different Types of
Tax:...............................................................................................45
-6-Taxation in
RSA.............................................................................................................45
-7-Tax Incidence-ie: Who really Pays the
Taxes?...............................................................46
The Impact of a Specific Excise
Tax:..............................................................................46
CHAPTER 5
...........................................................................................................................47
: THE FOREIGN
SECTOR.(MACROECONOMICS)......................................................................47
Important
Boxes/concepts/graphs/pages:........................................................................48
-1-WHY Countries
Trade:...................................................................................................49
Intra industry
trade:.......................................................................................................50
-2-Trade
Policy...................................................................................................................50
TYPES OF GOVERNMENT CONTROLS FOR Int
.Trade.....................................................50
-2-Arguments for the use of Trade
Barriers:...................................................................52
Arguments against Trade
barriers..................................................................................53
Trade Policy in
RSA.........................................................................................................53
Gold in the Internationqal monetary
system;.................................................................53
The GATT,The Uruguay round and WTO-world trade
organisation.................................53 The Balance of
Payments..................................................................................................53
The Balance of Payments and Economic activity and Policy in RSA.
.............................54 Gold and other Foreign
Reserves:..................................................................................54
The Int.M.Fund.+World
Bank..........................................................................................54
Exchange Rates:
...............................................................................................................54
The foreign exchange
market:.......................................................................................55
REASONS FOR THE DEMAND FOR
DOLLARS:..................................................................55
REASONS FOR THE SUPPLY FOR
DOLLARS:...................................................................55
THE EQUILIBRIUM EXCHANGE
RATE:..............................................................................55
Intervention in the Foreign Exchange
Market:................................................................56
Exchange Rate
Policy.....................................................................................................57
The Terms of
Trade:..........................................................................................................57
CHAPTER 6
...........................................................................................................................59
: INCOME DETERMINATION IN A SIMPLE KEYNESIAN MACROECONOMIC
MODEL(MACROECONOMICS).................................................................................................59
Important
Boxes/concepts/graphs/pages:........................................................................60
-1- Production Income and
Spending:................................................................................60
The Basic Assumptions of the
Model:................................................................................61
Consumption
Spending:-----------------------------------.............................................................61
The Consumption
Function.............................................................................................61
The position of the consumption function
....................................................................63
The Equation for Consumption
Function.........................................................................63
SAVING;..........................................................................................................................63
Investment
Spending:........................................................................................................63
The Investment
Decision:...............................................................................................64
Equation for Investment
Function:.................................................................................65ECS102-8
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The Simple Keynesian Model of a Closed Economy without
Gov.......................................65 Total Spending or
(Aggregate
Demand.)........................................................................65
The 45 0
Line..................................................................................................................66
The Equilibrium level of
Income:....................................................................................67
The Algebraic Version of the simple Keynesian
Model:..................................................68
-7-Impact of a Change in Investment Spending:The
Multiplier..........................................69 -1-What the
multiplier
means:........................................................................................69
-2-How it can be calculated from the
formula................................................................70
-3-Why it's size depends on the marginal propensity to
consume.................................70 -4-How it can be
represented
graphically.......................................................................70
CHAPTER 7
...........................................................................................................................72
:KEYNESIAN MACROECONOMIC MODELS INCLUDING THE GOVERNMENT and THE
FOREIGN
SECTOR.................................................................................................................................72
1-Introduction:...................................................................................................................73
2-Introducing The Government into our
Model:.................................................................73
1-Government
Spending:(G)...........................................................................................74
2-Taxes(T)......................................................................................................................76
Fiscal
Policy:...................................................................................................................78
2 -Introducing The foreign Sector into the Model:The Open
Economy..............................78
Introduction:...................................................................................................................78
Fiscal Policy inthe Open
Economy:.................................................................................80
CHAPTER 8
...........................................................................................................................81
: MORE ON MACROECONOMIC THEORY AND
POLICY............................................................81
The Aggregate Demand Aggregate Supply Model
8.1sp511t............................................82 The
Aggregate Demand
Curve.......................................................................................83
Changes in Aggregate
Demand:.....................................................................................84
The Aggregate Supply
Curve..........................................................................................85
The Slope of the Aggregate Supply
Curve:.....................................................................85
Changes in Aggregate
Supply........................................................................................86
The Monetary Transmission
Mechanism............................................................................87
Links between Interest Rates , Investment Spending and Rest of
Economy .................87
..........................................................................................................................................88
Monetary and Fiscal Policy in the AdAs
Framework...........................................................88
Expansionary and Contractionary Monetary and Fiscal
policy.......................................88 Monetary and Fiscal
Policy
lags......................................................................................88
The relative effectiveness of monetary and fiscal
policies:............................................89 CHAPTER 9
...........................................................................................................................90
:
INFLATION:..........................................................................................................................90
Introduction.......................................................................................................................90
Definition of
Inflation:........................................................................................................91
The Measurement of
Inflation:...........................................................................................91
The Consumer Price Index.
............................................................................................91
The Effects of
Inflation:......................................................................................................92
Hyperinflation-the Greatest Cost of
Inflation..................................................................93
The Causes of
Inflation:.....................................................................................................93
Demand- Pull and Cost-Push
inflation.............................................................................93
CHAPTER 10
.........................................................................................................................97
:
UNEMPLOYMENT:................................................................................................................97
Unemployment:....................................................................................................................98ECS102-8
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The Employment
Pool:.......................................................................................................98
Measuring
Unemployment.................................................................................................98
The Costs of
Unemployment:.............................................................................................98
Types of
Unemployment:...................................................................................................99
Policies to Reduce
Unemployment....................................................................................99
Unemployment in the Keynesian & AD-AS
Models..........................................................100
CHAPTER 11
.......................................................................................................................102
: Economic
Growth:.............................................................................................................102
Introduction:.......................................................................................................................102
Definition and Measurement of Economic
Growth..............................................................103
Some problems associated with GDP as measure of economic
growth:......................103 Calculating Economic
Growth:......................................................................................103
The Business
cycle:......................................................................................................104
Sources of Economic
Growth:.............................................................................................104
Supply
Factors:.............................................................................................................104
Demand
Factors:..........................................................................................................105
-----------------------------------------------------------------------------------------------------------------------------
:TO MAKE :SHORTENED NOTES OF TO STUDY LATER AFTER EXAM FOR
FUTURE:& magazines/journals for economics-& questions for
lecturers still to ask.Questions & answers:1. Answer to which
journals/magazines-Journals+ magazines: 'SEE'-"studies in economics
and econometrics"(international journal),+ also "Journal of
economics for RSA,financial mail + business day+ gauteng business
etc. 2. still to ask-":whwere do you get the actual elasticity
indexes, the investment multiplier from marginal propensity to
consume in keynes theory,also the graphics for demand& supply
curves with real info-also all other graphs with real info etc? 3.
why do they call income from natural resources rent- where it
should be profit from mines, forrests,fisheries etc., and how to
calculate gdp using 'interest 'and 'rent' profit & wages one
can understand- arnet there going to be other income fro FOP here
somewhere( alot of it missed somewhere maybe?)
