ECS2602-Notes
Study Unit 2 – Macroeconomics
Economic growth
Economic growth takes place when the total production of goods and services in an
economy increases. It is traditionally defined as the annual rate of increase in total
production or income in the economy under 2 conditions namely production, or
income should be measured in real terms, (effects of inflation should be
eliminated). Secondly, the figures should also be adjusted for population growth.
Gross domestic product
GDP (Gross Domestic Product) is an official measure of the FINAL goods and
services produced inside the borders of a country by both the citizens and
foreigners during a specified time period (usually one year). It is also the broadest,
best-known and most used measure of economic activity. GDP measures the
production of new goods and services known as current production during a
specified period and is a flow which reflects the level of economic activity that is
taking place in the country.
Nominal and real gross domestic product
Nominal GDP or GDP at current prices is the sum of the quantities of final goods
and services produced multiplied by their current price. An increase in nominal
GDP might increase over time due to an increase in the quantity or prices of
goods and services produced.
Real GDP or GDP at constant prices is a measure of GDP in which the quantities
produced are valued at the prices in a base year rather than at current prices.
Real GDP therefore measures the actual physical volume of production, and thus
over comes the problem of price changes.
Real per capita GDP
Positive economic growth occurs when the total production or income is growing at a
faster rate than the population. Real GDP per capita is used as the measure of the
economic wellbeing of the residents of a country. A rise in the real GDP per capita
implies that people are better off. However there are factors that could give rise to an
increase in the real GDP per capita without people becoming better off. An example is
where the increase in real GDP results from an increase in government spending on
defense.
,Inflation
Inflation is defined as a continuous and considerable rise in prices in general.
Note that this is a neutral definition of inflation since it does not tell us what the
causes of inflation are. The most commonly used indicator of changes in the
general price level (inflation) is the consumer price index (CPI).
Unemployment
Unemployment occurs when economically active people who are willing and able to
work, does not have paid employment.
The strict definition of unemployment used by Stats SA regards unemployed
people as being 15 years and older, who,
• are not in paid employment or self employed,
• were available for paid employment or self employment during the seven
days preceding the interview, and,
• took specific steps during the four weeks preceding the interview to find
paid employment or self employment.
1
Balance of payments
The balance of payments is a systematic statistical record of all economic
transactions between residents in the reporting country (e.g. South Africa) and the
rest of the world during a particular period (quarter or year). The South African
balance of payments summarizes the transactions between South African
households, firms and government and foreign households, firms and government.
The balance of payments consists of the following five sub accounts:
• Current account (Exports versus Imports): A surplus indicates that
the value of the country’s exports exceeded the value of its imports
during the period under review,
• Financial account: A surplus indicates that more funds flowed into the
country than flowed out during the period under review. A net inflow of
foreign capital thus occurred.
• Capital transfer account
• Unrecorded transactions
• Official reserve account
In principle the balancing item in the balance of payments is the change in the
country’s gold and other foreign reserves.
Stability in the balance of payments exists where there is some balance between
exports and imports. When a country has to repay foreign debt and cannot borrow
, funds on the international financial markets, it has o maintain a surplus of exports
over imports to offset the outflow of capital.
Distribution of income
Distribution of income refers to the way in which income is distributed between a
country’s residents (women, men and races). Who earns the most Money? South
Africa has a highly skewed distribution of personal or household income. Income
distributions are difficult to measure and are therefore not estimated regularly.
Moreover, the estimates are subject to a significant margin of error. In some
countries the distribution of income among individuals or households has never been
estimated, while in other countries such estimates are made only infrequently. The
Gini coefficient is used as a measurement to determine the distribution of income in
a country.
2
Study Unit 3 – Goods Market
The composition of GDP
• Consumption = C goods and services purchased by consumers.
• Investment = I sometimes called fixed investment
• Government Spending = G
• Foreign Trade: Exports>Imports (trade surplus); Export<Imports (trade deficit)
• Imports = IM
• Exports = X
, The Demand for Goods and Services
‘Z’ represents the demand for goods and services where:
Z Ξ C + I + G + X - IM
Goods Market
The Goods Market is the combined market for all goods and services, consisting of
all producers and consumers including the Public sector (government), and the
Foreign sector. It is in the goods market where producers decide how much to
produce and consumers decide how much to purchase.
Total Demand for Goods, (Z) (total = aggregate)
The total amount of goods and services demanded in the goods market. This
total demand for goods and services determines the level of income and output
in the economy.
Total amount of goods: (total = aggregate)
All goods and services produced even if they replace depreciated or worn out products.
Gross domestic expenditure (GDE)
The total value of spending within the borders of a country including imports but
excluding exports, since spending on exports takes place outside the borders of the
country.
Consumption
The usage and purchases (demand) for goods and services by consumers, firms, the
government and foreign sectors. Households are the biggest consumption sector.
Consumption C is a function of disposable income YD, as the disposable income YD
increases the ability to consume C increases (Induced Consumption). Therefore:
C = C(YD),
But, there are other types of consumption, namely Induced consumption (cYD) and
Autonomous
consumption (c0). Therefore:
C = c0 + c(YD),
Autonomous Consumption, (c0):
This type of consumption indicates what people would consume if their income (YD)
was zero. Autonomous consumption is financed by means other than income such as
inheritance, credit, past savings and gifts.
