so
or all
sf
o
i
t
n
u
l
Economics
C Chaplin
B Serfontein
C van Zyl
Learner’s
Book
11
CAP
S
Solutions for all
Economics
Grade 11
Learner’s Book
C Chaplin B Serfontein C van Zyl
Solutions for all Economics Grade 11 Learner’s Book
© C Chaplin, B Serfontein, C van Zyl, 2012
© Illustrations and design Macmillan South Africa (Pty) Ltd, 2012
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means,
electronic, photocopying, recording, or otherwise, without the prior written
permission of the copyright holder or in accordance with the provisions
of the Copyright Act, 1978 (as amended). Any person who commits
any unauthorised act in relation to this publication may be liable for
criminal prosecution and civil claims for damages.
First published 2012
13 15 17 16 14 12
2 4 6 8 10 9 7 5 3 1
Published by
Macmillan South Africa (Pty) Ltd
Private Bag X19
Northlands
2116
Gauteng
South Africa
Typeset by Purple Turtle Publishing CC
Cover image from AAI Fotostock
Cover design by Deevine Design
Illustrations by Ian Greenop, Dominick Mortier, Geoff Walton
Photographs by:
AAI Fotostock: pp. 29, 58, 83, 86, 87, 166 (4th from left), 309, 310, 316,
328, 330, 331, 341, 343, 344, 346; AfriPics: pp. 1, 63 (top), 94, 138,
209 (right); Africa Media Online: pp. 64, 163; Cedric Nunn: p. 200;
Digital Source: pp. 193 (left), 274; GalloImages: pp. 193 (right),
209 (left), 338; Greatstock: pp. 53, 56, 60 (left), 60 (right), 62, 63 (bottom),
73, 75 (bottom), 166 (far left), 166 (2nd from left), 166 (middle), 166 (far right),
199, 218, 243, 307, 314, 320, 321; South African Reserve Bank: p. 253;
The Bigger Picture: p. 215; Ummah Welfare Trust: p. 233;
VMS Images: pp. 75 (top), 116, 190
ISBN: 978-1-4310-1052-3
WIP: 4149M000
e-ISBN: 9781431018086
e-ISBN:
9781431018086
It is illegal to photocopy any page of this book
without written permission from the publishers.
The publishers have made every effort to trace the copyright holders.
If they have inadvertently overlooked any, they will be pleased
to make the necessary arrangements at the first opportunity.
The publishers would also like to thank those organisations and individuals
we have already approached and from whom we are anticipating permission.
Contents
Contents
Topic 1 Economics: Basic concepts, population and labour force.................... 1
1.
2.
Introduction ......................................................................................................................................... 3
Factors of production and remuneration ............................................................................................... 4
2.1 Factors of production: Natural resources ....................................................................................... 4
2.1.1 Characteristics of natural resources ...........................................................................................4
2.1.2 Importance of natural resources ................................................................................................7
2.1.3 Remuneration of natural resources ............................................................................................8
2.2 Factors of production: Labour ..................................................................................................... 10
2.2.1 Characteristics of labour .........................................................................................................10
2.2.2 Importance of labour ..............................................................................................................11
2.2.3 Remuneration of labour ..........................................................................................................13
2.3 Factors of production: Capital ..................................................................................................... 15
2.3.1 Characteristics of capital .........................................................................................................15
2.3.2 Importance of capital ..............................................................................................................15
2.3.3 Remuneration of capital ..........................................................................................................17
2.4 Factors of production: Entrepreneurship ..................................................................................... 18
2.4.1 Characteristics of entrepreneurship ..........................................................................................18
2.4.2 Functions of entrepreneurship .................................................................................................19
2.4.3 Importance of entrepreneurship ..............................................................................................20
2.4.4 Remuneration of entrepreneurship...........................................................................................21
3. Community participation .................................................................................................................... 23
3.1 Local economic planning and activities ....................................................................................... 23
4. Economically marginalised groups ...................................................................................................... 23
4.1 Accessibility ................................................................................................................................ 24
4.2 Empowerment ............................................................................................................................ 24
4.3 Procurement ............................................................................................................................... 25
Summary ................................................................................................................................................... 27
Topic 2 Circular flow and quantitative elements: Economic goods
and services......................................................................................... 29
1.
Introduction ....................................................................................................................................... 31
1.1 Final goods and intermediate goods ........................................................................................... 31
2. Final consumption expenditure by households (C).............................................................................. 33
2.1 Definition.................................................................................................................................... 33
2.2 Composition ............................................................................................................................... 34
2.3 Importance ................................................................................................................................. 35
3. Consumption expenditure by government (G) ................................................................................... 36
3.1 Definition.................................................................................................................................... 36
3.2 Composition ............................................................................................................................... 36
3.3 Importance ................................................................................................................................. 37
4. Gross fixed capital formation (I) .......................................................................................................... 38
4.1 Definition.................................................................................................................................... 38
4.2 Composition ............................................................................................................................... 38
4.3 Importance ................................................................................................................................. 40
5. The main aggregates .......................................................................................................................... 41
5.1 Gross domestic product (GDP).................................................................................................... 41
5.2 Gross value added (GVA) ............................................................................................................ 42
5.3 Gross national expenditure (GNE) ............................................................................................... 44
5.4 Expenditure on gross domestic product ...................................................................................... 45
5.4.1 Expenditure method .................................................................................................................46
5.5 Gross national income (GNI) ....................................................................................................... 47
5.5.1 Income method .......................................................................................................................48
Summary ................................................................................................................................................... 52
Contents • iii
Topic 3 Economic systems: Mixed economy ................................................... 53
1.
Introduction ....................................................................................................................................... 55
1.1 The market economy .................................................................................................................. 55
1.1.1 Characteristics of a market economy ........................................................................................55
1.1.2 Advantages of a market economy ............................................................................................56
1.1.3 Disadvantages of a market economy ........................................................................................56
1.2 The centrally planned (command) economy ............................................................................... 56
1.2.1 Characteristics of a centrally planned economy.........................................................................57
1.2.2 Advantages of a centrally planned economy .............................................................................57
1.2.3 Disadvantages of a centrally planned economy ........................................................................57
2. South Africa’s mixed economy ............................................................................................................ 58
2.1 The market ................................................................................................................................. 58
2.2 Characteristics of a mixed economy ............................................................................................ 59
2.3 Advantages ................................................................................................................................. 59
2.4 Disadvantages............................................................................................................................. 60
3. Economic efficiency ............................................................................................................................ 61
3.1 The National Budget ................................................................................................................... 61
3.2 South Africa’s social services........................................................................................................ 61
3.2.1 Education ................................................................................................................................62
3.2.2 Healthcare ...............................................................................................................................62
3.2.3 Welfare services and social grants ............................................................................................63
3.2.4 Housing and community amenities ..........................................................................................63
3.2.5 Public order and safety.............................................................................................................63
3.2.6 The South African government’s efficiency in delivering social services .......................................63
3.3 South Africa’s economic services ................................................................................................. 63
3.3.1 State-owned enterprises in South Africa ...................................................................................64
3.3.2 Privatisation vs. nationalisation ................................................................................................64
3.3.3 Promoting economic growth ....................................................................................................65
3.3.4 International trade policy .........................................................................................................65
3.3.5 Infrastructure ...........................................................................................................................65
3.4 The South African government’s efficiency in delivering economic services ................................. 65
3.4.1 Reconstruction and Development Programme (RDP) ................................................................66
3.4.2 GEAR .......................................................................................................................................66
3.5 International competitiveness ..................................................................................................... 67
Summary ................................................................................................................................................... 72
Topic 4 Basic economic problem, business cycles and public sector:
Economic structure ............................................................................. 73
1.
2.
3.
4.
iv
Introduction ....................................................................................................................................... 74
The primary sector .............................................................................................................................. 75
2.1 Composition of the primary sector .............................................................................................. 75
2.1.1 The mining industry .................................................................................................................75
2.1.2 Agriculture ...............................................................................................................................76
2.1.3 The forestry industry ................................................................................................................76
2.1.4 The fishing industry .................................................................................................................76
2.1.5 Our climate and natural scenery ..............................................................................................76
2.2 The importance of the primary sector ......................................................................................... 76
2.3 Discrimination, exclusion and access to opportunities in the primary sector ................................ 77
The secondary sector .......................................................................................................................... 78
3.1 Composition ............................................................................................................................... 78
3.2 The importance of the secondary sector ..................................................................................... 78
3.3 Discrimination and exclusion in the secondary sector .................................................................. 79
The tertiary sector ............................................................................................................................... 80
4.1 Composition ............................................................................................................................... 80
4.2 The importance of the tertiary sector .......................................................................................... 81
4.3 Discrimination and exclusion in the tertiary sector ...................................................................... 81
• Contents
Contents
5.
South Africa’s infrastructure ................................................................................................................ 83
5.1 Communications ........................................................................................................................ 83
5.2 Transport .................................................................................................................................... 84
5.3 Energy ........................................................................................................................................ 85
5.3.1 The importance of energy supplies ...........................................................................................86
5.4 Exclusions in South Africa’s infrastructure .................................................................................... 86
Summary ................................................................................................................................................... 92
Term 1 Revision........................................................................................................................................ 93
Topic 5 Dynamics of markets: Price elasticity ................................................. 94
1.
2.
Introduction ....................................................................................................................................... 97
Price elasticities and values.................................................................................................................. 97
2.1 Marginal utility ........................................................................................................................... 97
2.2 Price elasticity of demand ........................................................................................................... 99
2.2.1 Price elasticity of demand and its measurement ......................................................................100
2.2.2 Different kinds of price elasticity .............................................................................................102
2.3 Price elasticity of supply ............................................................................................................ 104
2.4 Factors determining the elasticity of demand ............................................................................ 106
2.4.1 Availability of substitutes........................................................................................................107
2.4.2 Time period under consideration ............................................................................................107
2.4.3 Degree of necessity or luxury ..................................................................................................107
2.4.4 Proportion of income spent ....................................................................................................108
2.5 Income elasticity of demand ..................................................................................................... 109
2.6 Cross price elasticity of demand ................................................................................................ 110
2.6.1 Substitutes.............................................................................................................................111
2.6.2 Complements ........................................................................................................................111
Summary ................................................................................................................................................. 115
Topic 6 Dynamics of markets: Relationship between markets ..................... 116
1.
2.
3.
Introduction ..................................................................................................................................... 118
Relative prices ................................................................................................................................... 118
Demand and supply relationships ..................................................................................................... 120
3.1 Substitutes .................................................................................................................................. 120
3.2 Complements ............................................................................................................................. 122
4. Relationship between product and factor markets ............................................................................. 124
5. Market structure ............................................................................................................................... 127
5.1 Perfect and imperfect markets................................................................................................... 127
5.2 Four basic market structures...................................................................................................... 127
5.3 Characteristics and differences .................................................................................................. 127
5.3.1 Perfect competition ................................................................................................................127
5.3.2 Monopoly ..............................................................................................................................131
5.3.3 Monopolistic competition .......................................................................................................132
5.3.4 Oligopoly ...............................................................................................................................133
5.4 Classification of models ............................................................................................................. 134
Summary ................................................................................................................................................. 137
Topic 7 Dynamics of markets: Effects of cost and revenue .......................... 138
1.
2.
3.