Shortened notes to make:1. 2. 3. 4. 5. ECONOMIES OF SCALE &
SCOPE PAGE 56 OF NOTES-CH 6 SEE under consumption spending points
2&3 non-income determinants of consumption pg 466 t marginal
production/maximum profit curves:of the production curves-profit
ratios etc: semester 1
ECS102-8 economics Part2 Yr1
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All Multipliers and index ratios:and Marginal propensty's to
ConsumeChapter 1: Chapter 61) #@#=1/1-c Government : Multiplier for
Keynesian macroeconomic model without foreign sector or
Chapter 71) The old marginal propensity to consume is c with
taxes included.The slope of this curve is c(1-t) which is allways
smaller than c. 2) The new marginal propensity to consume is c(1-t)
with taxes included.The slope of this curve is c(1-t) which is
allways smaller than c. 3) The Multiplier without Taxes= #@#= 1/1-c
4) Multiplier with Taxes = #@#=1/1-c(1-t)
All Formulas:Chapter 1: Chapter 18:1)
Chapter 19: GOVERNMENT SPENDING1) Equilibrium position of
Tot.Income-Production/Tot.Spending-Demand : Y0=Abar :Income
equilibrium =Tot. Autonomous Spending 2) Consumption Function:
c=C/Y : 3) Equilibrium Income=Y0 4) To calc: EQUILIBRIUM level we
start with 5) Equilibrium condition : Y=A(where eqilibrium is) 6)
so :Y=C+I+G because (A=C+Ibar+Gbar) 7) and C=Cbar +cY) 8) So:
Y=(Cbar+cY)+I+G 9) Thus:to solve above equation: 10)
Y-cY=Cbar+Ibar+Gbar 11) so: Y(1-c)=Cbar+Ibar+Gbar 12) THUS:
Y0=1/1-c(Cbar+Ibar +Gbar) : (19.4) 13) General formula can still be
written: Y0=#@# (Abar) :(19.5) 14) Y=A(the equilibrium 45 deg
line)******** 15) so :Y=C+I+G because
(A=C+Ibar+Gbar)*********ECS102-8 economics Part2 Yr1 Page 6
Page 7 of 106
16) and :C=Cbar +cY (consumption curve equation)******* 17) So:
Y=(Cbar+cY)+I+G 18) Where Y0 is equilibrium of A and Y 19)
.Where:#@#=multiplier , Abar = total autonomous spending
TAX1) Tax Rate: T=tY 2) Specific exercise:If the Gov. wishes to
close the gap between full employment (=Yf as an example) and lower
levels by incresing spending they must work pout how much with
above formula.=^Y=@^G :so:^G=^Y/@. where multiplier will increase
%income morethan %spending
Exports&Imports1) 2) 1) 2) 3) 4) 5)
The Formula for Imports/Exports is: A = C+I+G+(X Z). term Net
Exports usually referred to as =(X-Z) from A = C + I to A = C + I +
G.+(X-Z) Y=A (equil. condition) A=C+ Ibar+Gbar +(Xbar-Zbar)
(aggregate spending where I,G,X,Z, are autonomous) C=Cbar +c(1-t)Y
(consumption function) SUBSTITUTING: a) Y=A b) Y=C+Ibar
+Gbar+(Xbar-Zbar) c) Y=(Cbar +cYd)+Ibar+Gbar+(Xbar-Zbar) d) Y=(Cbar
+c(1-t)Y))+Ibar+Gbar+(Xbar-Zbar) e) Y-c(1-t)Y=(Cbar
+Ibar+Gbar+(Xbar-Zbar)) f) Y=(1-c(1-t)) *(Cbar +Ibar
+Gbar+(Xbar-Zbar)) g) Y0=1 /1-c(1-t)
*****(Cbar+Ibar+Gbar+(Xbar-Zbar))
ECS102-8 economics Part2 Yr1
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ECS102-8 economics Part2 Yr1
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IMPORTANT NOTES from LAST SEMESTER( +extra notes from class this
semester=) Bull market-buying bonds bear market-selling bonds at
lesser price with hope of buying them back at an lesser price.
demand deposit =sight deposit repo rate replaced the financial rand
Passive way of money supply=you deposit +withdrawing Active way
of-bank relends see multiplier. 1. -The 4 Factors of Production
+sometimes 5th identified =technology and their respective INCOMES
1.1. Natural resources or land=RENT 1.2. Entrepeneurship =Profit
1.3. Capital =Interest 1.4. Labour =wages/salaries 2. Law of demand
+Supply=higher price/more supplied/less demanded cet par. 3.
ECS102-8 economics Part2 Yr1
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ECONOMICS part 2 Yr1ECS102-8CHAPTER 1 : INTERDEPENDANCE OF MAJOR
SECTORS, MARKETS AND FLOWS IN THE ECONOMY.Important
Boxes/concepts/graphs/pages:1. 2. 3. 4. 5.
Pg47-Produc/income/spending flows diagram Pg52-circular flow
of-1-goods/services diagram/-2-income /spending pg 57/58-circu;lar
flow of goods +services with Government+Foreign+Financial sector.
BOX3.1 pg48-Stocks&Flows BOX3.2 pg50-Different types of
firms
ECS102-8 economics Part2 Yr1
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box 3.1 p48t Stocks and Flows1. Whether economic variables
either a STOCK or FLOW variable-important to allways consider when
considering any economic variable-some variables not either of
though. 2. a. A STOCK:Has no Time dimension: at a moment. can only
be measured at a moment,no time period,-still picture of economy:eg
water in a dam "the level of"-. b. A FLOW: Has a time
dimension,over a period of time the period concerned must allways
be specified. eg:water flowing out of a dam-"flowing in/out"3.
RELATIONSHIP? between stocks and flows.:Stocks can only change as a
result of flows. eg : Investment flow change capital stock.
Population stock changes from birth/death flow. 4. There are other
variables other than stocks and flows. 5. Prices are ratios between
different flows(not stocks). 6. RATIO between two stocks or two
flows have no time dimension. 7. RATIO between a stock and a flow
or vis.versa do HAVE a time dimension 8. Failureto distinguish
between stocks and flows can have faulty reasoning and analysis
consequenses. 9.STOCKS 1-wealth 2-assets 3-liabilities 4-capital
5-population 6-balance in savings account 7-unemployment 8-gold
reserves held by RSA reserve bank 10-stock inventory 'increasing
wealth' 'paying for assets' (??not direct??) direct direct direct
direct direct direct FLOWS over period:income over period:profit
over period:loss over period:investment over period:no.of births
/deaths over period:Saving(differencespend/earn) over period:demand
for labour over period:gold sales /gold production production
3.1 p46 THE 3 MAJOR FLOWS IN THE ECONOMY: Production ,Income and
Spending.-IN ECONOMICS EVERYTHING IS RELATED TO EVERYTHING ELSE
,OFTEN IN MORE THAN ONE WAY. ( the basis of this
chapter)quote:anonymous. IN MIXED ECONOMY: FOR THE DIAGRAM: "The 3
Major Flows in the Economy" -Production generates- Income(from
various FOP only) generates (used to(partly) spend on)-
Spending-Buys/pays for Production
ECS102-8 economics Part2 Yr1
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gg gg
Producti on
Spendi ng
Income
1. 2. 3. 4. 5.
In the mixed economy. Production ,income and spending are flows.
Productions aim is to use/consume raw or other products to satisfy
human wants. the sole aim and purpose of production is
consumption-adam smith.Production creates income earned in
production process by the various factors of
production.ie:distribution of income. 6. Total spending in economy
is the total spending of 4 major(or 5) major participants in
economy. 7. VARIOUS sectors of economy: 4+1=5 major types : 7.1.
Households,Firms,Government,Foreign sector, + is 5th (if include to
5)Financial sector: all participate in the sequence of production
/income /spending and all also contribute to each of the major
flows of economy:(incl.towards production) 8. The other important
economic activity that links the various sectors of economy is :
Exchange (apart fromnot incl. production/income/ spending ,exchange
is another link between ie relations in economic/between the
economic sectors. 8.1. usually occours in markets 8.2. The
fundamental markets in the economy are: 8.2.1. Goods and services
market 8.2.2. Factors of production market.(fop market)labour/raw
materials/entrepeneurial/capital. 9. The ultimate aim of production
is to satisfy human wants and needs.(byusing/cosume raw materials
or other products) 10. Income is actually the remuneration/reward
for application of the factors of production.
3.2 p47 The Interdependance between Households and Firms.1. 2
Major sectors of economy are :Households and Firms, of: 2. 5 Major
Sectors of economy2.1. households 2.2. firms 2.3. government 2.4.
foreign sector 2.5. financial sector HOUSEHOLDS 1. Households:all
the individuals who live together and make joint economic
decisions,or others make for
them./individuals,consumers/interchangably used terms. 1.1. joint
income+1.2. primitive times no Gov,foreign sector,firms etc 1.3.
members are consumers-consumption 1.4. Are the basic units in an
economic system
ECS102-8 economics Part2 Yr1
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1.5. Own the FOP and sell these factors to Firms,receive income
and buy consumer goods +services,consumed to satisfy human
wants/needs. 2. In mixed economy-Households own most FOP/own
labour/own capital goods/eg;anglo american-owned by shareholders.
CONSUMERS: 3. Total consumption Expenditure(or aggregate C.E)=total
consumption /spending in economy(on consumer goods and services by
households). 3.1. Symbol="C" 4. In market economy consumers
determine what should be produced. 5. In economic analysis we
assume consumers are rational-Max satisfaction for means at their
disposal. 6. FOP cannot satisfy human wants directly-thus sell to
firms to convert.-Income from fop flows from. FIRMS 1. Definition
of firms:The unit that employs FOP to produce goods and services
that are sold in the goods market. 2. Characteristics of firms:
2.1. basic productive unit in the economy 2.2. are actually
artificial units 2.3. ultimately owned /operated by
individuals/households-eg shareholders 2.4. Assumption is that
rational-aim to max profit. 2.5. Profit=total revenue-explicit cost
2.6. "I"=capital formation or investment. (in capital goods) 2.7.
purchase fop on the 'factor markets' 2.8. Decide what+/how+/+to
whom distribute from 3-central questions in economics.
TYPES OF FIRMS:P50 BOX Individual /Sole proprietorship1.1. 1.2.
1.3. 1.4. All decisions +ownership vested in single person Main
weakness unlimited liability-owner responsible all
debts+liabitities of firm. Relatively easy to form /dissolve Suited
activities require personal supervision,where: scale of
operations,and financing requirements not large. 1.5. Has no
separate existence from owner-assets of firm are assets of owner.
1.6. Limited liability to raise funds for expansion 1.7. eg :
shops,hairdressers,farms,plumbing services. 1.8. Suited to all
activities needing specialised abilities-benefit from
specialisation. 1.9. Differs little from sole proprietorship.
1.10.Action of partners binding on other partners including
unlimited liability. 1.11.Partners are joint owners of firm.
1.12.Exept for a bit better financing possibilities ,same liability
+other of sole proprietorship. 1.13.eg:attorneys
,accountants,doctors,etc.
Partnerships:
Companies1.14.Identity in eyes of law separate from owner.
1.15.Least risky form because liability usually limited to value of
shares owned. 1.16.Attract better financing through eg: shares
,bonds,bank credit. 1.17.Separation of owner /mangement can create
problems. 1.18.Specialists can be employed to manage firm.ECS102-8
economics Part2 Yr1 Page 13
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1.19.Can be sometimes abused by unscrupulous people.
1.20.Significant red tape to establish. 1.20.1. TWO TYPES: PRIVATE
company: a. Max 50 members b. Right to transfer shares restricted
c. Only must have 1 member d. (Pty)Ltd in RSA:Proprietry limited.
e. eg:Alusaf (Pty Ltd),Clicks stores(Pty Ltd),Johnson tiles(Pty
Ltd) 1.20.2. PUBLIC company. a. Not fewer than 50 shareholders b.
Any max shareholders c. Company that wishes to raise finance
through the issuing of shares thus shares easily transferable. d.
Shares easily transferable e. Many listed on JSE f. eg:Anglo
american,Remgro,Old Mutual,Sappi 1.21.many foreign owned or
multinational companies operate in RSA
eg:siemens,microsoft,shell,ibm.
Close Corporations.1.22.Since 1985 RSA new type. 1.23.Display cc
after name ,must by law. 1.24.Easier to establish than private or
public companies. 1.25.max 10 min 1 members. 1.26.Each member "%
Specified interest in close corporation." 1.27.Can only dispose of
interest with permission of other members. 1.28.Created to afford
advantages of companies without having to register as a fully
fledged company under the companies act. 1.29.By 1990 more CC's
than companies in RSA 1.30.Co-operatives(eg agriculture)
1.31.Trusts 1.32.Public enterprise (Gov.eg eskom,sabc)
1.33.Informal sector:spaza,hawker,shebeen,subsistence farmers.
Other forms of Business enterprise :
Market Types; Goods Market. Factors market1.1. market for goods
and services-consumers mostly buy. 1.2. all factors of production
markets 1.3. production /producers/firms mostly buy. 1.4. include
labour market+capital goods market. Aggregation:lump all different
markets into one heading,ie:in macro economics.
The Circular flow of Goods and Services Diagram.(NOT
SPENDING+INCOME)1. Diagram which illustrates the interaction
between markets and firms. 2. Households offer FOP for sale on
factor market 3. Firms buy FOP on factor market and combine FOP and
offer for sale on Goods market.ECS102-8 economics Part2 Yr1 Page
14
Page 15 of 106
4. Consumers /Households purchase Goods on Goods market.
FIRMS
FACTOR MARKETSA LE O FO P FF : ER FO
R
HOUSEHOLDS
G O SE A OD R N S (S VI D O C TO LD ES )
The Circular flow of Income and Spending.(NOT GOODS &
SERVICES)1. It's direction is OPPOSITE to Goods and Service flow.
2. Usually a MONETARY flow. 3. INCOME types from FACTORS OF
PRODUCTION: 3.1. Labour =Wages and Salaries 3.2. Natural
resources=Rent 3.3. Capital =Interest 3.4. Entrepeneur =Profit 3.5.
Profit from fop also to households income,also
rent,+interest+wages. HEN SP
FIRMS
FACTOR MARKETIN W CO AG M PR O ES E FI / T
GOODS MARKET
Abbreviations of major Terms:I=Investment in capital
goods(machines,bridges,robots etc). C=Households spending on
consumer goods and services. G=Government spending on goods and
services. E=foreign spending on RSA goods and services.ECS102-8
economics Part2 Yr1 Page 15
Sp en di ng
HOUSEHOLD S
S Pr ER G od VI O uc CE OD O N e/ S S : c A om : N D bi ne FO .
P
FO : P
U BO HT G
to
SE LL
GOODS MARKET
I NC OM
E
G
IN D
Page 16 of 106
Z=RSA spending on foreign goods and services. S = Saving S=
Total Expediture= Total Expenditure on SA Goods&Services=(less
imports) ANSWERS FROM LECTURER: 1. "G" represends both spending by
the government and income received by those who are selling the
goods. 2. Likewise, "C" represends both like you put it.(.spending
flow or goods flow or income origin flow for sellers) 3. For
Investment (I) It is the same as above.(spending flow or goods flow
or income origin flow for sellers of capilal goods) 4. It is once
again the same,(for both,"T" for People Spending tax or Government
receiving tax or both ) 5. They are for both."E" and "Z" are for
'spending' and 'goods flowing"
3.3 pg 52 Introducing the Government:
Central gov. all gov. depts also CSIR,SABS, universties
general government: incl.provincial gov.=9 provinces admin+local
gov=muncipalities+district councils
Public sector= pubic corporations-eskom,transnet,sabc,rand
water,post office,armscor, (can be regarded as firms for purposes
of our flow diagrams) +all of other government parts=ALL OF
1. Government :includes local,regional or provincial,+national
gov.////Incl:polititians ,civil servants,muncipal,mayors,etc, also
public corporations eg:Escom/Transnet/SA Reserve Bank. 2. Gov.
employees are only Gov. in official capacities,privately they are
households. 3. Public Sector :in economics refer to public sector-
means government +everything owned by, as representative of the
people. 4. Government is not assumed to ,DOES NOT ACT
RATIONALY,like firms,1-political party strategies vary and -2-
individual politicians can be biased by personal factors(eg
reelection-short term benefit bias) 5. Primary function of
government in economy-establish framework within which economy
operates. 6. Secondary functions of Gov.:INVOLVES 3 important
FLOWS: a. "G" =government spending on Goods and services
&Factors of production(mostly labour).ECS102-8 economics Part2
Yr1 Page 16
Page 17 of 106
b. "T' =Taxes levied on households+firms,-used to finance
services eg roads,defense. c. Transfer payments :from wealthy to
poor eg:pensions.(DOES NOT AFFECT OVERALL SIZE OF
INCOME/EXPENDITURE/PRODUCTION FLOWS-like taxes and "G" do so no
"abbreviation" given for 'economic workings outs'. 7. Gov. provides
services eg:defense,roads,dams,health services in return for Goods+
services &FOP purchased ,financed mainly by taxes. 8. Transfer
payments :Do not affect overall size of
income/expenditure/production flowslike "T"taxes and "G" do so no
"abbreviation" given for 'economic workings outs'. 9. Government
Spending on FOP and Goods +Services = injection into the flow of
spending +income 10. Taxes are a leakage/withdrawal from circular
flow of income between households + firms.
NOTE : BELOW-INCOME & SPENDING and GOODS & SERVICES(HERE
CALLED PRODUCTION)Figure 1 Government in the circular flow of
production,income +spending
(goods and services)
(goods and services)
3.4 Introducing the Foreign Sector.THE FORIEIGN SECTOR IN THE
CIRCULAR FLOW OF iNCOME AND SPENDING-NOT goods &
services!Payment for imports
(leakage)
Firmsspending and income spending and income
Foreign sectorpayments for exports injection
Households
1. 2.
4th major sector-foreign sector-consists of rest of world
+international fin.istitutions governing flow of funds and goods
& services between countries. 2 broad categories:developing
countries+industrial countries A. industrial countries: europe
mostly-germany,italy,france,USA,AustraliaPage 17
ECS102-8 economics Part2 Yr1
Page 18 of 106
3. 4. 5. 6.
