Learning Unit 1 – Interdependence between major
sectors, markets and flows in a mixed economy
Three major flows in the economy
= Production, income & spending
- An increase in the production of goods & services leads to an increase in income
which in return increases spending
- Production generates income used for spending
- We produce goods & services iot consume those goods & services and satisfy our
needs & wants.
- The amount of goods & services we can consume depends on how much we can
spend on them.
- A continuous circular flow between production, income and spending takes place in
the economy
- Production = combining inputs to make or grow an output for sale or use
- Income:
Reward/remuneration that one receives for providing a good/service
Four sources of income:
o Labour – salary/wage
o Capital – interest
o Land – rent
o Entrepreneurship – profit.
- Spending sources:
Households
Firms
Government
Foreign sector
- Consumer spending (C), investment spending (I), government spending (G), foreign
sector spending (X-Z)
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,Stock variables & flow variables
- Production, income and spending are flows
- Flow = measurement of a variable over a period of time
Has time dimension
Offers moving picture of the economy
- Stock = measurement of a variable at a point in time
Has no time dimension
Only changes as a result of flow
Offers a snapshot of the economy
- Eg income statement measures income received and expenditure paid over a period
of time (usually a year). The statement of financial position measures the assets and
liabilities of an entity as a point in time
Stock Flow
Wealth Income
Assets Profit
Liabilities Loss
Capital Investment
Population Number of births & deaths
Balance in savings account Savings
Unemployment Demand for labour
Gold Reserve held by SA Reserve Bank Gold Sales, Gold Production (mining)
Interdependence between households and firms
Households
= all the people who live together and who make joint economic decisions or who are
subjected to others who make such decisions for them
- Household can consist of an individual, family or group of people who have joint
income and take decisions together.
- In primitive societies, households were the only decision-making unit in the economy
- Household members are consumers as they consume goods and services to satisfy
their wants
- Consumption = act of consuming goods and services
- Total/aggregate consumption expenditure = total spending of all households on
consumer goods and services
- Households provide firms with the factors of production to receive income in return
- The income the households receive is the source of spending (demand) for goods
and services
2
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, - Through their spending they indicate to the entrepreneur what to produce
Firms
= unit or organization that employs factors of production to produce the goods and services
that are sold in goods market
- Firms are the basic productive units in the economy
- Firm = artificial unit
- Ultimately owned by or operated by for the benefit of one or more individuals or
households
- Large firms are owned by their shareholders
- Firms are primarily engaged in production
- They combine the factors and raw materials to produce the product or service in
such a way to make maximum profit
- Profit = difference between revenue and cost (revenue – cost)
- All individuals who own or work for a firm is also members of a household
Thus, they are engaged in 2 sets of decisions:
o Consumer decisions
o Business decisions
- Factor of production purchased by the firm = capital
- Investment/capital formation = act of purchasing capital goods
- Households are responsible for spending on consumer goods (C)
- Firms are responsible for spending on capital goods (I)
- Investment spending = Firms expand their spending to expand their production
operations
- Investment spending = capital formation or expanding or productive capacity by the
firm through the purchase of machines and equipment
Interdependence
- Households & firm interact via the goods market and the factor market
- The interaction is known as the circular flow of goods and services
- Households offer their factors of production for sale on the factor market where its
purchased by firms
- Firms combine the factors of production to produce consumer goods and services.
- These goods & services are offered for sale on the goods market, where they’re
purchased by households.
- The flow of income & spending = monetary flow and is in the opposite direction of
the flow of goods and services.
3
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Please note that we do not take responsibility for your test/exam results
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, Various injections into leakages from the circular flow of income & spending
Adding the government
- Primary function = establish institutional frameworks within an economy
- Public sector – everything is owned by the government
- Government includes politicians, civil servants, government agencies and other
bodies belonging to or under the control of the government (President, mayors,
cabinet ministers ect)
- Includes all aspects of local, regional and national government
- Taxes from people are used to finance public goods and services
- Government’s economic activity involves 3 important
flows:
Government expenditure on goods & services
(G)
Taxes levied, and paid by, households and
firms (T)
Transfer payments = transfer of income and
expenditure from certain individuals and
groups (the rich) to other individuals and
groups (the poor).
- Transfer payments do not directly affect the overall
size of the production, income and expenditure flows.
- Government spending (G) constitutes an
addition/injection into the flow of spending and
income
- Taxes constitute a leakage/withdrawal from the
circular flow of income between households and
firms.
Adding the foreign sector
- 4th major sector in the world
- SA’s economy is an open economy with strong links with the rest of the world
- Balance of payments = various flows between SA and the rest of the world
- Foreign sector = countries & organizations outside the country’s border.
- Globalisation = economic links between different countries becomes stronger and
more complex.
- Advances in transport and communication have opened international markets
4
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Please note that we do not take responsibility for your test/exam results
Our notes are up to date with the current module outlines.
sectors, markets and flows in a mixed economy
Three major flows in the economy
= Production, income & spending
- An increase in the production of goods & services leads to an increase in income
which in return increases spending
- Production generates income used for spending
- We produce goods & services iot consume those goods & services and satisfy our
needs & wants.
- The amount of goods & services we can consume depends on how much we can
spend on them.
