Study Unit 1
Chapter 3 page 41
Interdependence of the major sectors, markets and flows in a mixed economy
3.1 Production, income and spending
The three major flows in the economy as a whole:
Production
Income
Spending
Production occurs, creates income; and all or part of the income is spent to buy goods and
services.
Flows
Production, income and spending are all flows. They are measured over a period of
time. This period must be specified. These are moving pictures of the economy.
Stocks
These are measured at a particular point in time. These are still pictures of the
economy. Stocks can only change as a result of flows. Capital stock can only increase if
investment is made.
Apart from production, income, and spending, the other important economic activity that
links the various sectors in the economy is exchange. In a mixed economy, exchange
usually occurs in markets. Goods, services and factors of production are all exchanged in
markets.
Stock: still picture Flow: moving picture
Wealth Income
Assets Profit
Liabilities Loss
Capital Investment
Population Number of births and deaths
Balance in savings account Saving: diff between income & spending
Unemployment Demand for labor
Gold reserves held by the Reserve Bank Gold sales, production
Consumption
3.2 The interdependence between households and firms
,Although households own the factors of production, these factors cannot satisfy
human wants directly. Households sell their factors of production on the factor
market to the firms who combine these factors and convert them into goods and
services. In return for the factors of production they supply, households receive
income in the form of wages, salaries, rent, interest and profit. This income is
then used to purchase consumer goods and services in the goods market, which
satisfy their wants.
Households
In economic analysis it is assumed that households are rational and attempt to maximise
their satisfaction given the means at their disposal.
The household is the basic decision-making unit in the economy.
The word “economics” is derived from a Greek word meaning the management of the
household.
Members of household consume goods and services to satisfy their wants: consumers, and
the act of consuming is called consumption.
C = total consumption
Firms
This is the unit that employs factors of production to produce goods and services that are
sold on the goods market.
Firms are the basic productive units in the economy.
Firms are actually artificial units: they are ultimately owned by or operated for the benefit
of one or more individuals.
Firms are engaged primarily in production.
We assume that firms like households, are rational and aim to achieve maximum profit.
One of the factors of production firms purchase is capital and the act of purchasing is
called investment or capital formation = I.
3.3 Introducing the Government
In contrast to households and firms, who are assumed to act rationally and consistently,
we do not assume that government always acts in a consistent fashion.
Government’s economic activity involves 3 important flows:
1. Government expenditure: on goods and services including factor services = G
2. Taxes levied on and paid by household and firms = T
3. Transfer payments: the transfer of income from certain individuals and groups e.g.
the wealthy to other individuals and groups e.g. the poor.
Unlike government spending and taxation, transfer payments do not directly affect the
overall size of the production, income and expenditure flows. We only focus on
Government spending G and Taxes T.
Government spending constitutes an injection into the flow.
Taxes are a leakage or withdrawal from the circular flow.
3.4 Introducing the Foreign Sector
The fourth major sector is the foreign sector. An open economy is one that has strong links
with the rest of the world.
The various flows between South Africa and the rest of the world are summarized in the
balance of payments.
Globalisation occurs when the economic links between different countries become stronger
and more complex.
The flow of goods and services between the domestic economy and the foreign sector are:
Exports: additions or injections into the domestic economy = X
Imports: leakage or withdrawal from the domestic economy = Z
,3.5 Introducing the Financial Institutions
This sector serves as a link between those who save and those who require finance for
investment spending.
Households and firms that do not spend all their income during any particular period save
some of their income. Saving = S
To save is a decision not to consume. When saving occurs there is a leakage or withdrawal
from the circular flow. Saving is channeled to financial institutions.
These funds are then available to firms that wish to borrow to expand their productive
capacity i.e. deficit units.
When firms purchase capital goods, this is called investment = I. This results in an addition
or injection into the circular flow.
Saving is a withdrawal or leakage.
Investment is an addition or injection.
3.6 Total production, income and spending: a summary
Total spending = aggregate expenditure
Aggregate spending on South African goods and services consists of spending in the four
sectors:
1. Spending by households on consumer goods = C
2. Spending by firms on capital goods = I
3. Spending by government on goods & services = G
4. Spending by foreigners on SA goods & services = X minus spending by SA on
imported goods and services = Z
Total expenditure = C + I + G + X – Z
Apart from these elements of total spending we have 2 other flows, which are leakages or
withdrawals:
1. Taxes which are paid to government = T
2. Saving which is income not spent = S
Study Unit 2
Chapter 15 page 313
The Monetary Sector
Money is anything that is generally accepted as payment for goods and services or is
accepted in settlement of debt.
15.1 Functions of money
Money as a medium of exchange
In a barter economy, a double coincidence of wants is necessary in order for the exchange
of 2 goods to take place.
, Money serves as a lubricant or intermediary to smooth the process of exchange and
makes the process more efficient.
Money as a unit of account
A unit of account is an agreed measure for stating the prices of goods and services.
In a monetary economy the prices of all goods and services are expressed in monetary
terms.
Money is not, however, the only possible unit of account. Any other commodity or product
can serve as a unit of account. Money is only the most convenient unit of account.