Introduction ..................................................................................................................................... 140
Objectives of businesses .................................................................................................................... 140
Short-run costs ................................................................................................................................. 143
3.1 The law of diminishing returns .................................................................................................. 143
3.2 Total, average and marginal cost schedules .............................................................................. 145
3.2.1 Average fixed cost, average variable cost and average total costs............................................146
3.2.2 Marginal cost ........................................................................................................................148
3.3 Cost curves ............................................................................................................................... 149
3.3.1 Fixed cost and average fixed cost ...........................................................................................149
3.3.2 Variable cost and average variable cost ..................................................................................149
3.3.3 Total cost and average total cost ...........................................................................................150
Contents •
v
3.3.4 Marginal cost ........................................................................................................................150
3.3.5 Average variable cost, average total cost and marginal cost ...................................................151
4. Long-run costs .................................................................................................................................. 153
4.1 Revenue calculations ................................................................................................................. 154
4.1.1 Total revenue.........................................................................................................................154
4.1.2 Marginal revenue ..................................................................................................................155
4.2 Changes in revenue .................................................................................................................. 156
4.3 Profits and losses ....................................................................................................................... 156
4.3.1 Production and employment decisions ....................................................................................158
Summary ................................................................................................................................................. 162
Topic 8 Economic growth and development: Economic growth ................. 163
1.
2.
Introduction ..................................................................................................................................... 166
The wealth creation process .............................................................................................................. 167
2.1 Natural resources ...................................................................................................................... 167
2.2 Labour ...................................................................................................................................... 168
2.3 Capital ...................................................................................................................................... 168
2.4 Entrepreneurship ...................................................................................................................... 169
2.5 Increase in productivity ............................................................................................................. 169
3. Distribution ...................................................................................................................................... 170
3.1 Income ..................................................................................................................................... 170
3.2 Wealth ...................................................................................................................................... 171
3.3 Measuring inequality ................................................................................................................ 171
3.3.1 Lorenz curves.........................................................................................................................171
3.3.2 The Gini coefficient ................................................................................................................172
4. Redistribution methods ..................................................................................................................... 174
4.1 What is redistribution and why is it important? ......................................................................... 174
4.2 Redistribution methods ............................................................................................................. 174
4.2.1 A progressive income tax system ............................................................................................174
4.2.2 Effective government policies and administration ....................................................................175
4.2.3 Availability and utilisation of factors of production ..................................................................176
4.2.4 Monetary policy .....................................................................................................................177
5. Economic growth ............................................................................................................................. 178
5.1 What is economic growth and why is it important? .................................................................. 178
5.1.1 Measuring economic growth .................................................................................................178
5.2 Methods to achieve economic growth ...................................................................................... 178
5.2.1 An increase in investment ......................................................................................................179
5.2.2 An increase in productivity .....................................................................................................179
5.2.3 Improved technology .............................................................................................................179
5.2.4 More efficient financial markets..............................................................................................180
5.2.5 An institutional environment that stimulates growth...............................................................180
5.2.6 An increase in demand...........................................................................................................180
5.3 Constraints on economic growth .............................................................................................. 181
5.4 Economic growth in South Africa .............................................................................................. 181
6. Standard of living ............................................................................................................................. 182
Summary ................................................................................................................................................. 187
Term 2 Revision...................................................................................................................................... 188
Topic 9 Economic growth and development: Economic development ....... 190
1.
2.
3.
vi
Introduction ..................................................................................................................................... 192
Methods of development.................................................................................................................. 193
Characteristics of developing countries ............................................................................................. 198
3.1 Low standard of living............................................................................................................... 199
3.1.1 Poverty ..................................................................................................................................199
3.1.2 Access to adequate health services .........................................................................................200
3.1.3 Access to education................................................................................................................200
3.2 Low levels of productivity.......................................................................................................... 201
3.3 High population growth and dependency burdens ................................................................... 201
• Contents
Contents
3.4 High levels of unemployment ................................................................................................... 202
3.5 Dependence on the primary sector ........................................................................................... 203
3.6 Deficient infrastructure.............................................................................................................. 204
4. Developing strategies ....................................................................................................................... 208
5. South Africa’s endeavours ................................................................................................................. 210
6. Indigenous knowledge systems and their role in development .......................................................... 214
Summary ................................................................................................................................................. 217
Topic 10 Economic issues of the day: Poverty ................................................ 218
1.
2.
Introduction ..................................................................................................................................... 220
Poverty ............................................................................................................................................. 221
2.1 Absolute and relative poverty .................................................................................................... 223
2.2 Measuring poverty .................................................................................................................... 223
2.2.1 Poverty in South Africa ...........................................................................................................224
2.3 Causes of poverty ..................................................................................................................... 225
2.3.1 Land issues ............................................................................................................................225
2.3.2 Exploitation ...........................................................................................................................225
2.3.3 Lack of education...................................................................................................................226
2.3.4 Lack of infrastructure .............................................................................................................226
2.3.5 Bad government policy...........................................................................................................226
2.3.6 Aid may lead to poverty .........................................................................................................226
2.4 Effects of poverty ...................................................................................................................... 226
2.4.1 Hunger ..................................................................................................................................226
2.4.2 Health issues .........................................................................................................................227
2.4.3 Lack of housing, sanitation and water services........................................................................227
2.4.4 Violence.................................................................................................................................227
3. Government measures to alleviate poverty........................................................................................ 228
3.1 Global programmes to alleviate poverty .................................................................................... 228
3.2 Poverty alleviation by the South African government ................................................................ 230
3.2.1 Social security programmes in South Africa .............................................................................231
3.2.2 Free subsidised basic household services .................................................................................232
3.2.3 Subsidised individual services .................................................................................................232
3.2.4 Housing .................................................................................................................................233
3.2.5 Land reform ...........................................................................................................................233
3.2.6 Income-generating programmes and SMMEs .........................................................................233
3.2.7 Programmes of the Department of Public Works .....................................................................234
Summary ................................................................................................................................................. 241
Topic 11 Money and banking.......................................................................... 243
1.
2.
Introduction ..................................................................................................................................... 245
Money .............................................................................................................................................. 246
2.1 Technical functions of money ................................................................................................... 246
2.1.1 Money is generally accepted as a means of payment for goods and services ............................246
2.1.2 Money as a measure of value or accounting unit ....................................................................247
2.1.3 Money as a store of value ......................................................................................................247
2.2 Modern money ......................................................................................................................... 247
2.2.1 Coins and notes .....................................................................................................................248
2.2.2 Bank deposits ........................................................................................................................249
2.3 Money-associated instruments .................................................................................................. 251
2.3.1 Cheques ................................................................................................................................251
2.3.2 Debit cards ............................................................................................................................252
2.3.3 Credit cards ...........................................................................................................................252
2.3.4 Electronic money or e-money..................................................................................................253
2.4 The monetary system ................................................................................................................ 253
2.4.1 Handling the payment system ................................................................................................254
2.4.2 Transfer of funds from surplus to deficit units..........................................................................254
2.4.3 Creation of money .................................................................................................................255
2.5 The value of money .................................................................................................................. 255
Contents • vii
2.6 Stabilising the value of money .................................................................................................. 256
Banking ............................................................................................................................................ 257
3.1 Basic principles of credit creation .............................................................................................. 257
3.2 Interest rates ............................................................................................................................. 258
4. Micro-finance and micro-lending activities ........................................................................................ 260
4.1 Member-based organisations .................................................................................................... 261
4.2 Banks that act as micro-finance providers .................................................................................. 262
4.3 Other micro-finance institutions ................................................................................................ 262
5. Central banking ................................................................................................................................ 263
5.1 Basic functions .......................................................................................................................... 264
5.2 Monetary policy ........................................................................................................................ 265
5.3 Bank failures and consequences ................................................................................................ 269
5.3.1 Reasons for bank failures .......................................................................................................270
5.3.2 Consequences of bank failure .................................................................................................270
Summary ................................................................................................................................................. 272
3.
Topic 12 Economic growth and development: South Africa’s economic
importance in Africa........................................................................ 274
1.
2.
Introduction ..................................................................................................................................... 276
Comparing economic indicators ....................................................................................................... 276
2.1 Population ................................................................................................................................ 277
2.2 Infrastructure ............................................................................................................................ 279
2.3 Production ................................................................................................................................ 280
2.4 Consumption, poverty and wealth ............................................................................................ 281
2.5 Government finances ................................................................................................................ 283
2.6 Foreign trade ............................................................................................................................ 284
2.7 Economic freedom and competitiveness ................................................................................... 285
3. Comparing social indicators .............................................................................................................. 286
3.1 Poverty and wealth ................................................................................................................... 286
3.2 Income distribution................................................................................................................... 287
3.3 Urbanisation ............................................................................................................................. 288
3.4 Health and HIV/AIDS................................................................................................................. 289
3.5 Education ................................................................................................................................. 290
3.6 The marginalised ...................................................................................................................... 291
4. Economic integration and cooperation ............................................................................................. 292
4.1 The South African Customs Union (SACU) ................................................................................ 292
4.1.1 A common monetary area......................................................................................................294
4.2 Southern African Development Community (SADC) ................................................................. 295
4.3 New Partnership for Africa’s Development (NEPAD) .................................................................. 298
4.4 African Union (AU) .................................................................................................................... 299
4.5 Other economic projects........................................................................................................... 302
Summary ................................................................................................................................................. 305
Term 3 Revision...................................................................................................................................... 306
Topic 13 Globalisation ..................................................................................... 307
1.
2.
3.
4.
viii
Defining globalisation ....................................................................................................................... 309
Causes of globalisation ..................................................................................................................... 309
2.1 Multinational companies (MNCs) ............................................................................................. 310
2.1.1 Arguments against MNCs ......................................................................................................311
2.2 Free trade and world trade agreements..................................................................................... 311
2.2.1 The World Trade Organization (WTO) ...................................................................................311
2.2.2 International organisations ....................................................................................................312
2.2.3 Southern African Development Community (SADC) ................................................................312
The consequences of globalisation .................................................................................................... 313
3.1 The positive consequences of globalisation ............................................................................... 313
3.2 The negative consequences of globalisation .............................................................................. 314
Why do countries trade with each other? .......................................................................................... 317
4.1 Absolute advantage in trade ..................................................................................................... 317
• Contents
Contents
4.2 Comparative advantage in trade ............................................................................................... 318
4.3 South Africa and comparative advantage .................................................................................. 319
4.4 The advantages and disadvantages of absolute and comparative trade ..................................... 320
5. North/South divide ........................................................................................................................... 320
5.1 Development indicators ............................................................................................................ 321
5.2 Closing the divide ..................................................................................................................... 323
Summary ................................................................................................................................................. 327
Topic 14 Economic redress: Environmental deterioration .............................. 328
1.
2.
3.
