ECONOMICS PAPER1
The Circular Flow Model, National Account
Aggregates, and the Multiplier
These are three important ideas in Economics:
The Circular Flow Model shows how money, goods, and services move between
different parts of the economy (households, businesses, government, and foreign
sector).
National Account Aggregates measure how well a country's economy is doing, with
Gross Domestic Product (GDP) being the most important measure.
The Multiplier shows how a small increase in spending can lead to a much bigger
increase in income for the whole country.
The marginal propensity to consume (mpc) tells us how much of every rand people
spend instead of saving. The multiplier is calculated using the mpc with the formula:
Multiplier (K or α) = 1 ÷ (1 - mpc).
Key Concepts
Base year: A year with stable prices (no big changes), with South Africa's base
year being 2005.
Basic prices (bp): Used when calculating GDP with the production method,
showing the cost of production for businesses.
Capital market: Where long-term financial items like bonds and shares are
traded.
, Circular flow model: Shows the continuous movement of spending, production,
and income between different parts of the economy.
Closed economy: An economy that does not trade with other countries (no
foreign sector).
Consumption (C): Spending by households on goods and services.
Domestic figures (GDP): The total value of all goods and services produced
inside a country in a given time.
Economic equilibrium: When leakages equal injections (S + T + M = I + G +
X).
Expenditure method: Calculating GDP by adding spending from all sectors (C
+ G + I + (X - M)).
Exports (X): Goods and services made locally and sold to other countries.
Factor market: Where factors of production (land, labour, capital,
entrepreneurship) are bought and sold.
Factor cost/Factor prices: The cost of using factors of production like wages,
rent, interest.
Financial market: Where both short-term and long-term financial assets are
traded.
Financial sector: Institutions like banks, insurance companies, and the JSE that
aren't directly involved in production.
Foreign exchange market: Where one currency is traded for another (e.g., rands
for dollars).
Goods market: Where goods and services are traded, also known as Product
market.
Government (G): The expenditure of the government sector.
Imports (M): Goods and services produced in other countries and purchased by
local firms or households, sometimes represented by "Z".
Income method: Gross Domestic Income calculated by adding all income
earned by owners of factors of production (GDP(I)).
The Circular Flow Model, National Account
Aggregates, and the Multiplier
These are three important ideas in Economics:
The Circular Flow Model shows how money, goods, and services move between
different parts of the economy (households, businesses, government, and foreign
sector).
National Account Aggregates measure how well a country's economy is doing, with
Gross Domestic Product (GDP) being the most important measure.
The Multiplier shows how a small increase in spending can lead to a much bigger
increase in income for the whole country.
The marginal propensity to consume (mpc) tells us how much of every rand people
spend instead of saving. The multiplier is calculated using the mpc with the formula:
Multiplier (K or α) = 1 ÷ (1 - mpc).
Key Concepts
Base year: A year with stable prices (no big changes), with South Africa's base
year being 2005.
Basic prices (bp): Used when calculating GDP with the production method,
showing the cost of production for businesses.
Capital market: Where long-term financial items like bonds and shares are
traded.
, Circular flow model: Shows the continuous movement of spending, production,
and income between different parts of the economy.
Closed economy: An economy that does not trade with other countries (no
foreign sector).
Consumption (C): Spending by households on goods and services.
Domestic figures (GDP): The total value of all goods and services produced
inside a country in a given time.
Economic equilibrium: When leakages equal injections (S + T + M = I + G +
X).
Expenditure method: Calculating GDP by adding spending from all sectors (C
+ G + I + (X - M)).
Exports (X): Goods and services made locally and sold to other countries.
Factor market: Where factors of production (land, labour, capital,
entrepreneurship) are bought and sold.
Factor cost/Factor prices: The cost of using factors of production like wages,
rent, interest.
Financial market: Where both short-term and long-term financial assets are
traded.
Financial sector: Institutions like banks, insurance companies, and the JSE that
aren't directly involved in production.
Foreign exchange market: Where one currency is traded for another (e.g., rands
for dollars).
Goods market: Where goods and services are traded, also known as Product
market.
Government (G): The expenditure of the government sector.
Imports (M): Goods and services produced in other countries and purchased by
local firms or households, sometimes represented by "Z".
Income method: Gross Domestic Income calculated by adding all income
earned by owners of factors of production (GDP(I)).