Money as a store of value
In any society there is a need to hold wealth or surplus production in some form or
another.
The most common form of holding wealth is money, since it can always be exchanged for
other goods or services at a later date.
Wealth can also be held in other forms, such as fixed property, stocks and shares. The
advantage of using money is that it is usually more convenient and can be used
immediately in exchange for other assets.
Money is therefore the most liquid form in which wealth can be kept.
The disadvantages are that in times of high inflation, money loses its purchasing power
and is not a good store of value.
Money as a standard of deferred payment
Money serves as a standard of deferred payment in that it is the measure of value for
future payments. When we borrow money to purchase a house, your future commitment is
expressed in rand and cents. Money is also the means whereby credit is granted.
What money is not
Income and wealth are usually expressed in monetary terms, but they must not be
confused with money.
Income is the reward earned in the production process.
Wealth consists of assets that have been accumulated over time. Wealth can take many
forms such as fixed property, shares or even money. Money forms a part of wealth, but
wealth consists of other assets as well.
Many people who possess wealth keep most of their wealth in forms other than money.
15.2 Different kinds of money
The earliest forms of money were commodities, where the intrinsic value of the commodity
was equal to the exchange value assigned to it.
In the 16th century, the use of paper money originated. Gold coins were deposited with a
goldsmith for safe-keeping and in turn were issued a certificate of deposit (paper money)
for the full amount of coins deposited, which was then used to purchase goods or services.
The next step was to replace paper money by notes that were partially covered by a
commodity. The total value of the notes was greater than the gold backing it. Such money
is called fiduciary or credit money.
Today’s banknote bears no relation to any commodity and its value is based solely on
confidence in the government or monetary authorities to control the supply of notes in
such a way that their purchasing power does not decline substantially.
This confidence is further supported by the fact that the notes and coins issued by the
central bank have been declared, by law, as legal tender. Notes or coins cannot be refused
if they are tendered as payment.
The next development is the use of cheque accounts. In any developed country, this form
of money constitutes the largest part of the money stock.
We now have credit and debit cards and various forms of electronic payment. A demand
deposit (a positive balance in a current account) is money.
15.3 Money in South Africa
The South African Reserve Bank uses 3 different measures of the quantity of money. These
measures are labeled M1, M2 and M3.
The conventional measure M1
M1 exhibits the properties as a medium of exchange.
M1 includes coins and notes in circulation outside the monetary sector, as well as all the
demand deposits, including cheque and transmission deposits, of the domestic private
sector with monetary institutions.
Chapter 3 page 41
Interdependence of the major sectors, markets and flows in a mixed economy
3.1 Production, income and spending
The three major flows in the economy as a whole:
Production
Income
Spending
Production occurs, creates income; and all or part of the income is spent to buy goods and
services.
Flows
Production, income and spending are all flows. They are measured over a period of
time. This period must be specified. These are moving pictures of the economy.
Stocks
These are measured at a particular point in time. These are still pictures of the
economy. Stocks can only change as a result of flows. Capital stock can only increase if
investment is made.
Apart from production, income, and spending, the other important economic activity that
links the various sectors in the economy is exchange. In a mixed economy, exchange
usually occurs in markets. Goods, services and factors of production are all exchanged in
markets.
Stock: still picture Flow: moving picture
Wealth Income
Assets Profit
Liabilities Loss
Capital Investment
Population Number of births and deaths
Balance in savings account Saving: diff between income & spending
Unemployment Demand for labor
Gold reserves held by the Reserve Bank Gold sales, production
Consumption
3.2 The interdependence between households and firms
,Although households own the factors of production, these factors cannot satisfy
human wants directly. Households sell their factors of production on the factor
market to the firms who combine these factors and convert them into goods and
services. In return for the factors of production they supply, households receive
income in the form of wages, salaries, rent, interest and profit. This income is
then used to purchase consumer goods and services in the goods market, which
satisfy their wants.
Households
In economic analysis it is assumed that households are rational and attempt to maximise
their satisfaction given the means at their disposal.
The household is the basic decision-making unit in the economy.
The word “economics” is derived from a Greek word meaning the management of the
household.
Members of household consume goods and services to satisfy their wants: consumers, and
the act of consuming is called consumption.
C = total consumption
Firms
This is the unit that employs factors of production to produce goods and services that are
sold on the goods market.
Firms are the basic productive units in the economy.
Firms are actually artificial units: they are ultimately owned by or operated for the benefit
of one or more individuals.
Firms are engaged primarily in production.
We assume that firms like households, are rational and aim to achieve maximum profit.
One of the factors of production firms purchase is capital and the act of purchasing is
called investment or capital formation = I.
3.3 Introducing the Government
In contrast to households and firms, who are assumed to act rationally and consistently,
we do not assume that government always acts in a consistent fashion.
Government’s economic activity involves 3 important flows:
1. Government expenditure: on goods and services including factor services = G
2. Taxes levied on and paid by household and firms = T
3. Transfer payments: the transfer of income from certain individuals and groups e.g.
the wealthy to other individuals and groups e.g. the poor.