7. 8. 9. 10. 11. 12. 13. 14.
developing countries:africa/asia etc-most south american
+RSA=middle income,most poorestafrica-worst-sierra
leone,burundi,ethiopia World bank classifies its members into 4
groups(levels of income):low income,lower middleincome,upper middle
income,high income. Industrial=all high income,Developing=all re
'Open Economy'-strong links with rest of
world-exp/imp/multinationals. 'globalisation'-recent yearst
middle/lows economic links between countries grown stronger. i.
economic/or political development can result in massive flows of
funds between countries. ii. many firms tend to look at whole world
as market for their goods iii. become very easy to shift funds
between countries iv. global village where firms from different
parts of world must compete with each other. A countries economic
links with rest of world are often crucial determinants of level
and pace of economic activity in the domestic economy. "Z" =
Imports rsa mainly capital &intermediate goods "E"= Exports-rsa
mainly gold & minerals For exports the 'Spending ' originates
in rest of world.-thus constitute an 'injection' into circular flow
of income =spending in domestic economy. For imports 'spending'
originates local, constitutes leakage from circ. flow inc.+spend.
Flow of income +spending is also in opposite direction to FOP and
Goods +Services. Most important international economic
orgaisations:International Monetary Fund,World Bank,World Trade
Organisation. Rsa most important trade partners =industrial
countries=60%exports,66% imports---Africa to rsa=3% imports,18%
exports
B.
Financial Institutions in the circular flow of income
andspending.3.5tDiagram: FINANCIAL INSTITUTIONS IN THE CIRCULAR
FLOW OF INCOME AND SPENDING. (NOT goods & services
/production---NOTE NB !!!!) FIRMS jjjjjjjjjjjjjjjjjjj jsaving
Investment Spending and Income
. Spending and Income
FINANCIAL SECTORSaving
HOUSEHOLDS 1. Financial Institutions:include Banks,insurance
companies,pension funds(Iscor/Mine employees pe..)JSE securites
exchange. 2. Financial Institutions act as links between households
+firms with surplus funds and households and firms which require
funds. 3. Main function of financial sector:channel /act as funnel
for savings to flow to investment spending. 4. Units(firms/or
households) can be classified as; i. Surplus Units-those in a
position to save because spending less than incomeECS102-8
economics Part2 Yr1 Page 18
Page 19 of 106
5. 6. 7. 8. 9. 10.
ii. Deficit Units -those require funds spending more than income
"S" = Saving "S" =To Save:means decision not to consume for
households (defined as the act of not consuming)firms can also save
by not spending all their income. Saving means a leakage/withdrawal
from the circular flow of inc.+spend. Savings channeled to
financial instituions-households do save some of income-, (savings
deposits)become available to deficit units to expand production
capacity. (capital goods) called : :Investment : which is a
addition or injection into circular flow of inc.+spend. Linkage in
economics between expansion of the production capacity(investment)
and the decision to refrain from spending on consumer
goods(saving)
Total Production,Income,Spending-Revisited1. 2. 3. Aggregate
/Total producton=all prod in economy Aggregate /Total Income =
Rent-nat.resources + Interest-Capital + wages-labour +
profit-entrepeneur Aggregate/Total Spending= by 4 major sectors in
economy=1-households-2-firms-3government-4-foreigners where(if one
is trying to work out spending on (SA GOODS AND SERVICES) =
spending on {SA GOODS AND SERVICES Only}= E-Z = (spending by
foreigners on rsa (E)Exports MINUS spending by rsa consumers on
(Z)Imports Total Expenditure = C+I+G+ (X-Z) (T)Taxes and (S)Savings
and (Z)Imports represent = Leakages or Withdrawals.
4. 5.
Abbreviations of major Terms:I=Investment in capital
goods(machines,bridges,robots etc). C=Households spending on
consumer goods and services. G=Government spending on goods and
services. E=foreign spending on RSA goods and services. Z=RSA
spending on foreign goods and services. S = Saving S= Total
Expediture= Total Expenditure on SA Goods&Services=(less
imports)
THE MAJOR ELEMENTS OF THE CIRCULAR FLOW OF INCOME AND SPENDING
(Note Well NOT goods & services/production here-ONLY
income&spending!!) C,S,T,Z=LEAKAGESZ S Foreign Sector C &
Y
andFIRMS I
I,G,X=INJECTIONSG
FINANCIAL SECTOR S HOUSEHOLDS
C & Y T
Governmen t
XECS102-8 economics Part2 Yr1
Page 19
Page 20 of 106
ECONOMICS part 2 Yr1ECS102-8CHAPTER 2 : MEASURING THE
PERFORMANCE OF THE ECONOMY.Important Boxes/concepts/graphs/pages:pg
80 lorenz curve graph BOXES: changes in purchasing power:pg78 price
index construction:pg76/75
ECS102-8 economics Part2 Yr1
Page 20
Page 21 of 106
1 . Macroeconomic Objectives-2.1p9s,p61t1. Economist must judge
objectively-not own well being-1-which criteria to use? 2measure
criteria? 2. For firms we use profit as crieria,? use for
macroeconomy?
5 Macroeconomic Objectives used to Judge the Performance of the
EcoEnomyi. Economic Growth>most important one,to grow
empl.&liveStandards,econ. must grow,eg:pop.incr ii. Full
Employment >need econ.growth to fill up, iii. Price Stability
>inflation-not prices-see normalo supply&demand iv. Balance
of Payments Stability (or External Stability)>&foreign
exchange rate v. Equitable Distribution of Income. more normative
less positive,social +political threat security 3. i. Economic
Growth : a. First and arguably most important of criterion b. If
population grows economy must also grow or 1. unemployment 2.
living standards cannot increase c. requires yardstick-use
GDP-therefore GDP also central concept in national accounts.
ii.Full Employment a. Problems from unemployment: 1. personal
levelA. psycological suffering B. material suffering 2.
macroeconomic levelA. serious threat to Social and Political
Stability b. Must have economic growth to get more employment,but
you can get economic growth without extra employment: eg
technological advances cause less labour ,and more production. iii.
Price Stability a. Since WW2 and 1973 prices only riseECS102-8
economics Part2 Yr1 Page 21
Page 22 of 106
b. Price stability Refers to keeping inflation as low as
possible,not no change(refer to demand/supply problem in a market
based economy). c. Yardstick used to measure inflation
=CPI-consumer price index. iv. Balance of Payments(or External
stability) a. 2 aspects : in technical terms we say: 1. balance of
payments itself 2. Exchange rates b. South Africa must export
goods/services to earn foreign currency to pay for imports.
v.Equitable Distribution of Income(or Socially Acceptable
Dist.....) a. Partly a Normative/subjective/value judgement
issue-NOT positive. b. Assigning priority to the different
objectives.-esp. this one ,some say unequal distribution of the
above is way of causing savings +investmnet which will in turn
benefit poor. c. Highly unequal generates social + political
conflict. d. Can also have important efects on the structure and
development of economy.
#1 Macroeconomic Objective :Econ.Growth : GDP-Gross Domestic
Product-Measuring the Level of Economic Activity.4.2t,p631.
Definition: GDP (or GVA-value added)(gross domestic product) is
:The total value of all final goods and services produced within
the borders of a specific country in a particular period.
Aspects on the definition of GDP1. 3 /4 further aspects on
definitition of GDP: a. GDP means :Within boundry of
country=geographic term, MEANS: 'within border' if ever referred to
as "in economy" for GDP b. "over a period(year) :GDP is a
FLOW(measured over period)+ concerns only new goods and services
produced in relevant period:also called "Current Production"Goods
produced in a former period and sold in current period are not
included in calculation. Goods eg:Houses/cars resold again are not
included either. c. Gross-("G"DP) : GROSS in 'gross domestic
product' means :without subtracting DEPRECIATION from GDP total ,if
we subtract GDP then =NET total.
About GDP:2. GDP is a FLOW 3. We refer to gross domestic INCOME
as : "GDP" and NOT GDI if referring to it.(even though same) 4.
TERM "NDP" : Net Domestic Production :is GDP minus Depreciation of
machinary etc,it is more correct measure of economic
performance,since it adjusts gross production for the decrease in
value of capital goods. But GDP not NDP is mostly used because
depreciation is difficult to calculate. 5. TERM "Consumption of
fixed capital" is Depreciation of eg machinary.this is very
important/significant shows what proportion of total output must be
saved to maintain economys capacity(ie. :re-invested in capital
goods)in 2002 was 13% of SA GDP! 6. TERM GDP is also called
GVA-Gross Value Added. 7. Stats RSA and reserve bank calculate
this.-GDP is a central concept in their national accounts.ECS102-8
economics Part2 Yr1 Page 22
Page 23 of 106
8. GDP one most important barometers of performance of
economy,(Macro. Growth obj. most impotant 9. Prices ,not quantity
,(5 chickens +4 apples??)used to determine GDP ,and only value
added used or double counting results. 10. Term :"Current
Production" means only thatyeargoodsand services produced use
tocalculateGDP.
