Chapter 3:
Production, income and spending:
Three major elements:
• Production
• Income
• Spending
Productio
n
Spending Income
Stocks and Flows:
Stocks: Measured at a particular point of time
Flows: Measured over a period of time
Stocks and flows are related
Stocks can only change as a result of flows
Example:
Stock Flow
Wealt Income
h Stock
Wealth
Need income to
create wealth
Sources of Production:
,The Factors of Production:
The Four main factors of Production
Natural resources (Land)
Labour
Capital
Entrepreneurship
Production:
The Factors of Production:
Human Resources Non-Human
Resources
Primary Factors Labour Natural Resources
Secondary Factors Entrepreneurship Capital
Technology:
The fifth factor of Production
Invention
Innovation
Money is not a factor of Production
Sources of Income: The Remuneration of the factors of
Production:
Income:
Types Associated Factor of
Production
Rent Natural Resources (Land)
Wages and Salaries Labour
Interest Capital
Profit Entrepreneurship
Sources of Spending: The Four Spending entities:
, Spending:
Households (C)
o Consumer Spending
Firms (I
o Capital formation or Investment Spending
Government (G)
o Government Expenditure
Foreign Sector (X, Z)
Three important Flows:
Government Expenditure
Taxes
Transfer payments
Aggregate spending on South African goods and services consists
of spending by the four sectors:
spending by households on consumer goods and services (C)
spending by firms on capital goods (I)
spending by government on goods and services (G)
spending by foreigners on South African goods and services (X)
minus spending by South Africans on imported goods and services
(Z)
Total expenditure can therefore be written as C + I + G + X – Z
Putting things together: A Simple diagram:
Illustrating Interdependence: Circular Flows of Production,
Income and Spending: