ECS2602 EXAM PACK
2025
QUESTIONS AND
ANSWERS
FOR ASSISTANCE CONTACT
EMAIL:
, lOMoARcPSD|46589353
CHAPTER 1 & 2 (SU 1)
INTRODUCTION – A TOUR OF THE WORLD/BOOK
1.1 Introduction – The crisis & South Africa
When economists want to dig deeper and look at the state of health of the country, they look at three basic
variables:
Output growth The rate of change of output
The unemployment rate The proportion of workers in the economy who are not employed
and who are looking for a job
The inflation rate The rate at which the average price level in the economy is
increasing over time
2.1 Aggregate output
‘Aggregate’ is the word macroeconomists use for total
ECONOMIC GROWTH
Economic growth takes place when the total output (production) of goods and services in an economy
increases
It is traditionally defined as the annual rate of increase in total output (production) or income in the
economy
This definition has to be qualified in two important respects:
Production, or income, should be should be measured in real time – the effects of inflation should
be eliminated
Population growth should also be adjusted for – they should be expressed in per capita terms
GROSS DOMESTIC PRODUCT (GDP)
The GDP is the total value of all final goods and services produced within the boundaries of a country
during a particular period (usually one year)
GDP is also the broadest, best-known and most frequently used measure of economic activity
GDP is a gross measurement as it includes the total amount of goods and services produced
Final goods and services refer to those goods and services that are consumed by households and firms
Final goods are things such as television sets, clothes, chairs, bookcases, hats, etc.
Services are things such as the services provided by lawyers, doctors, teachers, plumbers, beauticians, etc.
Intermediate goods are purchased to be used as inputs in producing other goods before they are sold to
the end user, e.g. crude oil used to manufacture petrol, or flour for baking a bread
NOMINAL GDP vs REAL GDP
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 as a result of:
An increase in the quantity of goods and services produced
An increase in the 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 instead of at current prices
Real GDP therefor measures the actual physical volume of production
, lOMoARcPSD|46589353
REAL PER CAPITA GDP
Positive economic growth actually occurs only when total real production or income grows at a faster rate
that the population
If population growth rate exceeds the economic growth rate, a decline in real GDP per capita occurs
If real GDP per capita rises, it is assumed that people are better off
INFLATION
Inflation is defined as the sustained rise in the general level of prices – the price level
The inflation rate is the rate at which the price level increases
Deflation is a sustained decline in the price level, and corresponds to a negative inflation rate
Macroeconomists typically looks at two measures of the price level, at two price indexes:
The GDP deflator
The Consumer Price Index (CPI)
STABILISATION POLICY
The main concern is how fiscal and monetary policy can be used to stabilise the economy as opposed to
analysing the determinants of economic growth
The following two policies play a major role:
Fiscal policy
Fiscal policy is the government’s policy in respect of government spending, taxation, and
borrowing, aimed at pursuing particular economic goals
The main instrument of fiscal policy is the budget, while the main policy variables are
government spending and taxation
Expansionary fiscal policy entails an increase in the demand for goods by increasing government
spending and/or decreasing taxes – the budget deficit increases
Contractionary fiscal policy entails a decrease in the demand for goods in the economy by
decreasing government spending and/or increasing taxes – the budget deficit decreases
Monetary policy
This involves all deliberate actions by the monetary authorities to influence the monetary
aggregate, the availability of credit, interest rates and exchange rates, with a view to affecting
monetary demand output, income, prices and the balance of payments
Expansionary monetary policy entails an increase in the money supply to bring about a decrease
in the interest rate in order to increase the demand for goods in the economy
Contractionary monetary policy entails a decrease in the money supply to bring about an
increase in the interest rate in order to decrease the demand for goods in the economy
2.2 The unemployment rate
Two other variables (besides GDP) that are an important aspect of how an economy is performing, is
unemployment and inflation
Employment is the number of people who have a job
Unemployment is the number of people who do not have a job but are looking for one
The labour force is the sum of employment and unemployment
L = N + U
Labour force = employment + unemployment
Unemployment rate is the ratio of the number of people who are unemployed to the number of people in
the labour force:
U
u=
L
, lOMoARcPSD|46589353
CHAPTER 3 (SU 2)
PART 1: THE SHORT RUN
THE GOODS MARKET
Extract from Stanlib:
At the time of the global financial market crisis in 2008, government decided to embark on a policy of
counter-cyclical fiscal policy. Government chose to dramatically increase spending on government
salaries which included both a rise in employment as well as salary increases, bit also increased the
budget deficit
Ideally, instead of boosting salary payments, government should have tried to stimulate economic activity
through an increase in infrastructure related projects. This could have included fast-tracking projects that
were already at an advanced stage of preparation or projects that have stalled due to changes in personnel
Looking forward the authorities need to focus on introducing measures that ultimately help create
employment and broaden the tax base. Without a rapid rise in tax revenue it is going to become
increasingly difficult for the government to satisfy the demands of the population
3.1 The composition of GDP
To understand what determines the demand for goods, it makes sense to decompose aggregate output
(GDP) from the point of view of the different goods being produced, and from the point of view of the
different buyers for these goods
(Note: output and production are synonyms)
The demand for goods which consist of consumer spending (C), investment spending (I), government
spending (G), exports (X) and imports (IM) is an important factor in creating employment opportunities
in South Africa
In this regards fiscal policy, through changes in government spending and taxation, plays an important
role in influencing the demand for goods
Consumption (C) private consumption or consumption; these are goods and services
purchased by consumers, ranging from food to airline tickets, to new cars,
etc.
Investment (I) gross private investment or investment; the sum of private non-residential
investment, the purchase by firms of new factories or new machines, and
private residential investment, the purchase by people of new houses or
flats
Government spending (G) this represents the purchases of goods, services and investment spending by
the national, provincial and local governments; ranging from school text
books to hospital medicines, services include the services provided by
government employees
Note that G does not include government transfers like social grants, nor
interest payments, nor payments on the government debt
Imports (IM) to determine the purchases of South African goods and services, we must
subtract imports, the purchases of foreign goods and services by South
African consumers, firms and government
Exports (X) we must add exports, the purchases of South African consumption and
capital goods and services by foreigners
The trade balance is the difference between exports and imports (X – IM), also called net exports
If exports > imports, then a country has a trade surplus; if exports < imports, then a trade deficit
The difference between goods produced and goods sold in a given year, is called inventory investment
(some goods produced in a given year are not sold in that year but in later years)
2025
QUESTIONS AND
ANSWERS
FOR ASSISTANCE CONTACT
EMAIL:
, lOMoARcPSD|46589353
CHAPTER 1 & 2 (SU 1)
INTRODUCTION – A TOUR OF THE WORLD/BOOK
1.1 Introduction – The crisis & South Africa
When economists want to dig deeper and look at the state of health of the country, they look at three basic
variables:
Output growth The rate of change of output
The unemployment rate The proportion of workers in the economy who are not employed
and who are looking for a job
The inflation rate The rate at which the average price level in the economy is
increasing over time
2.1 Aggregate output
‘Aggregate’ is the word macroeconomists use for total
ECONOMIC GROWTH
Economic growth takes place when the total output (production) of goods and services in an economy
increases
It is traditionally defined as the annual rate of increase in total output (production) or income in the
economy
This definition has to be qualified in two important respects:
Production, or income, should be should be measured in real time – the effects of inflation should
be eliminated
Population growth should also be adjusted for – they should be expressed in per capita terms
GROSS DOMESTIC PRODUCT (GDP)
The GDP is the total value of all final goods and services produced within the boundaries of a country
during a particular period (usually one year)
GDP is also the broadest, best-known and most frequently used measure of economic activity
GDP is a gross measurement as it includes the total amount of goods and services produced
Final goods and services refer to those goods and services that are consumed by households and firms
Final goods are things such as television sets, clothes, chairs, bookcases, hats, etc.
Services are things such as the services provided by lawyers, doctors, teachers, plumbers, beauticians, etc.
Intermediate goods are purchased to be used as inputs in producing other goods before they are sold to
the end user, e.g. crude oil used to manufacture petrol, or flour for baking a bread
NOMINAL GDP vs REAL GDP
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 as a result of:
An increase in the quantity of goods and services produced
An increase in the 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 instead of at current prices
Real GDP therefor measures the actual physical volume of production
, lOMoARcPSD|46589353
REAL PER CAPITA GDP
Positive economic growth actually occurs only when total real production or income grows at a faster rate
that the population
If population growth rate exceeds the economic growth rate, a decline in real GDP per capita occurs
If real GDP per capita rises, it is assumed that people are better off
INFLATION
Inflation is defined as the sustained rise in the general level of prices – the price level
The inflation rate is the rate at which the price level increases
Deflation is a sustained decline in the price level, and corresponds to a negative inflation rate
Macroeconomists typically looks at two measures of the price level, at two price indexes:
The GDP deflator
The Consumer Price Index (CPI)
STABILISATION POLICY
The main concern is how fiscal and monetary policy can be used to stabilise the economy as opposed to
analysing the determinants of economic growth
The following two policies play a major role:
Fiscal policy
Fiscal policy is the government’s policy in respect of government spending, taxation, and
borrowing, aimed at pursuing particular economic goals
The main instrument of fiscal policy is the budget, while the main policy variables are
government spending and taxation
Expansionary fiscal policy entails an increase in the demand for goods by increasing government
spending and/or decreasing taxes – the budget deficit increases
Contractionary fiscal policy entails a decrease in the demand for goods in the economy by
decreasing government spending and/or increasing taxes – the budget deficit decreases
Monetary policy
This involves all deliberate actions by the monetary authorities to influence the monetary
aggregate, the availability of credit, interest rates and exchange rates, with a view to affecting
monetary demand output, income, prices and the balance of payments
Expansionary monetary policy entails an increase in the money supply to bring about a decrease
in the interest rate in order to increase the demand for goods in the economy
Contractionary monetary policy entails a decrease in the money supply to bring about an
increase in the interest rate in order to decrease the demand for goods in the economy
2.2 The unemployment rate
Two other variables (besides GDP) that are an important aspect of how an economy is performing, is
unemployment and inflation
Employment is the number of people who have a job
Unemployment is the number of people who do not have a job but are looking for one
The labour force is the sum of employment and unemployment
L = N + U
Labour force = employment + unemployment
Unemployment rate is the ratio of the number of people who are unemployed to the number of people in
the labour force:
U
u=
L
, lOMoARcPSD|46589353
CHAPTER 3 (SU 2)
PART 1: THE SHORT RUN
THE GOODS MARKET
Extract from Stanlib:
At the time of the global financial market crisis in 2008, government decided to embark on a policy of
counter-cyclical fiscal policy. Government chose to dramatically increase spending on government
salaries which included both a rise in employment as well as salary increases, bit also increased the
budget deficit
Ideally, instead of boosting salary payments, government should have tried to stimulate economic activity
through an increase in infrastructure related projects. This could have included fast-tracking projects that
were already at an advanced stage of preparation or projects that have stalled due to changes in personnel
Looking forward the authorities need to focus on introducing measures that ultimately help create
employment and broaden the tax base. Without a rapid rise in tax revenue it is going to become
increasingly difficult for the government to satisfy the demands of the population
3.1 The composition of GDP
To understand what determines the demand for goods, it makes sense to decompose aggregate output
(GDP) from the point of view of the different goods being produced, and from the point of view of the
different buyers for these goods
(Note: output and production are synonyms)
The demand for goods which consist of consumer spending (C), investment spending (I), government
spending (G), exports (X) and imports (IM) is an important factor in creating employment opportunities
in South Africa
In this regards fiscal policy, through changes in government spending and taxation, plays an important
role in influencing the demand for goods
Consumption (C) private consumption or consumption; these are goods and services
purchased by consumers, ranging from food to airline tickets, to new cars,
etc.
Investment (I) gross private investment or investment; the sum of private non-residential
investment, the purchase by firms of new factories or new machines, and
private residential investment, the purchase by people of new houses or
flats
Government spending (G) this represents the purchases of goods, services and investment spending by
the national, provincial and local governments; ranging from school text
books to hospital medicines, services include the services provided by
government employees
Note that G does not include government transfers like social grants, nor
interest payments, nor payments on the government debt
Imports (IM) to determine the purchases of South African goods and services, we must
subtract imports, the purchases of foreign goods and services by South
African consumers, firms and government
Exports (X) we must add exports, the purchases of South African consumption and
capital goods and services by foreigners
The trade balance is the difference between exports and imports (X – IM), also called net exports
If exports > imports, then a country has a trade surplus; if exports < imports, then a trade deficit
The difference between goods produced and goods sold in a given year, is called inventory investment
(some goods produced in a given year are not sold in that year but in later years)