Introduction ..................................................................................................................................... 329
The problem ..................................................................................................................................... 330
Protecting the environment .............................................................................................................. 331
3.1 The passing of laws to protect the environment ........................................................................ 331
3.2 Steps that all governments could take ....................................................................................... 332
3.3 Motor vehicle emissions ............................................................................................................ 332
3.4 Steps that businesses could take ............................................................................................... 332
3.5 Public opinion ........................................................................................................................... 333
3.6 Joint efforts by businesses and households ................................................................................ 333
4. Approaches to sustainability.............................................................................................................. 334
4.1 What is natural capital? ............................................................................................................. 335
4.1.1 Reducing the consumption of non-renewable resources ...........................................................335
4.1.2 Protecting resources from pollution .........................................................................................335
4.1.3 Re-using or recycling resources when possible .........................................................................336
4.1.4 Fully protecting or preserving resources...................................................................................336
4.2 Methods of conservation .......................................................................................................... 336
4.2.1 Conservation of biodiversity ...................................................................................................336
4.2.2 Forest conservation ................................................................................................................337
4.2.3 Soil conservation....................................................................................................................337
4.2.4 Water conservation ................................................................................................................337
4.2.5 Energy conservation ...............................................................................................................337
5. Global and local impact on South Africa ........................................................................................... 338
5.1 Environmental deterioration in South Africa .............................................................................. 338
5.1.1 The mining industry ...............................................................................................................338
5.1.2 Agriculture .............................................................................................................................339
5.1.3 Pollution ................................................................................................................................339
5.2 Government actions taken in South Africa................................................................................. 340
5.2.1 The Reconstruction and Development Programme ..................................................................340
5.2.2 South Africa’s Department of Environmental Affairs and Tourism ............................................340
5.2.3 National Environmental Management Act (NEMA) of 1998....................................................341
5.2.4 The Bill of Rights ....................................................................................................................341
5.2.5 The Marine Living Resources Act of 1998 ...............................................................................341
5.2.6 The National Strategy for Sustainable Development (NSSD) ...................................................342
5.3 Global actions ........................................................................................................................... 342
5.3.1 The World Summit on Sustainable Development 2002 ...........................................................342
5.3.2 The Kyoto Protocol .................................................................................................................342
5.3.3 The Millennium Development Goals .......................................................................................343
Summary ................................................................................................................................................. 347
Term 4 Revision...................................................................................................................................... 348
Word list ........................................................................................................... 350
Bibliography ..................................................................................................... 352
Note to the teacher:
Please refer to the Teacher’s Guide for possible formal assessment tasks, sample tests
and exam papers, as well as their memoranda.
Contents • ix
Understanding the icons used
in this book
What you know already
This is a brief summary of what you have already learnt about this topic in earlier
grades.
k
Chec f This will be a short exercise you will do in a group or with your whole
l class to discuss the topic and check your prior knowledge.
myse
Word bank
ABC
These are new words which appear in the topic. They each have a brief but clear
definition to explain what they mean.
What you still need to know
This includes all the new material as part of the Grade 11 content that you will learn
about in the topic.
This icon will alert you to current economic issues covered in
the topic.
x
• Contents
T
1
c
opi
Economics:
Basic concepts,
population and labour
force
What you will learn about in this topic
l
l
l
Analysis of the factors of production and their remuneration:
– characteristics
– importance
– remuneration.
Investigation of community
participation in local economic
planning and activities.
Accessibility of the
economically marginalised
groups:
– empowerment
– procurement.
Let’s talk about this topic
l
l
l
Why do some people earn more than others?
How are prices for the factors of production determined?
Why are some resources more valuable than others?
1
What you know already
An important question that we as a society must answer is how goods and
services should be produced. To produce goods and services, we need the
factors of production. The prices firms pay for the factors of production are an
important determinant of the cost of production and, therefore, the supply of
goods and services.
The ownership of the factors of production, such as labour, is important for
households, since it is through this ownership that households derive an
income that they can use to satisfy their needs and wants. In the circular flow
model between households and firms, there is a real flow of factors of
production and monetary flow through the factors market. In this factors
market, the price for the factors of production is determined.
k 1. What are the main economic questions that every society must
Chec f
answer?
l
e
s
y
m
2. Name the different factors of production.
Word bank
ABC
Capital comprises all manufactured resources, such as machines, tools and
buildings, which are used in the production of other goods and services.
Capital deepening occurs when the amount of capital per worker is
increased, that is, when the growth in the stock of capital is greater than
the growth in the number of workers.
Capital-intensive production occurs when the production process is
dominated by machines (capital).
Capital widening occurs when the capital stock is increased to
accommodate an increasing labour force. In this case, the average amount
of capital per worker remains unchanged.
Entrepreneurship is one of the factors of production required to produce
goods and services. It requires a special sort of human effort and involves
organising the other factors of production, as well as risk-taking.
Factors of production are the resources used to produce goods and
services. There are four main factors of production: natural resources
(including land), labour, capital and entrepreneurship.
Geographical mobility is the movement of factors of production from one
location to another location.
Interest is the reward for the use of the factor of production of capital in
the process of production.
Investment is the creation of capital goods used in the production of other
goods and services.
2
• Economics: Basic concepts, population and labour force
Topic 1
Labour refers to the human effort that goes into the production of goods
and services with the aim of receiving a reward. This effort includes both
physical and mental exertion.
Natural resources refer to natural wealth and include water, arable land,
mineral deposits and the environment.
Non-renewable natural resources are resources that can’t be replenished
(replaced) or increased by nature or human actions. Their quantities are
fixed and if they are used up today, they are not available for use
tomorrow.
Occupational mobility is the movement of factors of production from one
type of productive activity to another type of productive activity.
Profit is the difference between revenue and cost, and is the payment the
entrepreneur receives.
Remuneration is the price or reward paid for the use of the factors of
production.
Renewable natural resources are natural resources that can be replaced by
nature over a period of time, or through human actions. Efficient use of
renewable resources requires a balance between the rate of use and the rate
of renewal. If the rate of use exceeds the rate of renewal, the resource will
be exhausted.
Rent is the payment to the owners of natural resources for the use of the
natural resources in the production of goods and services.
Wage is a term used by economists to refer to the basic amount, excluding
any benefits or allowances, that is paid in return for the use of labour in
production.
What you still need to know
1. Introduction
The purpose of production in an economic system is to supply us with
those goods and services that not only satisfy our basic needs but also our
wants, which, as you know, are unlimited. Since our resources (the factors of
production) are scarce, and our needs and wants unlimited, we are faced with
the problem of scarcity. To deal with the issue of scarcity, we need to make
efficient use of our resources. The pricing and efficient use of our factors of
production is, therefore, an important field of study in economics.
Economics: Basic concepts, population and labour force •
3
2. Factors of production and remuneration
To produce a good or service, we need inputs. We call these inputs factors of
production. Factors of production are classified in the following four groups:
l natural resources
l labour
l capital
l entrepreneurship.
We will examine:
l the characteristics of these factors of production
l their economic importance
l the remuneration (the reward or price) of the factors of production.
Natural resources
Labour
Capital
Entrepreneurship
Rent
Wages
Interest
Profit
Remuneration of the factors of production
In a market system, factors of production are mostly owned by private
individuals. In return for making these factors of production available for the
production of goods and services, the owners of the factors of production
receive remuneration. By remuneration, we mean a reward or price. If you sell
your labour, you receive a wage, which is your reward for selling your
labour, or the price you receive for your labour. For natural resources, the
remuneration is rent, for capital it is interest, for labour it is wages and for
entrepreneurship it is profits.
2.1 Factors of production: Natural resources
2.1.1 Characteristics of natural resources
Natural resources (sometimes called land) are all those resources (actual and
potential) that are supplied by nature and used in the production of goods
and services. These resources can be regarded as a ‘gift of nature’, since we
did not have to do anything to create them. They include agricultural and
residential land, water, wildlife, vegetation, air, climate, sunshine, mineral
deposits and soil nutrients.
An important characteristic of natural resources, which distinguishes them
from other factors of production, such as capital, labour and entrepreneurship,
is that the supply of natural resources is fixed. Natural resources are made by
nature and the energy to make them comes from geochemical, geophysical
and solar energy. It’s not possible for us to increase the supply of these natural
resources by our own efforts. It is, however, possible to discover new natural
4
• Economics: Basic concepts, population and labour force
Topic 1
resources and improve the quality of some of them. For example, it’s possible,
through exploration, to discover new deposits of oil. It’s also possible to turn
more land into productive agricultural land through irrigation projects and
the use of fertiliser.
Limited supply
Non-renewable
Gift of nature
Uneven global distribution
Renewable
Characteristics of natural resources
The natural resources used in the production of goods and services are nonrenewable resources or renewable resources.
a) Non-renewable resources
Coal, for example, was formed from living plants, over millions of years. We
can’t increase the supply of coal simply because we need more of it. We could,
however, possibly discover new deposits of coal and other minerals, if such
deposits exist. South Africa is in the fortunate position of having a wide
variety and quantity of mineral resources. These mineral resources are,
however, exhaustible; once they are used up, they can’t be replaced. The rate
at which they are exploited is, therefore, a cause of concern.
b) Renewable resources
Natural resources, such as trees, wildlife, soil, air, water and sunlight, may be
regarded as renewable, since they can be replaced by nature over a period of
time. It is, however, important to realise that, through our actions, we might
cause irreparable damage to these renewable natural resources. Just think of
the problems caused by air and water pollution, the problem of the disposal of
refuse, and the destruction of forests and wildlife. An important renewable
natural resource in South Africa is its wildlife. Many people visit South Africa
to see animals such as lions, cheetahs and elephants in their natural
environment. It is, therefore, extremely important that we take care of these
renewable resources. We need to manage these resources properly so that
future generations can also benefit from them. We have to ensure the
sustainability of the resources.
Economics: Basic concepts, population and labour force •
5
A scarce renewable resource in South Africa is water. We have low and
variable rainfall patterns. Therefore, we need to manage our supply of fresh
water very carefully to ensure that we use it optimally for irrigation and
industrial purposes, and human consumption. Due to the low rainfall, only a
small percentage (about 13%) of the land can be used for agricultural
production without making use of irrigation. There is an uneven global
distribution of natural resources in the world. A few nations, such as South
Africa, China, Canada, the USA, the former USSR, Brazil and Australia, have
some of the largest deposits of important minerals.
South Africa is one of the most important mining countries in the world, in
terms of the variety and quantity of minerals produced (see Table 1.1). It has
the world’s largest reserves of chrome, gold, vanadium, manganese and
platinum group metals (PGMs). South Africa is the leading producer of nearly
all Africa’s metals and minerals. Some of the exceptions, where other
countries are the leading producers are: diamonds (Botswana and the DRC),
uranium (Niger), and phosphates (Morocco). Our mineral resources are,
however, non-renewable and it’s important that we don’t base the future of
the South African economy exclusively on our mineral wealth.
Table 1.1: Mineral resources
Mineral
% of world reserves
% of world production
80
19,5
Chrome
76,1
44,8
Platinum group metals
55,7
46,2
Gold
51,9
16,6
Vanadium
37,4
57,1
Manganese
(Source: South African Department of Minerals and Energy. (2000). Selected mineral
resources of South Africa.)
We can also look at resources in terms of their geographical mobility and their
occupational mobility. The geographical mobility of natural resources is
limited. By this we mean that natural resources, for example, agricultural land
or mineral deposits, can’t be moved from one place to another. Alternative
uses, the so-called occupational mobility, are fairly high for some natural
resources. For example, a piece of land can be used for many different
purposes, such as building houses or growing vegetables.
6
• Economics: Basic concepts, population and labour force
Topic 1
Classroom activity 1.1 (10 marks)
1
2
Identify three renewable and three non-renewable natural
resources in South Africa.
(6)
Comment on the sustainability and scarcity of these resources.
(4)
2.1.2 Importance of natural resources
a) Production of goods and services
Every product or service we use contains some sort of resource provided by
nature. Therefore, production is not possible without natural resources. Also
consider the fact that, in a modern economy, energy in the form of electricity
is needed to produce goods and services. Electricity is ultimately derived from
natural resources, such as coal, uranium (for nuclear power) and the sun for
solar power. For example, to produce a television requires 35 different
minerals and to produce a computer requires around 30 different minerals.