The 3 Methods of Calculating GDP:gg ggProducti on
Spendi ng
Income
BY:The Production or Income or Spending method. i. THE
PRODUCTION METHOD:(or VALUE ADDED METHOD) Value method - Add value
added part of all prices -not quantities sold- of all
goods&services. VALUE OF SALES VALUE ADDED VALUE intermediate
goods Farmer 10000 10000 -(assuming) Miller 12500 2500 10 000 Baker
18000 5500 12 500 Shopkeeper 21000 3000 18 000 TOTA 61500 21000 40
500` L ii. EXPENDITURE METHOD(FINAL GOODS and SERVICES method) a.
Only Final goods added,not Intermediatry goods or you get double
counting ie:ultimate useeg:flour for consumer is final good ,but
flour for baker is'nt. b. If flour of baker not sold in period it
gets counted as "inventories",in national accounts iii. INCOME
METHOD(incomes of the factors of production) a. Income earned
=Gross income,not net income.Rent,salaries not subtracted. b.
Income is earned by producing- that is adding value to goods and
services,thus income for whole economy can only be increased if
'production' increases. c. Refers to income from 4 Factors of
Production:-ONLY1. RENT 2. INTEREST 3. SALARIES 4. PROFIT
Difference between the 3 Methods of calculating GDP1. National
Accounts use all 3 methods to calculate GDP and these must balance
like normal accounts. 2. The 3 methods essentially measure the same
thing but at different points in the circular flow of
Production/Income /Spending. 3. Reward from FOP-Income /=Spending
(used to purchase) /= ProductionECS102-8 economics Part2 Yr1 Page
23
Page 24 of 106
4. Income from FOP = Rent(Land NR) , Interest(Capital) ,
Profit(Entrepeneurship) , Salaries(labour) Income from FOP = Total
Value of Production in Economy. 5. remember that Primaryinputs are=
FOP and secondary inputs are eg flour for baker etc. 6. SEE TABLE
ABOVE IN :Income type : for next workings out as well.: 7. If
:Baker uses : PRIMARY INPUTS: SECONDARY INPUTS from farmer Wages
and Salaries 2500 Intermediate goods& 12 500 services Rentals
1000 Interest 500 Profit 1500 He sells for 18 000 He buys flour for
12500 FINAL GOODS TOTAL 18000 :cost=18000 If the same is applied
for all those before him:miller/farmer (the 12500 he spent on flour
also gets . subdivided like this),then we see that total income
from FOP=value final goods were sold for. 8. Thus :Value of TOTAL
SALES = Total Primary income + Value of intermediate goods and
services. or :Total sales intermediate goods etc. =total primary
income(FOP) 9. Since value of total sales in this sequence= value
of "Final goods and services" (all "Intermediate g&s"
automaticly included). :THEN value of final goods and services
=Total income 10. Therefore OUTPUT expressed in monetary terms
should = total primary income derived from it. 11.
Income=Spending(expenditure 'final goods only')=Production
METHODS.
Measurement at Market Prices,Basic Prices and Factor Cost(or
Income)1. The 3 methods of measuring GDP will only yield equal
results if used with same set of prices.
2. 3 SETS of PRICES that can be used to calculate GDP = PRICES
TYPE USED USED FOR CALCULATING : CALC. FROM SUBTRACT a. Market
Prices Expenditure method(Final Final goods Subsidies & LESS
this = goods ) Indirect Basic Prices Tax&Subs./Unit good or
service.(TxTaxes on Vat,imp+ exp.) (Subsidyproducts
exports/Domestic for bread ) b. Basic Prices Production Val. added
OTHER taxes LESS this = method(val.add) & subsidies Factor
Prices Other Tax&Subs NOT /Unit on products
goods/serviceeg:Tax-payroll,land tx,buldings,licence firm.
:Subsidies-on employment or payroll
c.
Factor Cost Income method(factor cost)
Factor cost fop
+"Other"=ba s
3. Therefore different valuations of GDP yield different results
,so one should always check prices used.ECS102-8 economics Part2
Yr1 Page 24
Page 25 of 106
4. Different prices are only from different types of taxes and
subsidies on goods and services. 5. TERM: 'Indirect' taxes = taxes
on products eg VAT 6. Taxes And Subsidies fall into 2 categories at
national accountants a. TERM Taxes and Subsidies on Products i.
Taxes on products =tax payable /unit :VAT & Duties on Imports
& Taxes on Exports ii. Subsidies on products=subsidies linked
to goods/service=per unit to encourage export & domestic
product subsidy eg:bread below cost b. TERM OTHER Taxes and
Subsidies (NOT per unit goods or service) i. OTHER taxes =NOT /unit
goods&service eg:payroll,land,buildings,business licence. ii.
OTHER subsidies=NOT /unit goods&service eg:employment or
payroll. 7. GDP @market prices Taxes& subsidies on
products=GDP@ basic prices 8. GDP @basic prices OTHER Taxes&
subsidies on products=GDP@ factor cost/FOP /Factor Income 9. GDP
@factor cost(FOP)(income) + OTHER Taxes& subsidies on
products=GDP@ basic prices
GDP at Current prices & GDP at Constant Prices:1. TERM GDP
at Current prices = Nominal GDP:expressed at current years price
levels/not converted 2. TERM GDP at Constant prices = Real GDP :use
a BASE years prices,convert others to that years : inflation eg1995
3. TERM Nominal GDP-gdp at current prices 4. TERM Real GDP-GDP at
constant prices 5. TERM Nominal value-also called :'Monetary value'
means in "terms of the name" ie at face value , 5000 = 5000 or
less/more 6. TERM Real value-means actual or essential,refers to
purchasing power ,what? money can buy. 7. Inflation :causes
monetary values of goods/pricesto change per year-thus cannot
compare different years GDP's 8. In world of inflation,All
values,not just GDP,must be expressed in nominal and real terms
tocompare 9. TERM Purchasing power-what a certain amount of money
can buy.To calculate:The % of the first/base years price over the %
of currrent years price .(how much this years go in last
years=?70%)EG: 2000=100%=base year,this year 2003 = 115% of
that:answer =100%/divided by 115%= 0.87: so to work out a answer
you say 0.87 * 5 baskets in 2000 will give purchasing power of 4.35
baskets at current years prices. 10.TERM Base year:year used as
guideline for coverting other years prices to, to find Real
value/Constant Prices
Other Measures of Production ,Income and Expenditure. GNI (or
GNP)- Gross National Income1. TERM GNI=Gross National Income= :(IS
NOT GDI,but GNI) derived by: a. SUBTRACT from GDP: all FOP-income
earned in borders of SA by FOREIGN NATIONALS. b. ADD to GDP :all
FOP-income earned outside borders of SA by RSA NATIONALS. i.
include in FOP-Interest from money lenders,dividends(profit) etc.
2. TERM GNP=Gross National Product=same as GNIECS102-8 economics
Part2 Yr1 Page 25
Page 26 of 106
3. TERM:Primary Income Payments&Receipts:Payments=to
foreigners ; Receipts=from foreigners. The FOP add/subtract in
calculation can also be called this instead. 4. TERM :NET primary
income pay.OR rec.=to rsa- to rest of world : the result is the
answer. 5. GDP: best to measure level+rate change of Economic
Activity+job creation in SA. 6. GNP :best to measure level+ rate
change of Income and Standard of living 0f RSA citizens. 7. In RSA
GNI has allways been a bit smaller than GDP.
Expenditure on GDP1. Expenditure-spending method
(final/intermediate consumption) approach to calc.GDP by C,G,I,XZ
consumption method-and is allways at Market prices,not basic or
factor cost. 2. GDP=C+I+G+X-Z a. C-largest amount,in Nat.Accounts
subdivided into Non-durable,semi durable,durable. b. I-Most
volatile.Called Gross capital formation in national
accounts,includes Government capital goods investment in
nat.acc.,Subdivided into : i. TERM:Gross Fixed capital formation
:(purchases of capital in current year) ii. TERM:Changes in
Inventories :Goods made past years purchased in current year,and
goods made this year unsold.-can be positive or negative
number.(ii)Added to (i)=gross capital formation. c. G-final
consumption exp. by Gov.-does not include Investment /capital. d.
X-exports added to GDP e. Z-imports subtracted from GDP 3. TERM
Residual value in national Accounts for aqbove calculayin
means-where 3 different methods of calculating GDP conflict-ie
Production method,Expenditure method,Income method. 4. TERM Gross
Capital Formation:In national accounts Investment spending called
capital formation,Note includes Gov. spend on Investment.,and Gross
means not less depreciation.
GDE: Gross Domestic Expenditure.1. TERM GDE =gross domestic
expenditure-only money spent in the borders :incl.imp./excl.exp 2.
Measured at Market prices,not basic prices or factor cost. 3.
GDE=C+I+G -NOT include (x) exports BUT DOES include imports 4.