Unlike government spending and taxation, transfer payments do not directly affect the
overall size of the production, income and expenditure flows. We only focus on
Government spending G and Taxes T.
Government spending constitutes an injection into the flow.
Taxes are a leakage or withdrawal from the circular flow.
3.4 Introducing the Foreign Sector
The fourth major sector is the foreign sector. An open economy is one that has strong links
with the rest of the world.
The various flows between South Africa and the rest of the world are summarized in the
balance of payments.
Globalisation occurs when the economic links between different countries become stronger
and more complex.
The flow of goods and services between the domestic economy and the foreign sector are:
Exports: additions or injections into the domestic economy = X
Imports: leakage or withdrawal from the domestic economy = Z
,3.5 Introducing the Financial Institutions
This sector serves as a link between those who save and those who require finance for
investment spending.
Households and firms that do not spend all their income during any particular period save
some of their income. Saving = S
To save is a decision not to consume. When saving occurs there is a leakage or withdrawal
from the circular flow. Saving is channeled to financial institutions.
These funds are then available to firms that wish to borrow to expand their productive
capacity i.e. deficit units.
When firms purchase capital goods, this is called investment = I. This results in an addition
or injection into the circular flow.
Saving is a withdrawal or leakage.
Investment is an addition or injection.
3.6 Total production, income and spending: a summary
Total spending = aggregate expenditure
Aggregate spending on South African goods and services consists of spending in the four
sectors:
1. Spending by households on consumer goods = C
2. Spending by firms on capital goods = I
3. Spending by government on goods & services = G
4. Spending by foreigners on SA goods & services = X minus spending by SA on
imported goods and services = Z
Total expenditure = C + I + G + X – Z
Apart from these elements of total spending we have 2 other flows, which are leakages or
withdrawals:
1. Taxes which are paid to government = T
2. Saving which is income not spent = S
Study Unit 2
Chapter 15 page 313
The Monetary Sector
Money is anything that is generally accepted as payment for goods and services or is
accepted in settlement of debt.
15.1 Functions of money
Money as a medium of exchange
In a barter economy, a double coincidence of wants is necessary in order for the exchange
of 2 goods to take place.
, Money serves as a lubricant or intermediary to smooth the process of exchange and
makes the process more efficient.
Money as a unit of account
A unit of account is an agreed measure for stating the prices of goods and services.
In a monetary economy the prices of all goods and services are expressed in monetary
terms.
Money is not, however, the only possible unit of account. Any other commodity or product
can serve as a unit of account. Money is only the most convenient unit of account.
Money as a store of value
In any society there is a need to hold wealth or surplus production in some form or
another.
The most common form of holding wealth is money, since it can always be exchanged for
other goods or services at a later date.
Wealth can also be held in other forms, such as fixed property, stocks and shares. The
advantage of using money is that it is usually more convenient and can be used
immediately in exchange for other assets.
Money is therefore the most liquid form in which wealth can be kept.
The disadvantages are that in times of high inflation, money loses its purchasing power
and is not a good store of value.
Money as a standard of deferred payment
Money serves as a standard of deferred payment in that it is the measure of value for
future payments. When we borrow money to purchase a house, your future commitment is
expressed in rand and cents. Money is also the means whereby credit is granted.
What money is not
Income and wealth are usually expressed in monetary terms, but they must not be
confused with money.
Income is the reward earned in the production process.
Wealth consists of assets that have been accumulated over time. Wealth can take many
forms such as fixed property, shares or even money. Money forms a part of wealth, but
wealth consists of other assets as well.
Many people who possess wealth keep most of their wealth in forms other than money.
15.2 Different kinds of money
The earliest forms of money were commodities, where the intrinsic value of the commodity
was equal to the exchange value assigned to it.
In the 16th century, the use of paper money originated. Gold coins were deposited with a
goldsmith for safe-keeping and in turn were issued a certificate of deposit (paper money)
for the full amount of coins deposited, which was then used to purchase goods or services.
The next step was to replace paper money by notes that were partially covered by a
commodity. The total value of the notes was greater than the gold backing it. Such money
is called fiduciary or credit money.
Today’s banknote bears no relation to any commodity and its value is based solely on
confidence in the government or monetary authorities to control the supply of notes in
such a way that their purchasing power does not decline substantially.
This confidence is further supported by the fact that the notes and coins issued by the
central bank have been declared, by law, as legal tender. Notes or coins cannot be refused
if they are tendered as payment.
The next development is the use of cheque accounts. In any developed country, this form
of money constitutes the largest part of the money stock.
We now have credit and debit cards and various forms of electronic payment. A demand
deposit (a positive balance in a current account) is money.
15.3 Money in South Africa
The South African Reserve Bank uses 3 different measures of the quantity of money. These
measures are labeled M1, M2 and M3.
The conventional measure M1
M1 exhibits the properties as a medium of exchange.
M1 includes coins and notes in circulation outside the monetary sector, as well as all the
demand deposits, including cheque and transmission deposits, of the domestic private
sector with monetary institutions.