The more natural resources a country has, the higher the potential output
will be. However, to have natural resources is not enough to ensure that
goods and services will be produced. In order to produce goods and
services from these natural resources, additional inputs in the form of
labour, capital (machines or tools) and entrepreneurship (such as technology)
must also be provided. There are a number of factors that influence the
ability of a country to make use of natural resources. Important factors are
the accessibility of the natural resources, the quality of the natural resources,
the availability of skilled labour and access to appropriate technology to
extract the natural resources.
b) The economic development of a country
The availability and quality of natural resources have a direct impact on the
economic development of a country. The current economic structure in South
Africa is largely a function of the discovery of diamonds and gold during the
late nineteenth century and the discovery of other important minerals during
the twentieth century. These discoveries influenced the development of our
infrastructure and shaped our society.
c) Job creation
The natural resources of a country also play an important role in the creation
of job opportunities. In South Africa, the mining industry created a variety of
jobs – from semi-skilled work in the mines to highly skilled work in the fields
of geology, engineering, exploration, mineral processing, surveying and
management. Unfortunately, we are also grappling with the negative effects
of a workforce that is not sufficiently skilled to meet the demands of our
modern technological era.
Economics: Basic concepts, population and labour force •
7
d) Export opportunities
Natural resources also enable a country to earn foreign exchange through
exports. South Africa has benefited from exporting gold, diamonds, coal and
platinum. This has boosted the primary sector of our economy. We now need
to develop our secondary sector (the manufacturing sector) to become more
competitive in today’s global markets.
Classroom activity 1.2 (15 marks)
1
Which factors must be present to enable a country to make use of
its natural resources?
(4)
2
In the Karoo, a major shale gas field can be exploited through
fracking that can supply South Africa with much need energy
resources. However, environmentalists are opposed to this process.
a) Is this a renewable or non-renewable resource?
(2)
b Why are environmentalists opposed to this process?
(3)
c) What are your views on the trade-off between preserving the
environment and exploiting this resources.
(4)
d) What other alternative energy resources are available to
South Africa.
(2)
2.1.3 Remuneration of natural resources
‘Rent is that portion of the produce of earth which is paid to the landlord for use of the
original and indestructible powers of the soil.’ David Ricardo (1772–1823)
In everyday usage, the word ‘rent’ has different meanings. Many people rent
their houses, offices and shops. Included in this rent is the rent for both the
land on which the building is situated and the building itself. The concept of
rent is also used in connection with the rental of a car or a computer. When we
use the concept of
Demand for the
rent in the field of
products or services
natural resources,
produced
we refer to the
payment made to
Climate
the owners of
natural resources
for the use of
these natural
Quality of the natural
resource
resources. This
excludes the
Factors that influence rent
rental payments
for improvements on the land, such as a building. The above diagram shows
some of the important factors that influence rent:
8
• Economics: Basic concepts, population and labour force
Technology
Location
Topic 1
a) An increase in the demand for a product or service
This will increase the demand for the natural resources used in the production
of a good and the delivery of a service. This, in turn, will increase the price, i.e.
the rent that the natural resource can command in the market.
b) The quality of the natural resource
This will also influence the rent we are prepared to pay for the natural
resource. The higher the quality of the resource, the higher the quantity of
goods and services will be that we can produce with this resource. We will,
therefore, be willing to pay a higher rent to obtain this resource.
c) Climate
This has an important impact on the use of agricultural land. In the tropical
areas of the world, agricultural land can be used to produce a variety of crops,
such as fruit, coffee and rubber. Land in the desert has very little value for
agriculture. Useful agricultural land will, therefore, command a much higher
rent than land that is of little agricultural value.
d) Technology
To extract natural resources and convert these into goods and services
requires appropriate technology. New technology can help us to unlock new
resources that are difficult to extract. It can also improve the quality of existing
natural resources and help us to create substitutes. All these factors will
impact on the rent that a natural resource can command.
e) Location
A fast-food outlet in the centre of the city will probably have a higher volume
of sales than one located on the outskirts of the city. The rent paid by the food
outlet in the centre of the city will, therefore, be higher. Location also
influences the cost of transportation. The further away the resource is from the
market, the higher the transport cost will be and the lower the rent will be that
can be charged.
Classroom activity 1.3 (7 marks)
1
Name the three factors that influence rent.
2
What do you think will happen to the rent on land that is situated
far from the market, if the government builds a railway line to
connect the farmer to the market?
(2)
3
Why do you think banks are prepared to pay a high rent in order
to be located in the centre of our cities instead of paying a low rent
by locating themselves far away from the city centres?
(2)
Economics: Basic concepts, population and labour force •
(3)
9
2.2 Factors of production: Labour
2.2.1 Characteristics of labour
Labour refers to any human effort that goes into the production of goods and
services with the aim of receiving a reward. It includes both physical and
mental effort and is performed to receive income in the form of wages or
salaries. A person who plays golf for recreational purposes also uses mental
and physical effort, but does not do it with the aim of receiving an income and
it is not regarded as labour.
Most jobs in the modern economy involve both mental and physical labour.
Writing a business proposal involves both physical and mental effort. The
mental effort is using your brain to come up with new and creative ideas,
while the physical effort is typing the proposal.
The use of labour in the production of goods and services is influenced by a
number of issues that are different from those for the other factors of
production.
Ownership cannot
be separated
Occupational and
geographic mobility
are limited
Non-monetary
factors play an
important role
Use is determined
by bargaining
between employer
and employee
Heterogeneous:
Differs from person
to person
Supply changes
slowly
Characteristics of labour
a) The ownership of labour does not belong to the firm, but to the person
selling the labour service. Ownership can’t be separated from the person
selling the service. When a firm buys labour, it doesn’t buy or own the
person itself (this would be slavery), but only the services that the person
provides. A firm can’t sell labour, or transfer ownership of labour to
someone else, as in the case of capital, where a firm owns a machine.
b) Usually labourers need to be physically present when their services are
used. This means that non-monetary factors, such as the geographic
location of the work; working conditions, such as hours of work, leave,
health and safety issues; and job satisfaction are important. Machines, on
the other hand, do not complain about working conditions.
c) Labour can’t be stored or hoarded for use in the future. Labour lost due to
strikes or inefficiency is lost forever.
10
• Economics: Basic concepts, population and labour force
Topic 1
d) The geographical and occupational mobility of labour is relatively low.
Geographical mobility refers to the willingness and ability to move to a job
in another place. Some factors that influence geographical mobility are the
financial cost of moving, the availability of schools and healthcare, family
ties and so on.
Occupational mobility refers to the willingness and ability to do different
kinds of jobs. Factors such as the lack of qualifications, retraining and the
difference in working conditions associated with different jobs influence
occupational mobility. Some jobs require specialised skills that are not
easily transferable to other jobs. Over time, however, both geographical
and occupational mobility increase as younger people enter the labour
market and make different choices.
e) Labour is heterogeneous, which means that it has many different
characteristics. This is because people differ in terms of attitude, abilities,
personalities, physical attributes and productivity. This makes labour a
complex factor of production to manage.
f) The use of labour by a firm is a bargaining process between the firm
(employer) and the worker (employee). Neither the firm nor the worker
can determine conditions of work on the spur of the moment or without
following any formal structure. Both must take the existing labour
legislation into account in the bargaining process. In many cases, there is a
long-term relationship between labour and a particular firm, based on a
contract between the firm and worker.
g) It isn’t possible to increase the supply of labour on short notice. This is
because the quantity of labour available depends on factors such as
population growth, cultural factors, and education and training. These
factors take a long time to change.
Classroom activity 1.4 (6 marks)
1
2
How does labour, as a factor of production, differ from natural
resources and capital?
(3)
What do we mean when we say that labour is heterogeneous?
(3)
2.2.2 Importance of labour
Production cannot take place unless labour is part of it. Both the quantity of
labour and the quality of labour are important for the production of goods
and services to take place.
a) Quantity of labour
The greater the quantity of labour available in a country, the greater the potential
output that can be produced. It is currently estimated that between 400 000 and
500 000 new people enter the South African labour market every year.
Economics: Basic concepts, population and labour force • 11
There are mainly three factors that determine the quantity (or supply) of
labour available in a country:
l the population growth rate (the birth rate minus the death rate)
l the labour force participation rate
l migration.
i)
The population growth rate. If the birth rate exceeds the death rate, the
size of the population increases. Since there are more people, there is more
labour. The effect of an increase in the population growth rate is only felt
when children reach working age.
ii) The labour force participation rate. This is another factor that determines
the size of the labour force. Not all people of working age are part of the
labour supply or the economically active population. Some choose not to
work and some are not able to work.
iii) Migration. The difference between immigration and emigration is another
factor that influences the supply of labour. Workers who move from one
country to another immediately add to the labour force of the destination
country. According to official data provided by Statistics South Africa,
immigration was an important source of skilled labour for South Africa in
the past, but the trend has changed and we are now experiencing an
outflow of skilled labour.
b) Quality of labour
Even more important than the quantity of labour is the quality of labour. The
quality of labour refers to the skills, knowledge and health of workers. The
quality of labour is often referred to as human capital. Many economists
believe that the difference in living standards between countries is mainly due
to differences in human capital. The higher the quality of human capital in a
country, the higher the productivity of labour. As a result, more goods and
services are produced to satisfy needs and wants.
i) Increased education is one way in which the quality of labour can be
improved. It can be of a formal nature, where students obtain diplomas,
certificates and degrees, or it can be informal through on-the-job training,
or learning-by-doing.
ii) Skills development is currently a key strategy adopted by the South
African government to deal with the quality of labour.
c) Selling of labour services is the main source of income for households
In South Africa, about 63% of the income of households is in the form of
wages and salaries that households earn by selling their labour services.
A change in the wages and salaries paid to labour will, therefore, have an
important impact on the living standards of households.
d) The cost of labour is the largest cost factor in production
For most businesses the largest cost item is the wages and salaries paid
to labour. An increase in wages, without an increase in productivity,
12
• Economics: Basic concepts, population and labour force
Topic 1
will have a major impact on the cost of production, and will cause a rise in
prices and inflation.
e) Households are an important part of the total demand for goods and
services
The spending by households is a major component of the demand for goods
and services. If the income households receive in the form of wages and
salaries increases, they will tend to spend more. This, in turn, will provide an
incentive for firms to increase the production of goods and services in the
economy. A decrease in the income of households will have the opposite effect.
f) Labour has a major impact on the productivity of a business
Labour plays an important role in improving the efficiency and productivity of
our economy. While all the factors of production are needed for the production
of goods and services it is that labour actively uses capital and natural
resources to produce goods and services. The better use is made of these
resources by labour, the more productive and efficient our economic system.
Classroom activity 1.5 (10 marks)
1
Briefly explain how the population growth rate and the labour force
participation rate influence the labour supply of South Africa.
(2)
2
Why do we argue: ‘Even more important than the quantity of
labour is the quality of labour’?
3
(2)
What are the likely impacts of HIV/Aids on the labour force and
economy of South Africa?
(6)
2.2.3 Remuneration of labour
In return for providing firms with labour services, the owners of these labour
services receive remuneration in the form of wages and salaries, royalties,
commissions, management and consultancy fees, bonuses and fringe benefits
(housing, medical aid, pension contributions, etc.).
In a market system, the underlying forces that determine the level of wages,
and the difference in wages, are linked to the forces of demand and supply.