Induced Consumption, c(YD):
Induced income causes a change in consumption as the result of a change in disposable
income. As
Study Unit 2 – Macroeconomics
Economic growth
Economic growth takes place when the total production of goods and services in an
economy increases. It is traditionally defined as the annual rate of increase in total
production or income in the economy under 2 conditions namely production, or
income should be measured in real terms, (effects of inflation should be
eliminated). Secondly, the figures should also be adjusted for population growth.
Gross domestic product
GDP (Gross Domestic Product) is an official measure of the FINAL goods and
services produced inside the borders of a country by both the citizens and
foreigners during a specified time period (usually one year). It is also the broadest,
best-known and most used measure of economic activity. GDP measures the
production of new goods and services known as current production during a
specified period and is a flow which reflects the level of economic activity that is
taking place in the country.
Nominal and real gross domestic product
Nominal GDP or GDP at current prices is the sum of the quantities of final goods
and services produced multiplied by their current price. An increase in nominal
GDP might increase over time due to an increase in the quantity or prices of
goods and services produced.
Real GDP or GDP at constant prices is a measure of GDP in which the quantities
produced are valued at the prices in a base year rather than at current prices.
Real GDP therefore measures the actual physical volume of production, and thus
over comes the problem of price changes.
Real per capita GDP
Positive economic growth occurs when the total production or income is growing at a
faster rate than the population. Real GDP per capita is used as the measure of the
economic wellbeing of the residents of a country. A rise in the real GDP per capita
implies that people are better off. However there are factors that could give rise to an
increase in the real GDP per capita without people becoming better off. An example is
where the increase in real GDP results from an increase in government spending on
defense.
,Inflation
Inflation is defined as a continuous and considerable rise in prices in general.
Note that this is a neutral definition of inflation since it does not tell us what the
causes of inflation are. The most commonly used indicator of changes in the
general price level (inflation) is the consumer price index (CPI).
Unemployment
Unemployment occurs when economically active people who are willing and able to
work, does not have paid employment.
The strict definition of unemployment used by Stats SA regards unemployed
people as being 15 years and older, who,
• are not in paid employment or self employed,
• were available for paid employment or self employment during the seven
days preceding the interview, and,
• took specific steps during the four weeks preceding the interview to find
paid employment or self employment.
1
Balance of payments
The balance of payments is a systematic statistical record of all economic
transactions between residents in the reporting country (e.g. South Africa) and the
rest of the world during a particular period (quarter or year). The South African
balance of payments summarizes the transactions between South African
households, firms and government and foreign households, firms and government.
The balance of payments consists of the following five sub accounts:
• Current account (Exports versus Imports): A surplus indicates that
the value of the country’s exports exceeded the value of its imports
during the period under review,
• Financial account: A surplus indicates that more funds flowed into the
country than flowed out during the period under review. A net inflow of
foreign capital thus occurred.
• Capital transfer account
• Unrecorded transactions
• Official reserve account
In principle the balancing item in the balance of payments is the change in the
country’s gold and other foreign reserves.
Stability in the balance of payments exists where there is some balance between
exports and imports. When a country has to repay foreign debt and cannot borrow
, funds on the international financial markets, it has o maintain a surplus of exports
over imports to offset the outflow of capital.
Distribution of income
Distribution of income refers to the way in which income is distributed between a
country’s residents (women, men and races). Who earns the most Money? South
Africa has a highly skewed distribution of personal or household income. Income
distributions are difficult to measure and are therefore not estimated regularly.
Moreover, the estimates are subject to a significant margin of error. In some
countries the distribution of income among individuals or households has never been
estimated, while in other countries such estimates are made only infrequently. The
Gini coefficient is used as a measurement to determine the distribution of income in
a country.
2
Study Unit 3 – Goods Market
The composition of GDP
• Consumption = C goods and services purchased by consumers.
• Investment = I sometimes called fixed investment
• Government Spending = G
• Foreign Trade: Exports>Imports (trade surplus); Export<Imports (trade deficit)
• Imports = IM
• Exports = X
, The Demand for Goods and Services
‘Z’ represents the demand for goods and services where:
Z Ξ C + I + G + X - IM
Goods Market
The Goods Market is the combined market for all goods and services, consisting of
all producers and consumers including the Public sector (government), and the
Foreign sector. It is in the goods market where producers decide how much to
produce and consumers decide how much to purchase.
Total Demand for Goods, (Z) (total = aggregate)
The total amount of goods and services demanded in the goods market. This
total demand for goods and services determines the level of income and output
in the economy.
Total amount of goods: (total = aggregate)
All goods and services produced even if they replace depreciated or worn out products.
Gross domestic expenditure (GDE)
The total value of spending within the borders of a country including imports but
excluding exports, since spending on exports takes place outside the borders of the
country.
Consumption
The usage and purchases (demand) for goods and services by consumers, firms, the
government and foreign sectors. Households are the biggest consumption sector.
Consumption C is a function of disposable income YD, as the disposable income YD
increases the ability to consume C increases (Induced Consumption). Therefore:
C = C(YD),
But, there are other types of consumption, namely Induced consumption (cYD) and
Autonomous
consumption (c0). Therefore:
C = c0 + c(YD),
Autonomous Consumption, (c0):
This type of consumption indicates what people would consume if their income (YD)
was zero. Autonomous consumption is financed by means other than income such as
inheritance, credit, past savings and gifts.
Induced Consumption, c(YD):
Induced income causes a change in consumption as the result of a change in disposable
income. As