GDP=C+I+G+X-Z 5. TERM Net Exports=(used for common GDP calculation)
=X-Z 6. If GDP>GDE then exports must be more than imports (net
exports must be positive)and Visa Ver
SUMMARY of national accounting totals1. GDE=C+I+G a. C-largest
amount,in Nat.Accounts subdivided into Non-durable,semi
durable,durable. b. I-Most volatile.Called Gross capital formation
incl. Gov. capital goods invest. i. consists of:Gross Fixed capital
formation-'I' buy+Changes in Inventories-last years+,not sold c.
G-final consumption exp. by Gov.-does not include Investment
/capital.ECS102-8 economics Part2 Yr1 Page 26
Page 27 of 106
(TERM Residual value difference 3 methods calc GDP) = GDE
-------------------------------a. X-exports added b. Z-imports
subtracted =GDP at market prices ---------------------------------
primary income payments +primary income receipts =GNI (GNIncome) at
market prices (TERM:NET primary income pay.OR rec.=larger minus
smaller (name =larger))
#2 MACROECONOMIC OBJECTIVE : Full Employment :Measuring
Employment and Unemployment.1. TERM Unemployment:of those willing
and able to work ,the rate/index/% etc of those not employed. 2.
Employment&Unemployment :In principle easy to measure:1-No. of
able workers-2No. of employees;BUT Quite difficult to measure in
practice:;parttime,seasonal;criminal
prostitutes,drugseller,Hawkers/informal,+Those not seeking work
etc.
#3MACROECONOMIC OBJECTIVE:STABLE PRICES:Measuring Prices,the
Consumer Price Index.The Consumer Price Index.1. 2. Economists are
interested in :1-what is happening to prices of goods&services
in general-2-inflation-3-info on price movements for
nominal&real(ratio to other prices)3-purchasing power TERM
INDEX NUMBER:expresses value of some series over given period as %
of it's value in a base period.eg the CPI-consumer price index is
an INDEX NUMBER. a. Specific Indices :for relative changes:-for
only one good-not weighted average of lots -Convert all of
different years prices to percentages of one of the years prices
,to compare these %'s to each other ie:price/base price*100/1=% of
base price.,thus the answer is egYear B is 127 % of base year A
price,BUT an increase of 27% and the new price is 127% of the old
price-but increase is only 27%!!!!!!!!NOTE!!!! b. General or
Composite Indices :for combine different series:CPI is a composite
index where a lot of different indexes are compiled(eg % change in
bread price is one in series,% for meat another) and this series of
prices are combined AGAIN BY according to a weighted average(how
much bread eaten to meat)to get final composite or general index.
TERM Purchasing power- first year/last year = eg 0.87= the 'Real'
value of or what a certain amount of money can buy.To calculate:The
% of the first/base years price over the % of currrent years price
.(how much this years go in last years=?70%)EG: 2000=100%=base
year,this year 2003 = 115% of that:answer =100%/divided by 115%=
0.87: so to work out a answer you say 0.87 * 5 baskets in 2000 will
give purchasing power of 4.35 baskets at current years prices.
Price increases ie Inflation erodes the real value or purchasing
power of a fixed nominal amount.Page 27
3.
4.
ECS102-8 economics Part2 Yr1
Page 28 of 106
5.
TERM CPI Consumer Price Index:=115 % or 120% is an index of the
prices of a representative "basket " of consumer goods and
services: it thus represents the cost of the shopping basket of
goods & services of a typical RSA household.CPI is normally
=115% or 132% or so (not 6.2% like inflation:ie the change from one
years to the next .) term Inflation RATE: If you subtract Last
years CPI from this years cpi ,AND divide the quotient by last
years cpi * 100 (the percentage %)you get the inflation rate
ie:127%-105% / 105 % *100 TO construct the CPI ,Stats SA must : a.
Select the "goods and services" to be included in the "Shopping
Basket." : ..To select-Stats SA does survey of household every 5
years. b. TERM Determine Weight of each good/sevice: ..Stats SA
does a survey 5 yrly to determine relative importance in Av.
Consumers Basket. c. TERM Decide on a BASE YEAR for calculating CPI
: ..Base year is year in which the Survey(5 yearly) is done d.
Decide on FORMULA for calculating CPI ..Standard price index
formula used,Weight of item decides it's effect on CPI, e. Collect
prices each month to calculate CPI. A_....RSA 1500 different
goods&services,in -1- 40 groups/subgroups,for which a CPI is
calculated for each one -2- 5 expenditure groups,pensioners,9
provinces+14 major urban areas.+metro+other urban areas+rural
B_Prices are collected by questionaire sent to 2200 retailers110
000 quotations per month and info. double checked.,Prices used are
first 7 days of month. CPI available 2nd half of following month.
Used to calculate inflation. large base 1500goods means cpi is
fairly accurate.
6.
7. 8.
9. 10. 11.
#4 MACROECONOMIC OBJECTIVE: Balance of Payments1. 2. Balance of
payments :summarises between local& foreign-usually yearly.
TERM: Balance of payments consists of 2 major accounts: a. Current
account:Part of "balance of payments" account,Account of a country
of all:Sales:Exports,Purchases:Imports+Primary Income Pay&Rec.
b. Financial account:Account of country of all flows of financial
products only into and out of country like sales +purchases of
-bonds,shares also loans etc . TERM :Surplus on Current
account:Exports exceeded Imports TERM :Deficit on Current
account:Imports exceeded Exports. TERM :Surplus on Financial
account:(also NET INFLOW of Capital):Inflows of money exceeded
Outflows of Money. TERM :Deficit on Financial account:(also NET
OUTFLOW of Capital): Outflows of money exceeded Inflows of Money.
TERM :Change in the Countries Gold and Foreign Exchange
Reserves:Add current &financial accounts.-the result serves as
the balancing item on the balance of payments. Compiled by SA
reserve bank in SA,from SARS info. mostly.Page 28
3. 4. 5. 6. 7. 8.
ECS102-8 economics Part2 Yr1
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9. 10.
Purchasing Power =year 1% / year 2 % .Also ,or nominal % /price
level %=real value. eg:between 1920-1930 purchsing power increased
by 40 % in SA ie :there was negativeinflation.
#4 MACROECONOMIC OBJECTIVE:Equality in Distribution of Income: 3
Methods of Measuring Inequality.1. a-measuring performance of
economy in general no easy task ,-b- but measuring this one type is
most difficult of all.-data from tax returns/census etc.-then
applying measures to estimate degree 2. TERM Personal distribution
of Income:to people/races/levels,all fop included. 3. TERM
Functional distribution of Income:Between FOP only.
Method #1 of 3 : Lorenz Curve1. Term A Lorenz Curve is a simple
graphic device which illustrates the degree of inequality in dist.
of income.(or any other variable)-named after american statistician
developed it 1905. 2. To construct: a. Make Chart with
-1-Population % poorest to richest -2- Income -3- Cumulative
Population -4- Cumulative Income %Number of Each Population Income
Poorest 20% 3 % Next 20% 7% Next 20% 15 % Next 20% 25 % Richest 20%
50 % Cumulative Population Income 20 % 3% 40 % 10 % 60 % 25 % 80 %
50 % 100 % 100 %
b. Plot Graph
i. see graph pg80 in textbookii. iii. iv. v. (-1-)Horizontal
axis =Cumulative %'s of Population. (-2-)Vertical axis =Cumulative
%'s of Income. Axes are joined to form a square Diagonal drawn from
Origin A to point B corner:Diagonal indicates a perfectly equal
distribution of income-Serves as a reference point. ie: perfectly
equal distribution occours along line :first 20% population would
earn 20% of income and so on etc. A Lorenz curve ALLWAYS starts at
Origin and ends at B(opposite corner = 100%). Greater distance
between diagonal and Lorenz Curve the greater the inequality. Area
(shaded) between diagonal and Lorenz curve = called- "Area of
inequality" Greatest possible inequality: where 1 person earns all
money=curve O-AB(triangle)
vi. vii. viii. ix.
#2Gini Coefficient:(or RATIO)1. TERM Gini coefficient or ratio
=area of inequality /divided by/ area of triangle [axes-diagonal].
2. Divide (AREA of INEQUALITY) :by: (AREA of DIAGONAL and
AXES(right corner=A)0 3. Varies between 0-1. If perfectly equal
then =0 (lorenz curve=diagonal) or If utterly unequal = 1.ECS102-8
economics Part2 Yr1 Page 29
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4. In practice between 0.3(highly equal) and 0.7(highly
unequal). 5. TERM Gini Index = Gini coefficient multiply*100 (ie
between 0-100 then,not 0-1) 6. By Italian demographer Corrodo Gini
1912
#3Quantile Ratio1. TERM Quantile Ratio is [the % income of
Highest 20%] divided by [% income of Lowest 20%] 2. The Higher the
ratio ,the Higher the inequality. 3. We use each groups %
percentage of Countrys Total Income to work it out ,not actual
income Rands. 4. Economists also often compare : top 20% to bottom
40% and top 20% to bottom 20%.