The demand for labour is based on the demand for goods and services that
will be produced with labour. The remuneration of labour will depend on two
things, namely, the demand for the goods and services produced by labour,
and how valuable the person is to the firm.
a) The higher the demand for a good or service, the higher will be the
demand will be for the labour needed to produce the goods or service, and
the higher the wage that will be paid.
b) The more valuable a person is to a firm, the more willing and able the firm
will be to pay a higher wage. How valuable a person is to a firm will also
depend on his or her productivity and skills. Therefore, wages differ
Economics: Basic concepts, population and labour force • 13
c)
d)
e)
f)
g)
h)
14
because the services of some people are regarded as more valuable than
the services of other people. The market also reflects which levels of skills
are scarce and which are in abundant supply. If a skill is regarded as
scarce, the market will offer a higher reward. This is to ensure that people
will be willing to invest in gaining the skills. This will then increase the
supply of this skill to the market. If a skill is in abundant supply, the
market will decrease the rewards for these skills and people will rather try
to gain other more useful skills to offer the market.
Wage differentials also occur because jobs are different. Different jobs
require different levels of education, skills, training and experience. The
higher these requirements are, the higher the wage is. Some jobs are
dangerous and hazardous, while others are more pleasant. A wage
differential is usually paid to compensate people for doing more
hazardous jobs.
Not only do jobs differ, but people differ. Labour is not homogeneous.
Different people have different attitudes, skills, education and experience.
Therefore, they earn different wages. We have seen that the scarcer the
supply of certain skills, the higher the wage that is paid. The more
abundant the supply of skills, the lower is the wage that is paid.
Wage differences are also caused by geographical and occupational
immobility. Workers do not easily move from one location to another
location and from one kind of job to another job.
There is also evidence to show that the larger the firm is and the more
unionised it is, the higher the wage will be compared to smaller firms and
less unionised firms.
Discrimination is another reason why wages might differ. Discrimination
by employers occurs when different wages are paid to people in the same
occupation, who have the same levels of education, skills or experience.
One can distinguish between occupational discrimination and human
capital discrimination. Occupational discrimination occurs where, for
example, women are restricted to ‘woman’s work’, such as nursing,
teaching or secretarial work. This leads to a high supply of labour and low
wages for these occupations. Human capital discrimination occurs where
certain groups are given fewer opportunities to gain education and skills
and, consequently, earn less. This was the case under apartheid in South
Africa.
Another issue of importance in South Africa is the wage gap. The wage
gap is the difference between the wage level of the average production
worker and the chief executive officer of a firm. This is believed to be too
high in South Africa, compared to other countries. It is estimated that the
chief executives in large enterprises in South Africa earn about 50 times
more than production workers. One of the aims of the Employment Equity
Act is to reduce the wage gap in South Africa.
• Economics: Basic concepts, population and labour force
Topic 1
Classroom activity 1.6 (4 marks)
1
Why do people with scarce skills receive higher wages?
(1)
2
How does discrimination contribute to wage differentials?
(3)
2.3 Factors of production: Capital
2.3.1 Characteristics of capital
Capital comprises all manufactured resources, such as machines, tools and
buildings, which are used in the production of other goods and services.
Capital goods are not consumed to satisfy needs and wants. They do not yield
direct consumer satisfaction. Their only function is to be used in the
production of goods and services, to satisfy our needs and wants. Capital
goods are important in any economy because they enable people to create
those goods and services that satisfy needs and wants.
A factor that distinguishes capital goods from other factors of production is
that capital goods must first be created before they can be used. Unlike in the
case of natural resources, the supply of capital goods is not fixed, but depends
on the willingness and capacity of a society to create these capital goods.
2.3.2 Importance of capital
Creation of capital goods
Once capital goods have been created, they can be used in the
production of other goods and services, now and in the
future. Capital goods are, therefore, of a more durable nature
than the other factors of production. Still, they undergo wear
and tear (depreciation) and must be replaced. Provision must,
therefore, be made for the upkeep and replacement of capital.
Due to the diverse nature of capital, the mobility of different
capital goods varies. The geographical mobility of some
capital goods, such as tools and machines, is very high. It is
relatively easy to move these goods from one place to
another. It is also possible to use some capital goods in
different occupations. A personal computer can be used by
Increase
Increase productivity
architects, accountants, writers, artists, etc. Other capital
production capacity
of labour
goods, such as buildings, factories, railway lines, bridges
and dams, are immobile and cannot be moved from one area
to another.
Increase in economic growth
Importance of capital goods for the
economy
Capital goods play an important role in creating production
capacity. The more machines, factories and tools we have, the
more goods and services we can produce. The better the
Economics: Basic concepts, population and labour force • 15
quality of these capital goods is, the more productive we can be. The more
productive we are, the higher our economic growth will be.
Classroom activity 1.7 (4 marks)
1
Give two examples of capital goods.
(2)
2
How do capital goods differ from natural resources?
(2)
The creation of capital goods is called investment in economics and involves
the following steps:
Step 1: Based on a number of factors, a firm decides that it needs more capital
goods, such as machines or a larger building. Firms usually base this decision
on the expected profits they can make in the future from selling goods and
services, which satisfy needs and wants.
Step 2: The firm needs to raise the funds, called financial capital, to create or
buy these capital goods. Where do they obtain these funds? If they do not
have their own funds, they will need to borrow funds from someone else.
Step 3: Once the firm has obtained the finance, it will create or buy the capital
goods.
Step 4: The firm will then add the capital goods to their existing capital goods
and their capital stock will increase.
Step 5: By combining the new capital goods with other inputs, the firm will be
able to produce more goods and services, which it can sell to consumers. From
the proceeds, the firm can pay interest payments and eventually repay the
money it borrowed.
In order for the creation of capital goods to take place, savings are needed.
People must abstain from current consumption and, in order to convince them
to do that, banks and other institutions pay them an interest on their savings.
The foreign sector also provides an important source of financing in the form
of investment by foreign firms and individuals.
Capital deepening in the economy occurs when the amount of capital per
worker is increased. This happens when the growth in the stock of capital is
greater than the growth in the number of workers. For example, if the capital
stock increases by 10% and the number of workers increases by 8%, it implies
that each worker has more capital goods to work with. As a result, capital
16
• Economics: Basic concepts, population and labour force
Topic 1
deepening takes place in the economy. An increase in the capital intensity of
production means that it takes more capital to produce a unit of output than
in the past.
Capital widening occurs when the capital stock is increased to accommodate
an increasing labour force. In this case, the average amount of capital per
worker remains unchanged.
Classroom activity 1.8 (6 marks)
1
Why is savings important for the creation of capital goods?
(2)
2
Differentiate between capital deepening and capital widening.
(4)
2.3.3 Remuneration of capital
The reward for capital is the interest that the owner of capital receives as
payment for making his or her capital available for production. This is
expressed as an annual percentage of the amount loaned and is called the
interest rate. In the case of a loan of R1 000 000 and an interest payment
of R100 000, the interest rate received is equal to 10% per year, since
R100 000 ÷ R1 000 000 × 100 = 10%.
The interest rate is determined in the financial market. You will find that
there are many different interest rates in the market.
There are a number of factors that influence the interest rate on capital:
a) Risk of investment
The higher the risk associated with the investment, the higher the
interest rate. If a person regards the risk of lending funds to a firm as
very high, he or she will only lend the funds to the firm if the interest
rate compensates him or her for this risk.
b) Liquidity of investment
The easier it is to turn the investment back into money, the lower the
interest rate will be.
c) Term of investment
The longer the term of the investment, the higher the interest rate
associated with it. If the firm wants to borrow the money from Mr Bee for
a 20-year period, it will have to pay him a higher interest rate than in the
case of a 5-year period.
d) Demand for capital goods
The demand for capital goods will depend on the number of profitable
opportunities that exist for the firms in the economy. The more positive
they feel about the future and the higher their expectations of profits, the
Economics: Basic concepts, population and labour force • 17
more capital goods they will demand. This increase in the demand for
funding of capital goods will increase the interest rate.
e) Supply of funding
The higher the supply of funding, the easier it is for firms to borrow funds
and the lower the interest rate.
f) Monetary policy
Through its monetary policy, the central bank of a country can also
influence the interest rate.
Classroom activity 1.9 (4 marks)
1
2
How does the term of investment influence the interest that
is paid?
(2)
How does risk influence the interest rate that is paid on a loan? (2)
2.4 Factors of production: Entrepreneurship
2.4.1 Characteristics of entrepreneurship
The word ‘entrepreneur’ comes from the French word ‘entrepredere’,
which means ‘to undertake’. The term was coined by Jean Baptiste Say
(1816), who described the entrepreneur as the agent ‘who unites all means
of production’.
Ask yourself the question: ‘What do I want to be when I grow up?’ Many of
you would probably choose some sort of career where you would work for
someone else. If your answer is that you wish to be your own boss, you are
probably an entrepreneur in the making. In broad terms, an entrepreneur
may be regarded as someone who organises and assumes the risk of a
business, in return for profit. This includes:
a) Bearing the risk of buying at certain prices and selling at uncertain
prices. In the market economy, the entrepreneur exploits opportunities
that arise in markets whenever there is an excess supply, or excess
demand, for a product. In this sense, the actions of entrepreneurs are
important to establish equilibrium in markets.
b) Bringing together the factors of production to produce goods and
services for which there is a demand and from which they can make a
profit. In a market economy, the availability of labour, capital and natural
resources is not enough to ensure that production takes place. Someone
must take the responsibility and shoulder the risk of combining and
organising these resources. They must do it in such a way that the
production of goods and services takes place in the most efficient way
possible.
18
• Economics: Basic concepts, population and labour force
Topic 1
c) The creation of new enterprises, of which the entrepreneur is the founder.
In this sense, the entrepreneur is responsible for the introduction of a new
product, new ways of producing goods and services, opening new
markets and establishing new organisations in an industry. The
entrepreneur is an innovator, as he or she transforms creative ideas into
goods and services for society.
2.4.2 Functions of entrepreneurship
Another way to describe an entrepreneur is to look at the entrepreneurial
process, which is a process that describes the different things that an
entrepreneur does.
Entrepreneurs:
Identify
Have a clear
opportunities understanding
of what they
want to do
Persuade others of their plan
Get hold of
resources
Create a new
enterprise from
resources
Health shop
Business
plan
Business
plan
The entrepreneurial process
According to this approach, the following five stages or functions can be
distinguished:
a) Recognising and identifying opportunities. This can involve the
development of a new good, such as the fax machine, the mobile phone
and the computer, or a new service, such as online auctions and electronic
banking. It may also involve the development or ‘discovery’ of new
resources to be used in the process of production of a good or service. This
can also take the form of new innovative ways of producing goods and
services. Entrepreneurs are always looking for new opportunities and are
good at adapting to change and uncertainty.
b) Having a clear understanding of what they want to do. Behind their
‘vision’ is a well-structured business plan and a good understanding of
what it will take to make it happen. They have to make decisions about
the location of the business, the scale of production, the way in which
production will take place and how it will be financed and marketed.
Economics: Basic concepts, population and labour force • 19
c) Persuading others of their plan. To implement their plan, they need the
cooperation of others. They also need to convince other role-players of the
feasibility (workability) of their plan. Therefore, they need to be able to
communicate their plans effectively to others.
d) Getting hold of resources. We have seen that, to produce a good or service,
we need resources (natural resources, labour, capital and
entrepreneurship). In some cases, you might need a very specialised
resource, such as people with specific skills, or a particular kind of natural
resource. Getting hold of the necessary finances for the venture is also
often important.
e) Creating a new enterprise. By organising the resources, an opportunity is
converted into a new enterprise that supplies goods and services to
society.