- A continuous circular flow between production, income and spending takes place in
the economy
- Production = combining inputs to make or grow an output for sale or use
- Income:
Reward/remuneration that one receives for providing a good/service
Four sources of income:
o Labour – salary/wage
o Capital – interest
o Land – rent
o Entrepreneurship – profit.
- Spending sources:
Households
Firms
Government
Foreign sector
- Consumer spending (C), investment spending (I), government spending (G), foreign
sector spending (X-Z)
1
Created by Pastthattest
Note: This document is protected under the Copyright Act
Illegal distribution of the document is not allowed
Please note that we do not take responsibility for your test/exam results
Our notes are up to date with the current module outlines.
,Stock variables & flow variables
- Production, income and spending are flows
- Flow = measurement of a variable over a period of time
Has time dimension
Offers moving picture of the economy
- Stock = measurement of a variable at a point in time
Has no time dimension
Only changes as a result of flow
Offers a snapshot of the economy
- Eg income statement measures income received and expenditure paid over a period
of time (usually a year). The statement of financial position measures the assets and
liabilities of an entity as a point in time
Stock Flow
Wealth Income
Assets Profit
Liabilities Loss
Capital Investment
Population Number of births & deaths
Balance in savings account Savings
Unemployment Demand for labour
Gold Reserve held by SA Reserve Bank Gold Sales, Gold Production (mining)
Interdependence between households and firms
Households
= all the people who live together and who make joint economic decisions or who are
subjected to others who make such decisions for them
- Household can consist of an individual, family or group of people who have joint
income and take decisions together.
- In primitive societies, households were the only decision-making unit in the economy
- Household members are consumers as they consume goods and services to satisfy
their wants
- Consumption = act of consuming goods and services
- Total/aggregate consumption expenditure = total spending of all households on
consumer goods and services
- Households provide firms with the factors of production to receive income in return
- The income the households receive is the source of spending (demand) for goods
and services
2
Created by Pastthattest
Note: This document is protected under the Copyright Act
Illegal distribution of the document is not allowed
Please note that we do not take responsibility for your test/exam results
Our notes are up to date with the current module outlines.
, - Through their spending they indicate to the entrepreneur what to produce
Firms
= unit or organization that employs factors of production to produce the goods and services
that are sold in goods market
- Firms are the basic productive units in the economy
- Firm = artificial unit
- Ultimately owned by or operated by for the benefit of one or more individuals or
households
- Large firms are owned by their shareholders
- Firms are primarily engaged in production
- They combine the factors and raw materials to produce the product or service in
such a way to make maximum profit
- Profit = difference between revenue and cost (revenue – cost)
- All individuals who own or work for a firm is also members of a household
Thus, they are engaged in 2 sets of decisions:
o Consumer decisions
o Business decisions
- Factor of production purchased by the firm = capital
- Investment/capital formation = act of purchasing capital goods
- Households are responsible for spending on consumer goods (C)
- Firms are responsible for spending on capital goods (I)
- Investment spending = Firms expand their spending to expand their production
operations
- Investment spending = capital formation or expanding or productive capacity by the
firm through the purchase of machines and equipment
Interdependence
- Households & firm interact via the goods market and the factor market
- The interaction is known as the circular flow of goods and services
- Households offer their factors of production for sale on the factor market where its
purchased by firms
- Firms combine the factors of production to produce consumer goods and services.
- These goods & services are offered for sale on the goods market, where they’re
purchased by households.
- The flow of income & spending = monetary flow and is in the opposite direction of
the flow of goods and services.
3
Created by Pastthattest
Note: This document is protected under the Copyright Act
Illegal distribution of the document is not allowed
Please note that we do not take responsibility for your test/exam results
Our notes are up to date with the current module outlines.
, Various injections into leakages from the circular flow of income & spending
Adding the government
- Primary function = establish institutional frameworks within an economy
- Public sector – everything is owned by the government
- Government includes politicians, civil servants, government agencies and other
bodies belonging to or under the control of the government (President, mayors,
cabinet ministers ect)
- Includes all aspects of local, regional and national government
- Taxes from people are used to finance public goods and services
- Government’s economic activity involves 3 important
flows:
Government expenditure on goods & services
(G)
Taxes levied, and paid by, households and
firms (T)
Transfer payments = transfer of income and
expenditure from certain individuals and
groups (the rich) to other individuals and
groups (the poor).
- Transfer payments do not directly affect the overall
size of the production, income and expenditure flows.
- Government spending (G) constitutes an
addition/injection into the flow of spending and
income
- Taxes constitute a leakage/withdrawal from the
circular flow of income between households and
firms.
Adding the foreign sector
- 4th major sector in the world
- SA’s economy is an open economy with strong links with the rest of the world
- Balance of payments = various flows between SA and the rest of the world
- Foreign sector = countries & organizations outside the country’s border.
- Globalisation = economic links between different countries becomes stronger and
more complex.
- Advances in transport and communication have opened international markets
4
Created by Pastthattest
Note: This document is protected under the Copyright Act
Illegal distribution of the document is not allowed
Please note that we do not take responsibility for your test/exam results
Our notes are up to date with the current module outlines.