Extra Notes:RSA: best known for ;precious metals,fruit,wine
Services sector largest. muanufacturing sector 15% of GDP maize
most important crop,mined=mang,gold,chrome,platinum ,coal,diamonds.
export production nurtured in eg:ostridge meat,high value
fruit,wine Gauteng 33% of GDP,western cape15% unemployment
29.4%=4.7million=SA ranked as on of most unequal disb.of Income in
word,where accurately measurable.
ECS102-8 economics Part2 Yr1
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ECONOMICS part 2 Yr1ECS102-8CHAPTER 3 : THE MONETARY
SECTOR.(MACROECONOMICS)ch ch15t,pg353
Explain what money is and explain its functions Define M1, M2
and M3 Discuss the functions of the SARB Explain and illustrate
with the aid of a diagram the interaction between the interest rate
and the demand for money Discuss the instruments of monetary policy
Study unit outcomes and activities
Important Boxes/concepts/graphs/pages:
ECS102-8 economics Part2 Yr1
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M
INTRODUCTION: Money important -double coincidence of wants,etc
Years 'neutrality of money '(print 2*more money ,cause 2*higher
prices )y , was economic cornerstone,today different thinking
slightly. a bank is a place that will lend you money if you can
prove you dont need it.-bob hope money is a good servant but a bad
master-proverb english money like muck,not good exept it be spread
around-francis bacon.
The Functions of Money:1-Money as a meduium of exchange:1. TERM
Barter economy :is characterised by numerous unneccessary exchange
transactions. causes problem of double coincidence of wants.2. TERM
Double coincidence of wants=is if both parties DO want opposite
persons goods-not where one must first exchange for something else
at another person,ie:you want others shoes,you got shirts,but shoe
guy wants pants.so you go look for pants to change for your shirts
first.,then go get the shoes with that. 3. TERM Monetary
Economy:money used as a intermediatry or lubricant. 4. TERM medium
of exchange ONLY function of money unique to money&most basic
function of 5. TERM:Definition of Money:Money is any thing that is
generally accepted for payment for goods and services or in
settlement of debt.
2- Money as a unit of account:1. An agreed/common unit of
comparison of the cost of goods,anything can be a unit of account.
2. 2nd in importance to no1 -exchange med- above. 3. Inflation can
cause it to loose usefulness as unit of comparison a bit in terms
of 'Real' values.
3-Money as a Store of Value:1. The most Liquid form in which
wealth can be kept (derived from can be medium of exchange) 2.
Money can be disadvantagous as a store with Inflation,other maybe
better eg:land,works of art,shares,post stamps. 3. Many people with
great wealth do not own much money,they use assets for in times of
inflation. 4. Standard of deferred payment(and interest),and means
whereby credit is granted.
4-What Money is Not:1. Money is NOT : 1-Wealth(=assets,+ money)
or 2-IncomeECS102-8 economics Part2 Yr1 Page 32
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2. Is not a Flow,money is a Stock which can finance a much
larger flow of income during a period.
Different Kinds of Money.2. eg:cocoa
beans,cigarettes,tea,seashells,cattle,silver:earliest forms were
commodities value intrinsic. 3.
Uniformity,durability,divisability,ability to be carried. i.
Coins,too heavy, ii. Paper money.1st paper money was certificates
of deposit at goldsmith. iii. TERM Fiduciary/credit money(gov.
issued partly covered by gold in reserve) iv. Today-no gold
deposits ,based on confidence in Gov.to control supply of notes. v.
Cheque accounts-next development-Constitutes largest part of money
stock indeveloped lands 4. debit +credit cards&electronic
payment make difficult pinpoint exactly what money is esp.infin
Markt 5. A cheque ,debit or credit cards or electronic transfers
ARE Transfer methods NOT MONEY-the deposit is,and a credit card is
in addition1 a means of getting short term loan AND 2method
transfer. 6. Credit card means of deferring/postponing payment. 7.
Credit card :Also people 'economise' on holding money,hold less on
avg,buy on credit pay end mnth.
Money in RSA.1) Not easy to measure money,ie:assets/differnt
means of payment/ 2) Economists interested in store of value
function of money:3 measures of money by SARB:M1,2,3
TERM 1-Coventional measure:M11) M=C+D (Money quantity =Cash(all
coins ,notes)+demand deposits with monetary sector.) 2) TERM THE
Money Supply =C ,not D of M=C+D only cash in circulation outside
banking sector can be regarded as the money supply. 3) monetary
sector incl. in SA :land bank,public finance corporation,private
banks,post bank, SARB 4) Solely on basis as medium of exchange
(Incl. M1A=cash notes+coins only) 5) TERM :Demand deposits =91% of
money in SA,refer to deposits can be withdrawn immediately.
TERM 2-M21) M2 =M1+all other short term and medium term deposits
of the domestic private sector with monetary institutions(more than
1.5 times m1 in SA) 2) Short term=less than 30 days ,Medium
term=less than 6 months.can only withdraw sooner at a cost 3) Quasi
money =nearly money : short and medium term deposits,since maturity
not very long.
TERM 3-M31) M3 =M2 + all long term deposits of the domestic
private sector with monetary institutions. 2) Long term
deposits-maturity value longer than 6 months. 3) Most comprehensive
measure of money.,also regarded as most reliable indicator.ECS102-8
economics Part2 Yr1 Page 33
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4) Emphasis is more on store of value function as we move from
m1-m2-m3,m3 most store function.
Financial Intermediaries.1) Financial intermediaries main
function is : to act as an intermediary between surplus units and
deficit units in the monetary economy. 2) TERMIndirect/Direct
Financing:Indirect-through financial intermediatry/Direct person to
person 3) TERM Financial Transactions :Distinguished from real
transactions by fact no goods/other services involved.(distinction
between 2 divides economy into real and financial sector) 4) TERM
Real transactions :All transactions where goods and services are
involved. (divides fin/real) 5) The institutions in the financial
sector have one main function, namely to act as an intermediary
between surplus units and the deficit units in the monetary
economy.
6) 7) When the government borrows money, it uses treasury bills
and government stock or bonds as security. 8) TERM Security or
Credit instrument issued. In exchange for funds, a piece of paper
issued,this document stipulates the interest rate at which funds
are loaned as well as when and how the loan is to be repaid.
Examples of credit instruments are bills of exchange, promissory
notes, and bankers' acceptances. Government uses treasury bills and
gov.stocks and bonds. 9) Financial intermediatries
includes:Insurers,pension funds,banks,unit trusts,finance
companies,SARB. 10) TERM Interest is amount borrower must pay
lender for use of funds concerned. 11) Banks can create money by
granting overdrafts which is M1 money class.=D (of C=D=M1),and
banks can do this because need only keep % of deposits in reserve
bank ,so can lend rest out. 12) TERM monetary baseAlso known as
high-powered money. It usually refers to the stock of cash (notes
and coins) and includes the cash in the hands of the non-banking
public, vault cash of banks and cash deposits with the Reserve
Bank
THE SOUTH AFRICAN RESERVE BANK.1) SARB established 1920 by
act,primary goal in the South African economic system as "The
achievement and maintenance of financial stability".ECS102-8
economics Part2 Yr1 Page 34
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2) Cannot be dictated to by parliment how use instruments of
monetary policy-guaranteed operational independance.by Constitution
3) TERM Monetary Policy-Definition:the measures taken by the
monetary authorities to influence the 1--1-Quantity of money or -2-
Rate of interest to : ..To achieve:-1- Stable prices -2- Full
employment -3- Economic growth.(mis 1diff.earnings/2For.ex. 4) 5
main functions of SARB a) Issuing banknotes and coins b) Acting as
banker for other banks c) Acting as banker for the government. d)
Acting as custodian of countries gold and other foreign reserves.
e) formulating and implementing monetary policy.
Issuing banknotes and coins Sole right in SA to issue
banknotes+coins.Bank purchases assets to get cash in general
circulation
Acting as banker for other banks1) SARB holds minimum cash
reserves for banks that they are required to hold. 2) TERM clearing
bank :Acts as for banks by meeting the claims and obligations of
banks by using their reserves. 3) TERM lender of last resort :to
banks.(if banks need funds over and above that from surplas
depositors to finance deficit lenders/ or other things. 4)
financing of fin.inst. changed alot since 1990's-first
redisdounting of assets+overnight loans,then: 5) TERM
:(REPO)Repurchase tender system-Interest rate of SARB to
Banks,(also how much is lent per time can be controlled) 6)
Acting as banker for the government. grants credit,advise
gov.,issue treasury bills ,administer exchange control. holds gold
and foreign exchange reserves-level is one of main indicators of
state of economy.