Classroom activity 1.10 (4 marks)
Why do we need entrepreneurs in the South African economy?
(4)
2.4.3 Importance of entrepreneurship
All the economies of the world possess natural resources, labour and capital.
They all face the challenge of combining these resources in the most efficient
way to produce goods and services, which will satisfy some of the unlimited
needs and wants of their citizens. In a market economy, the entrepreneurs are
the people who face this challenge, as well as the risks and rewards associated
with it.
In a market economy, entrepreneurs are the driving force. Their actions result
in the production of more goods and services, and the creation of employment
and wealth for the whole country. The more entrepreneurial activity there is
in a country, the higher the economic growth rate. Economic growth is
essential for development and an increase in living standards.
Production of goods
and services
Create employment
Increase economic growth
Increase in living standards
More wealth
Entrepreneurial activity
Create opportunities
for others
Importance of entrepreneurial activity
20
• Economics: Basic concepts, population and labour force
Topic 1
Entrepreneurs are also innovators. They develop new products and services,
and change the processes of production, which create further opportunities
for other entrepreneurs. Think of the many opportunities created by the
development of the computer. Examples are: software products, the
development of the internet and all the opportunities associated with it. It also
changed the way in which we do business and operate businesses.
On the other hand, a lack of entrepreneurial activity causes a low level of
economic activity. The economy then tends to stagnate and economic
development suffers. In such a case, it might be necessary for the state to
interfere and act as an entrepreneur. Sometimes, however, the state itself,
through its interference and regulations, might be the reason why
entrepreneurial activity is very low.
It is expected that, in the future, more people will have to work for
themselves. It is important, therefore, that we not only equip people with the
necessary skills, but also create an environment that makes it easier for people
to create their own businesses.
Classroom activity 1.11 (4 marks)
What is the link between more entrepreneurial activity and economic
growth?
(4)
2.4.4 Remuneration of entrepreneurship
Profit is the remuneration of the entrepreneur, who is the driving force in a
market economy. In all the activities undertaken by entrepreneurs, they face
the risk of failure. Why do you think they are willing to undertake this risk
of failure?
In a market economy, the possibility of making a profit is a strong incentive
for entrepreneurs to undertake the risk associated with the establishment of
new enterprises. Typically, an entrepreneur will weigh the risk of failure
against the probability of making a profit. If the probability of making a profit
outweighs the risk involved, the entrepreneur will be willing to undertake the
enterprise. If the entrepreneur is successful in providing the right product, at
the right price, at the right time and to the right consumers, he or she will be
able to make a profit.
Profits are the difference between the revenue received from selling the good
or service to the market and the cost of producing the good or service. If the
revenue exceeds the cost of production, a profit is made. If the revenue is less
than the cost of production, there is a loss. The amount of profit a business
Economics: Basic concepts, population and labour force • 21
makes is determined by how successful the business is. It isn’t possible to
determine beforehand what the profit will be. The amount earned by the
entrepreneur might change from one period to the next. There is no guarantee
that a profit will be made. Whether or not a profit is made depends on how
successful the entrepreneur is. The more successful the entrepreneur is, the
higher his or her profits will be.
Apart from providing an incentive for entrepreneurs to undertake the risk
associated with it, profit also plays an important role in signalling to
entrepreneurs whether they are on the right track. In a market system, the
successful entrepreneur is rewarded through profit, which indicates that he or
she is producing the right product, at the right price, at the right time, for the
right consumer.
The unsuccessful entrepreneur, who is wasting resources by not producing
the right product or services at the lowest cost possible, is punished, since his
or her enterprise will make a loss. This loss that the entrepreneur suffers
provides a signal to him or her to change his or her actions.
There are a number of factors that influence the amount of profit an
entrepreneur makes. Any factor that influences either the cost of production
or the revenue of the business will influence profits. Can you think of some
factors that might influence the cost and revenue of a business?
The following factors will have an important influence:
Factors influencing revenue
Factors influencing cost of production
Economic conditions in the country
Changes in the cost of production
(wages, interest rates, transport cost)
Changes in the demand for the product
(income of consumers, taste of
consumers)
Technology
Price of the product
Innovation
The availability of products from other
competitors
Government regulations
Classroom activity 1.12 (2 marks)
How does the market reward an entrepreneur and punish an
entrepreneur?
22
• Economics: Basic concepts, population and labour force
(2)
Topic 1
3. Community participation
In economics, we need to solve the questions of what should be produced,
how goods and services should be produced, for whom goods and services
should be produced, who makes the economic decisions and by what process.
The answers to the third and fourth questions are particularly important in
South Africa. In a market system, goods and services are produced for people
who can pay for them. The poor are, therefore, largely excluded. The answer
to the fourth question, ‘Who makes the economic decisions and by what
process?’ reveals a great deal about our society in South Africa.
3.1 Local economic planning and activities
Participation in municipal affairs is an important means by which residents
can be involved in decisions about the goods and services that need to be
provided by the local authorities (municipalities and city councils). Through
this process, residents are given a voice about the rates and taxes they must
pay, the goods and services that should be produced, how they should be
produced and for whom, and the efficiency of these services.
For this system to work, it is, therefore, important that residents take an active
role in these affairs through voting and serving on official committees and
services.
4. Economically marginalised groups
People who are discriminated against are, to a large extent, excluded from the
decision-making process. In the past, black, coloured and Indian South
Africans were discriminated against in terms of employment opportunities,
the development of skills, ownership and control of businesses, and access to
educational and social services. As a result, we have many economically
marginalised people in South Africa.
These are people who don’t fully participate in the economy. They don’t
own factors of production and, therefore, don’t receive sufficient benefits
from the factors of production. In other words, their needs are not being
sufficiently met.
Economically marginalised people include unemployed people or people that
are ‘employed’ in the informal sector. The informal sector is made up of
people who sell goods and services to the local community on a small scale.
Examples are spaza shops, the hairdresser and the shoe-repair man on the
street corner. You will learn more about South Africa’s unemployment
problem and the role of the informal sector during the course of your studies
Economics: Basic concepts, population and labour force • 23
this year. People in the informal sector satisfy their needs mainly through
entrepreneurship on a small scale. Through its policy of small, micro and
medium enterprises (SMME), the government is trying to help these
entrepreneurs to gain access to the formal economy.
Women are also economically marginalised. They were excluded from the
decision-making processes in the economy for a long time. The new
dispensation in South Africa has achieved remarkable successes in improving
the participation levels of women in our economy.
Racial discrimination in South Africa in the past resulted not only in a very
unequal distribution of wealth and income, but also in poor productivity rates
for the country.
Physically and mentally handicapped persons are also part of the
marginalised groups and they find it difficult to access services and find
gainful employment.
4.1 Accessibility
To address the issue of unequal distribution of wealth and income, and poor
productivity rates, we need more than just anti-discriminatory regulations.
Participation and access by marginalised groups need to be increased at all
levels of the economy in South Africa to redress the imbalances in the
ownership and control of South Africa’s resources.
For this reason, the government of South Africa has developed a set of black
economic empowerment policies (BEE policies) and procurement policies.
4.2 Empowerment
The three core components of broad-based black economic empowerment are
direct empowerment, investment in human resources and indirect
empowerment. Indirect empowerment is achieved through developing
entrepreneurship and enterprises. To achieve the objectives of black economic
empowerment, the government developed a number of policies, such as those
relating to:
l job creation
l poverty alleviation
l specific policies to empower black women
l education
l skills transfer and management development
l meaningful ownership
l access to finance to conduct business
l affirmative action
24
• Economics: Basic concepts, population and labour force
Topic 1
l
l
l
preferential procurement
restructuring and privatisation of state-owned enterprises
public/private partnership.
We can, therefore, expect to see many changes in the factor market in the
future in terms of legislation and the functioning of this market. The factor
market is the term we use for the labour market, the capital market and other
markets where the factors of production are bought and sold.
4.3 Procurement
Preferential procurement is one of the cornerstones of black economic
empowerment. By using its own purchasing power, government hopes to
increase the involvement of BEE-compliant businesses in the tendering
system and thereby reach the goals of increased accessibility and
empowerment.
The Preferential Procurement Policy Framework Act was enacted in 2000. The
Act established a policy of preferential procurement of services by people who
were disadvantaged by unfair discrimination. The Act applies to contracts
entered into by state agencies and departments.
Classroom activity 1.13 (4 marks)
Briefly discuss the meaning of economically marginalised groups.
(4)
Homework activity 1 (51 marks)
Define the four factors of production and give an example
of each.
(8)
Distinguish between natural resources and capital by referring
to the characteristics of each.
(2)
3
Explain why natural resources are important for South Africa.
(6)
4
Identify three factors that impact on the quantity of labour and
three factors that impact on the quality of labour.
(6)
1
2
5
Indicate whether the following statements are true or false:
a) All natural resources are non-renewable.
b) We have an unlimited supply of natural resources.
c) Rent is the payment for natural resources.
d) Labour is the factor of production that is created with the express
purpose of being used in the production of goods and services.
Economics: Basic concepts, population and labour force • 25
e) Both the quality and quantity of labour are important for the
production of goods and services.
f) The more scarce the skill possessed by a person, the higher the
wage he or she can command.
g) An increase in the productivity of labour will make a higher
level of production possible.
h) Capital is not an important factor of production and it is possible
to produce goods and services without capital.
i) The remuneration for capital is interest.
j) The more politically and economically stable a country, the
easier it is to create capital.
k) An increase in the demand for capital goods will increase the
interest rate.
(11)
6
Explain how the following factors will impact on the remuneration
of the factors of production involved:
a) Location – on the remuneration of natural resources.
b) Education – on the remuneration of labour.
c) Risk of investment – on the remuneration for capital.
d) Price of the product – on profits.
(8)
7
Read the following extract from the New Economic Growth Path
and answer the questions:
The poorest regions of the country, with the highest unemployment rates
and most vulnerable workers, are the former Bantustan and commercial
farming areas. Areas considered rural today developed historically as
impoverished labour reserves for the urban economy, and not as viable
economic zones. Still, the agricultural value chain offers major opportunities
in these areas for employment creation through smallholder schemes and
the processing and sale of agricultural products. Improvements in
livelihoods for rural dwellers are possible by upgrading farmworkers’
conditions and organisation and helping rural households increase
production. Other jobs drivers, notably the public sector and social
economy, tourism and infrastructure, can also contribute.
(Source: http://www.economic.gov.za/publications/new-growth-path-series)
a) Why is the agricultural sector regarded as important in the
New Growth Path?
b) What is meant by the agricultural value chain?
c) How can more employment opportunities be created in the
agricultural sector?
d) How can the livelihoods of people in this sector be
improved?
26
• Economics: Basic concepts, population and labour force
(2)
(3)
(2)
(3)
Topic 1
Extra practice activity 1 (72 marks)
1
Identify the four factors of production and their remuneration.
(8)
2
Draw a circular flow model to illustrate the flow of factors of
production and the flow of income between households and
firms in the factor market.
(4)
3
4
Identify a possible business opportunity and use the
entrepreneurial process to show how you would go about
converting your idea into a viable enterprise.
(20)
Write an essay on the importance of the factors of production
for the economy.
(40)
Summary
l
The four factors of production are: natural resources, labour,
capital and entrepreneurship.
l
Natural resources can be regarded as gifts of nature. A distinction
can be made between non-renewable and renewable natural
resources. The remuneration for natural resources is rent, which
is determined by factors such as the demand for the goods
produced, quality of the natural resources, climate, technology
and location. The sustainability of these resources is an important
issue that all societies need to deal with.
l
Labour is any physical or mental effort that goes into the
production of goods and services with the aim of receiving a
reward. The reward for labour is wages and salaries. A number of
factors determine the reward for labour, such as the demand for
the good or service produced by labour, the quality and skill of
the labour, the productivity of the labour and the kind of work.
Wages and salaries for labour services are the main source of
income for households and is also the largest cost factor for firms
in the economy.
l
Capital goods are created for the purpose of producing more
goods and services. Capital differs from the other factors of
production in that it is produced specifically to be used in the
production of goods and services. The remuneration for capital is
interest, which is determined by factors such as the risk
associated with the investment, availability of funding, the term
Economics: Basic concepts, population and labour force • 27
of the investment and the monetary policy. Capital is important
for the economy, since it increases the production capacity of the
economy, which makes it possible for us to produce more goods,
now and in the future.
28
l
An entrepreneur can be regarded as someone who organises
and assumes the risk of a business. The remuneration for
entrepreneurship is profits, which are determined by factors that
determine the cost and revenue of a business. Entrepreneurs are
the driving force in the economy. They are responsible for the
production of goods and services, and the creation of
employment and wealth for the whole country.
l
Marginalised groups do not fully participate in the economy.
A major challenge facing South Africa is how to improve
community participation and accessibility of marginalised groups
to the economy. To increase participation by marginalised
groups, the government of South Africa has developed a set of
black economic empowerment policies (BEE policies) and
procurement policies.
• Economics: Basic concepts, population and labour force
T
2
c
opi
Circular flow and
quantitative
elements: Economic
goods and services
What you will learn about in this topic
l
l
l
l
Final consumption expenditure (C).
Consumption expenditure by government (G).
Gross fixed capital formation (I):
– definition
– composition
– importance.
The main aggregates:
– gross domestic product
(GDP)
– gross value added
(GVA)
– gross national
expenditure
(GNE)
– gross domestic
expenditure (GDE)
– expenditure on gross
domestic product
– gross national income
(GNI).
Let’s talk about this topic
l
l
How do we know what is happening in the South African
economy?
Who are the buyers of goods and services in South Africa?
29
What you know already
In the circular flow model, we have identified the major decision-makers in
the economy. We have also shown how the interaction between these
decision-makers determines the flows of production, income and spending in
the economy.
An important measure of the level of production in the economy is the gross
domestic product, while the gross domestic income provides us with a
measure of the economic welfare of the citizens of a country.
k
Chec f 1. Identify the main economic decision-makers in the economy.
l
myse 2. Distinguish between nominal and real GDP.
Word bank
ABC
Final goods and services refer to those goods and services that are
consumed by individuals, households and firms.
Gross domestic expenditure (GDE) is the total value of spending within
the borders of a country. It includes imports but excludes exports, since
spending on exports occurs outside the country’s borders.
Gross domestic product (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).
Gross fixed capital formation is spending on additions to the capital stock
(machinery, structures, inventories, etc.).
Gross national income (GNI) provides a measure of the income earned by
South African citizens or permanent residents of the country. All income
earned by foreign-owned factors of production is subtracted from the GDP
and all income earned by South African-owned factors of production in the
rest of the world is added to the GDP to arrive at this figure.
Gross value added is the value added by each firm during the production
process.
Intermediate goods are used in the production of final goods and services.
Intermediate goods are purchased to be used as inputs in producing other
goods before they are sold to end-users.
Inventory investment takes place when firms build up their stock of
finished products.
30
• Circular flow and quantitative elements: Economic goods and services
Topic 2
What you still need to know
1. Introduction
To understand how the economy operates in the real world, we need to observe
and measure (quantify) what is happening out there. In macroeconomics, an
important question that we would like to answer is: ‘What is happening with
the level of expenditure, production and income in the economy?’
Knowing what is happening with the level of spending, production and
income in the economy does not only tell us what is happening with the
overall level of economic activity, but also what is happening with the
economic wellbeing of the citizens of a country. Having this information
available also makes it possible to predict (not always accurately) the
prospects for the future. Moreover, policy-makers can use this information to
develop and implement appropriate policy measures.
1.1 Final goods and intermediate goods
There are two kinds of economic goods and services that are produced in an
economy. These are final goods and services, and intermediate goods and services.
a) Final goods and services are those goods and services that are bought by
the ultimate user to satisfy a need or want. The buyers of these goods and
services have no intention to further transform these goods and services to
resell them. These final goods and services can be either consumer goods
and services or capital goods, such as machines. Capital goods are regarded
as final goods, since they are not going to be processed further for resale.
If Chick Roast buys raw chicken pieces to be
transformed into fried chicken pieces,
which are to be sold to households, the raw
chicken pieces are an input and are
regarded as an intermediate good. They are
going to be transformed into a good that
will be resold. However, if a household
buys fried chicken pieces to be used in a
meal for the family, the chicken is a final
good. It will not be resold. From this
example it is clear that the intended use of a
Raw chicken pieces are an
Fried chicken pieces are
intermediate good.
a final good.
good or service determines whether it is a
considered final good or service.
Final goods and services are bought on the product markets by four basic
macrosectors (the main participants in the economy). These are
households, businesses (firms), government and the foreign sector.
Households buy mainly consumer goods and services. We call this private
consumption expenditure (C). Firms buy capital goods. We call this
Circular flow and quantitative elements: Economic goods and services • 31
investment expenditure (I). Expenditure by government is referred to as
government expenditure (G). The foreign sector also supplies final goods
and services to our product (goods) market. These final goods and services
supplied by the foreign sector are bought by households, firms (who are
important buyers of capital goods) and government and is known as
imports (M). Final goods and services are also bought by the foreign sector
and is known as exports (X).
b) Intermediate goods and services are those
goods and services that are used in the
production of other goods and services. In
order to produce final goods and services,
intermediate goods are combined and
processed.
To determine whether a good is a final good
peach
Jam
or an intermediate good, we need to know
something about the intended use of the
good. For example, if you are going to
ches
produce and sell peach jam, the peaches you
pea
use are an intermediate good. Your intention
is to combine and transform the peaches
Peaches as a final good.
Peaches as an intermediate
with other inputs to produce a final product,
good.
peach jam, which you intend to sell.
If, however, you are responsible for packing your sibling’s lunchbox
and you decide to add a fruit, the peach in your lunchbox is a final good.
You are not intending to transform the peaches to resell them. You intend
to consume them.
Classroom activity 2.1 (11 marks)
1
Indicate which of the following represents a final good and which
represents an intermediate good:
(5)
Final good
Intermediate
good
Spades bought by the owner of a
hardware store to resell
A spade bought by Alex to use in
his garden
Flour used in a bakery to bake bread
Flour used by Helen to bake bread
for her family
A tractor bought by Farmer Sibisi to
be used in the production of wheat
32
• Circular flow and quantitative elements: Economic goods and services
Topic 2
2
3
Explain how you would distinguish between a final good and
an intermediate good.
(2)
Name the four major participants in an economy and the type of
expenditure of each participant.
(4)
2. Final consumption expenditure by households (C)
2.1 Definition
Final consumption expenditure by households includes spending by
households on final goods and services. It can be anything from refrigerators
and medical services to movie tickets and food. It also includes imputed
expenditure, such as the rent a household would have to pay if it did not own
the house. Also included in this figure is the payment by households to the
government for things such as licences and permits. In our national accounts,
final consumption expenditure is categorised according to durable goods,
semi-durable goods, non-durable goods and services. In terms of our circular
flow, this is measured by the flow of expenditure from households to firms
and is indicated by the symbol C.
Factor market
Monetary flow
Factors of production
Income
Households
Real flow
Firms
Goods market
Consumption
Production
Circular flow between households and firms
What do you think determines the final consumption expenditure of
households? The income they receive, of course! The higher the income of
households, the more they will be able to buy and the higher their
consumption expenditure will be.
Figure 2.1 presents the real final consumption expenditure by households in
South Africa since 2000. Remember that when the term constant prices is used,
it means the effect of inflation on prices has been factored out of the figures
(i.e. inflation has not been taken into account in the figures). From the
diagram, we can see that there was a steady increase in consumption
spending until 2009, when it declined. This was due to the impact of the
economic recession we experienced.
Circular flow and quantitative elements: Economic goods and services • 33
Consumption spending is also the
largest component of expenditure in
South Africa. It makes up about 63% of
the total expenditure. In 2010, it
amounted to about R 1 184 324 million.
R Millions
2.2 Composition
Final consumption expenditure by households
(Constant 2005 prices)
In the national accounts of South Africa,
this expenditure by households is broken
down as follows: spending on durable
goods, spending on semi-durable goods
and spending on non-durable goods and
services.
a) Durable goods are tangible goods
Year
that tend to last for more than a year.
Tangible goods are things that can be (Source: South African Reserve Bank, Online statistical query.)
touched, i.e. physical goods.
Figure 2.1
Examples of durable goods are
furniture, household appliances, cars and personal computers. These
goods are all things that we use over and over for several years and that
we do not dispose of very quickly.
A house, however, is not included as a durable good, since it is regarded
as part of residential investment spending, which forms part of gross
capital
Services
Durable goods
Semi-durable goods
Non-durable goods
formation
(investment).
Looking at
the figures for
South Africa –
the following
picture of
expenditure
on durable
goods
emerges:
Composition of household expenditure
In 2010, South
Africans spent about R123 393 million, in real terms, on durable goods.
This represents 10% of final consumption expenditure by households (see
Figure 2.2 on the next page). It is also clear that households in South Africa
have been spending a larger percentage on durable goods since 2000. This
percentage increased from 8% in 2000 to 10% in 2010. The biggest item of
expenditure on durable goods was personal transport equipment, which
includes spending on cars. In 2010, this represented about 48% of the
expenditure on durable goods.
34
• Circular flow and quantitative elements: Economic goods and services
Topic 2
Percentage spending by households
Percentage spending
b) Semi-durable goods are tangible
goods with a shorter life cycle than
durable goods. They are also not as
expensive as durable goods. Examples
of semi-durable goods are clothing
and footwear, motor vehicle tyres,
parts and accessories, and glassware.
In 2010, South African households
spent R133 088 million on semidurable goods. Looking at Figure 2.2,
you can see there has been an increase
from 7% to 11%, compared to 2000.
The most important item in this group
NonServices
Durable
Semiis clothing and footwear. In 2010,
durable
goods
durable
South African households spent
goods
goods
R81 208 million on clothing and
Types of goods and services
footwear, which represents about
(Source: South African Reserve Bank, Online statistical query.)
61% of their expenditure on semiFigure 2.2
durable goods.
c) Non-durable goods are tangible goods that are only used once. Common
examples are food and petrol. Looking at the data for South Africa, the
following picture emerges:
There has been a decline in the percentage that households spend on this
category. It decreased from 41% in 2000 to 35% in 2010.
The most important items that households spend on in this category are
food, beverages and tobacco. In 2010, South Africans spent R278 255
million on food, beverages and tobacco. This figure represents about 66%
of their spending in this category.
d) Services include consumption expenditure on activities that provide
direct satisfaction of needs and wants, without the production of tangible
goods. Common examples are rent, medical services, information,
entertainment and education.
Figure 2.2 indicates that there was a slight decline from 44% in 2000 to 43%
in 2010. In 2010, South African households spent R507 974 million on
services. The major expenditure items were transport and communications
services. In 2010, households spent R119 233 million on transport and
communications, which represents 23% of the expenditure in this
category.