Acting as custodian of countries gold and other foreign
reserves.
formulating and implementing monetary policy.eg currently price
stability main one in SA
The Supply of Money. For this we assume:M1=m=c+d,only banks hold
demand deposits& a central bank controls banks.
Banks: in the money creation process.(role in supply)1- Money is
created by banks and not printing presses because accept
surplas,lend to deficit 2- Difference lend /deposit rates is income
banks receive. 3- Only institutions allowed accept deposit from
public, Banks activities regulated by Act,Monitored by SARBank.
ECS102-8 economics Part2 Yr1
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4- The most notable feature of banks is able write a cheque to
draw against account,or transfer on demand,therefore it they be
treated as money.-very convenient so little interest paid. 5-
Demand deposits can be created in tho ways: a. Deposit=(^='change
in') ^M=^C+^D so = -C1000+D1000=M0 b. Overdraft facilities.
^M=^C+^D so = C0 +D1000=M1000 -bank created credit
2-Reserve Asset position and Credit Multiplier:1. TERM :Cash
reserves : IN SA 2.5% of Total Liabilities WITH RESERVE BANK at 0
interest ;amount banks know have to pay for withdrawals/transfers
to other banks-eg confidence run on bank- eg saambou 2002 run on
bank. 2. TERM CREDIT multiplier:=formula is 1/b^(change)R=D(deposit
M=C+D) (In RSA 1/b is 40) : If someone deposits money in a bank,by
multiplying that ammount by the Cred. Multipl. you get the eventual
amount of bank deposits,including the original one ,that can be
created by that deposit eventually.This works like that because
only a certain percentage of each deposit can be lent out to
someone ,the rest must be banked by law in the reserve bank.Now if
a bank lends a % out of every deposit they receive ,those who lent
this money pay others who re-deposit that amount with other
banks,which continues the cycle until no more bank deposits can be
created from one original deposit. 3. TERM:Classical cash reserve
system :where gov. does control economy by changing the rate to be
held in reserve bank.Today it is not an essential part of monetary
control system in SA,we use cost of additional reserves 4. BUT
Under the present system the money supply process in SA is a
function of demand for credit ,and this is determined by the level
of the interest rate of banks lending out money,and not by the
amount of credit banks are able and willing to extend. This reduces
gov.control over size of money supply(reserve rate wont affect)
3-Other Factors in Supply of Money1. Foreign trade exports/
BRINGs money into/increases supply of money in country,and imports
reduce it a. A countries money supply increase when gold &
foreign reserves increase and decrease visa versa. 2. Gov. spending
increases supply of money by reducing amount of taxes,which take
money out of suppy,being kept in the SARB(today gov. keeps some of
tax in normal banks to incr. supply of moneyin circulation 3. TERM
inflationary financing:Gov. lending from reserve bank can cause
inflation to rise.
EXTRA BOX:Bonds,the Bond market and Capital.1. TERM A BOND is a
Financial Instrument that promises the issuer (the borrower)will
regularly pay the holder(lender) Interest and will repay the
capital amount on a certain date.eg:Gov. issues bonds to finance
its expenditure.The features in a bond are. a. The Principle:The
amount the issuer will repay the bondholder when bond expires. b.
The Maturity Date:the expiry date-must pay all date. c. The Coupon
rate:Interest at annual rate.-usually fixed rate,and dates the
interest must be paid are also specified. 2. Bonds can be
traded/sold : eg. on Bond exchange of JSE called Bond Exchange of
SA. Bond market forms part of capital market which is a market for
long term financial instruments.ECS102-8 economics Part2 Yr1 Page
36
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3. On capital Market 4 main types of long term financial
instruments are traded. a. Fixed-Interest-Bearing Securities (or
bonds). b. Variable Interest Securities c. Shares d. Negotiable
Documents. 4. Interest rates determined in capital market (eg on
gov. bonds with different maturities) are long term rates and
determined by market forces of supply and demand. 5. TERM
Perpetuity:a special kind of bond where no maturity date is
set-only a fixed amount of money is set to be paid each year as
interest and buyer makes no promise to buy it back. 6. The most
important relationship in the market for interest bearing
securities is the inverse relationship between the price of bonds
and the interest rates on them.bond prices high when interst rates
low and visa versa-is inverse reationship.
The Demand for Money.1. Holders of wealth must decide in which
form to keep:eg financial assets,land ,art,antiques 2. TERM demand
for money is: the amount holders of wealth decide to hold as money
balances. 3. TERM Financial assets: there are 2 types a.
Bonds(interest bearing assets) b. money 4. TERM Fixed
property:Means real estate. 5. :The Opportunity Cost of holding any
money balance is the actual interest that could have been earned
had the money been used to purchase bonds instead. 6. TERM
Liquidity Preference :The Reasons for holding money instead of
bonds are :ByKeynes in30's a. TERM Transactions motive:for paying
for goods,wages weekly so hold money between,the more money you
earn,more need to pay for so transactions need for money is
function of national income. b. TERM Precautionary Motive:for
emergencies,also function of national income. c. TERM Speculative
Motive:-keynes most important add to monetary economics.If Interest
rates high then opportunity cost is high for money so people invest
in bonds.Also there is a negative /inverse relationship between qty
money Demanded for speculation and interest rates. 7. TERM Active
Balance: for 1-transactions or 2-precautionary motive.-main
determinant-Income 8. TERM Passive(or idle) Balance : for
speculative motive. main determinant-Interest rate 9. Equation for
demand for money: L=f(Yi) L-Liquidity preference/Y-National
Income/iInterest Rate 10. Graph of DEMAND FOR MONEY: a. Active
balance Curve:=f(Y) Income controlling factor:Vertical line,shift
right income increase/visaversa. b. Passive balance Curve:=f(i)
negative slope reflects inverse relationship between interest rate
and Qty demanded of money. ie:cash held with purpose of investing
if rates are high enough will=0.At certain interest (i1)rate no
funds will be demanded for spec.purposes.(i1)(this should be on
diagram where curve meets vertical line and interest is highest .
c. The Joint or total money demand curve or Total Liquidity
Preference graph(same as passive graph but label curve "L= L1+L2" (
is merely the horizontal addition of the two other graphs/is made
up of the other two graphs)ECS102-8 economics Part2 Yr1 Page 37
Page 38 of 106
i. The negative slope reflects inverse relationship between
interest rate and Qty Demanded- for speculation purposes ie:cash
held with purpose of investing if rates are high enough will=0 ii.
The position of curve:affected mainly by demand for active
balances.-from income level.Increase in Income levels will shift LL
curve to right,decrease LL to left. iii. See pg 370 textbook for
diagrams.
For the Horizontal axis:label is "Qty. of money demanded"/For
vertical:Interest rate.
Interest Rates: When referring to interest rate means:all
interest reates tend to move in harmony with each other up or
down.(another typeof simplification is income also could be GNI or
GDP.) different types eg:mortgage rates,rate on government
stock,interbank lending rate,prime rate of banks,repo rates,various
rates on deposits etc.
Equilibrium in the Money Market1. TERM:Demand-Determined money
supply.: That there is no independant money supply curve,but the
money supply(or Qty. of money) is determined by the demand for
money(due to 'transaction' and 'precaution' reasons) and the
interest rate(cost of credit). 2. This approach differs from
traditional explanantion of equilibrium in money market,which was
based on assumption that authorities can control the supply of
money-ie that there is an independant money supply curve. 3.
According to this approach, the money supply is determined by the
interaction of the demand for money and the interest rate,because
it is not possible to determine a suooly curve for money due to the
miney creation process being too complex. 4. The interest rate in
return is determined mainly by the monetary authorities,by means of
the Repo rate . 5. LL represents the demand for money curve which
indicates the quantity of money demanded at various interest rate
levels. If the monetary authorities set the interest rate (for
instance through accommodation policies) at i2 the quantity of
money demand is L1. Since the supply of money is determined by the
demand for it, the money supply is M1 which is equal to L1. At a
lower interest rate of i1, both the quantity of money demanded and
supplied increases to L2 and M2. There is no independent money
supply curve since the money supply depends on the demand for money
and the cost of credit THE MONEY MARKET:
ECS102-8 economics Part2 Yr1
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The supply of money is determined by the interaction of interest
rate and demand for money.see up(5)
Simulaneous control over the supply of money andthe Interest
RateAuthority Controlling Supply1. The above/todays approach
differs from traditional explanantion of equilibrium in money
market,which was based on assumption that authorities can control
the supply of