2.3 Importance
The spending of households on final goods and services is important for
various reasons. The higher the consumption spending by households, the
more needs and wants are being satisfied and the higher the economic welfare
of the households. Consumption spending by households is also important for
Circular flow and quantitative elements: Economic goods and services • 35
the production side of the economy. The higher the consumption spending by
households, the higher the demand for goods,
and services, and more will be produced. As production increases, more jobs
are created.
Classroom activity 2.2 (6 marks)
1
2
3
What determines how much households can spend on final
goods and services?
(2)
What happens to household spending on final goods and
services during an economic recession?
(2)
Is a cool drink a durable good, a semi-durable good,
a non-durable good, or a service? Explain your answer.
(2)
3. Consumption expenditure by government (G)
3.1 Definition
Final consumption expenditure by government relates to the expenditure of
the central government on final goods and services. It includes not only the
buying of final goods, such as textbooks for
schools and medication for hospitals, but also
the services provided by government
employees, such as teachers and medical staff.
3.2 Composition
There are two categories of final consumption
expenditure by government:
l The remuneration of public sector
employees, which is by far the largest
component.
l Current spending on goods and services,
such as stationery, uniforms and medicine.
Excluded from this figure are transfer payments,
for example, old-age pensions, child grants and
disability payments, and interest on debt, since
these are not part of the buying of final goods
and services. It is a transfer of income from one
group to another group without productive
services being rendered.
Government
Remuneration of public
servants
Spending on goods
(e.g. books, medicine,
uniforms)
Composition of government expenditure
36
• Circular flow and quantitative elements: Economic goods and services
Topic 2
Final consumption expenditure by government
(at constant 2005 prices)
Final consumption expenditure by
government also excludes capital
expenditure by government. This figure
is included under capital formation.
R Millions
In 2010, final consumption expenditure
by government on final goods and
services was R383 223 million at constant
2005 prices. This represents about 20% of
expenditure in South Africa.
Government spending increased steadily
for the period 2000 to 2010. Unlike final
consumption spending by households
and gross capital formation, it did not
Year
decline in 2009. The reason was that
(Source: South African Reserve Bank, Quarterly Bulletin,
September 2011.) government deliberately maintained its
spending to support the economy during
Figure 2.3
the recession that was experienced.
3.3 Importance
Every year, usually in February, the Minister of Finance presents the budget,
which outlines the government’s expenditure and tax plans for the coming
year. The budget is essentially a reflection of political decisions on how much
to spend, what to spend it on and how to finance the spending. Through the
budget, the government fulfils its various functions in the economy.
The final consumption spending by government is also an important tool that
the government can use to influence the macro economy. During the recession
of 2009 in South Africa, government used its spending on goods and services
to ensure that the recession did not worsen. Both households and businesses
decreased their spending during this period, which decreased the level of
output in the economy. By supporting the demand for goods in the economy,
the government helped to stabilise the economy of South Africa.
Classroom activity 2.3 (5 marks)
Explain whether the following are part, or not part, of consumption
expenditure by government:
l household spending on services
l
payment of old-age pensions
l
buying of medicines for public hospitals
l
paying the salaries of teachers in public schools
l
building a new road by government.
(5)
Circular flow and quantitative elements: Economic goods and services • 37
4. Gross fixed capital formation (I)
4.1 Definition
Gross fixed capital formation or real investment (I) is spending
on additions to the capital stock, such as machinery, structures
and inventories. Such investment is undertaken with the aim of
making profits in the future. This is an important definition and
should not be confused with financial investment.
Financial investment is investment in shares and other financial
Spending on capital stock is called
instruments. When people deposit money in a bank, or buy
real investment.
bonds or shares, they are making a financial investment on which
iTs
they earn a return.
DepOs
Financial investment in shares and other financial instruments is obviously
very important in the economy, but does not directly create production
capacity. When an economist refers to investment, he or she usually means
real investment.
Capital goods are regarded as final goods, since they are not processed further
for resale.
4.2 Composition
Gross capital formation (at constant 2005 prices)
R Millions
In 2010, South Africa spent about
R358 173 million at constant 2005 prices
on the creation of capital goods. The data
in Figure 2.4 also shows that there was
an increase during the period 2000 to
2008 and a decline during 2009. This was
also due to the impact of the recession.
While capital creation increased during
2010, it was still below the level of 2008.
Another feature of investment spending
is that it fluctuates more than
consumption spending and government
spending. This is due to the nature of the
capital creation process. Think about
what you have learnt about the capital
creation process.
Year
(Source: South African Reserve Bank, Online statistical query.)
Figure 2.4
In our national accounts, a distinction is
made between inventory investment and gross fixed capital formation.
Inventory investment is a very small component of gross capital formation.
38
Depositing money in
a bank is a financial
investment.
• Circular flow and quantitative elements: Economic goods and services
Topic 2
R Millions
Gross fixed capital formation 2010
(at constant 2005 prices)
Non- Construction Transport Computers Machinery
Residential
and
and related
buildings residential
works
buildings
equipment equipment
Types of assets
(Source: South African Reserve Bank, Quarterly Bulletin,
September 2011.)
Figure 2.5
Gross capital formation by organisation, 2010
(at constant 2005 prices)
The level of expenditure in the economy
also impacts on the level of inventories. If,
for some reason, the level of expenditure
in the economy decreases (people are
buying less goods and services), the level
of inventories will increase.
R Millions
Firms will be left with more unsold stock
than before and an involuntary inventory
build-up will occur. On the other hand, if
total expenditure in the economy
increases (people buy more goods and
services), the level of inventories will
decline.
General
government
Public
corporations
Private business
enterprises
Economic participants
Figure 2.6
Inventory investment takes place when
firms increase their stock of finished
products. One reason firms wish to keep
inventories (stocks) is to avoid loss of
sales. Loss of sales will occur if finished
products are unavailable when a
customer is ready, willing and able to
buy. A decrease in the stocks held by
firms is regarded as disinvestment, while
an increase in stocks is regarded as an
increase in inventory investment.
Gross fixed capital investment is broken
down into the following types of assets:
l residential buildings
l non-residential buildings
l construction work
l transport equipment
l machinery and other equipment.
In 2010, most of the gross fixed capital formation was in construction works,
followed by machinery and equipment. In 2010, we spent R114 310 million on
construction works and R95 230 million on machinery and equipment.
The economic participants that are responsible for gross fixed capital
formation are:
l general government
l public corporations
l private business enterprises.
Circular flow and quantitative elements: Economic goods and services • 39
In 2010, as much as 61% of the gross fixed capital formation in South Africa
originated from private business enterprises, which makes it a very important
sector for the South African economy. One can, therefore, expect that changes
in the investment behaviour of private business enterprises in South Africa
will have a major impact on the South African economy.
What is the meaning of the term ‘gross’ in gross capital investment? In the
production of goods and services, capital goods suffer wear and tear
(depreciation) and must eventually be replaced. Provision must, therefore, be
made for the upkeep and replacement of capital goods.
Part of the expenditure on investment is to provide for depreciation. By
subtracting the depreciation from the gross capital formation, we arrive at the
net gross capital formation (or net investment).
Gross capital formation – Depreciation = Net gross capital formation
4.3 Importance
Capital formation creates production capacity and, therefore, makes higher
levels of production possible. The more machines, factories and tools we have,
the more goods and services we can produce. This is a vital topic and relates
to the issue of economic growth.
Capital formation is an important expenditure component in the circular flow
of production income and spending. As factories are built, more factors of
production are employed, causing the income of households to increase. With
this increase in income, households then buy more goods and services to
satisfy their needs and wants.
Investment usually requires a substantial capital outlay, and a lot of planning
goes into the decision whether to invest or not. Since the future is very
uncertain, investment tends to fluctuate a lot. During a recession, one also
finds that investment declines more than the other expenditure components.
Classroom activity 2.4 (6 marks)
1
2
40
Distinguish between real investment and financial investment
and give an example of each.
(4)
What do we mean when we say, ‘Capital formation contributes
to production capacity’?
(2)
• Circular flow and quantitative elements: Economic goods and services
Topic 2
5. The main aggregates
5.1 Gross domestic product (GDP)
The gross domestic product provides us with a measure of the total
production of final goods and services in a country. Gross domestic product is
formally defined as the total value of all final goods and services produced
within the boundaries of a country in a particular period (usually a year).
There are three ways in which GDP can be measured:
l the value-added method
l the income method
l the expenditure method.
In terms of our circular flow model, the expenditure method measures the
flow of spending of households, firms, government and the foreign sectors, on
final goods and services. The income method measures the flow of income to
the owners of the factors of production, while the value-added method
measures the value that is added during the different stages of the production
process.
The following table and Figure 2.7 shows the real GDP for South Africa.
For the period 2000–2008, production increased every year. In 2009, less was
produced and South Africa experienced a recession. In 2010, production
increased again.
Real GDP for South Africa
Real GDP for South Africa R millions
R Millions
Constant prices (2005)
Year
Figure 2.7
2000
1 301 773
2001
1 337 382
2002
1 386 435
2003
1 427 322
2004
1 492 330
2005
1 571 082
2006
1 659 121
2007
1 751 499
2008
1 814 134
2009
1 783 617
2010
1 834 435
(Source: South African Reserve Bank, Online statistical query.)
Circular flow and quantitative elements: Economic goods and services • 41
5.2 Gross value added (GVA)
One way in which we can measure the total production of goods and services
in a country is to measure the gross values added during the production
process. The gross value-added method measures the total output of final
goods and services produced in a year.
Value added is the market value of a firm’s output less the value of the inputs
that the firm bought from others. In other words, it calculates the value added
by each firm at each successive stage of the production process.
To explain what this involves, we will take a closer look at the value that is
added to bread during the production process by the farmer, the miller, the
baker and the shopkeeper. Each one of these people contributes a good or
service and it is this contribution that we will be measuring.
The farmer produces 1 000 bags of wheat, which he or she then sells to the
miller for R20 000. The value added by the farmer is, therefore, R20 000.
The miller then mills the wheat to make flour. The miller then sells the flour to
the baker for R30 000. How much value did the miller add to the production
of bread? It is not R30 000, since the R30 000 includes the value added by the
farmer of R20 000. The contribution or value added by the miller is, therefore,
R30 000 – R20 000 = R10 000. To calculate the value added by each participant
we must subtract the expenditure on intermediate goods bought from other
participants.
The baker then uses the flour to bake the bread and sells it to the shopkeeper
for R45 000. The value added by the baker is, therefore:
R45 000 – R30 000 = R15 000.
The shopkeeper then sells the bread to households for R50 000. The value
added by the shopkeeper is, therefore, R50 000 – R45 000 = R5 000.
Therefore, the total value added by the participants is:
Value added by the farmer
= R20 000
Value added by the miller
= R10 000
Value added by the baker
= R15 000
Value added by the shopkeeper = R 5 000
Total value added
= R50 000
By using only the value added, we have avoided double counting. Double
counting would have occurred if we had counted the selling prices. The
selling prices were: R20 000 + R30 000 + R45 000 + R50 000 = R145 000. This is
not the value of the production created. This is clearly an overestimation, due
to double counting, and it is not correct.
42
• Circular flow and quantitative elements: Economic goods and services
Topic 2
Using the value-added method, GDP is calculated by adding together the
value added by each individual participant in the production and selling of
the goods.
In the national accounts for South Africa, the gross value added by each type
of economic activity is given. The following table shows the value added by
the different sectors for the period 2000 to 2010.
Gross value added by each kind of economic activity (at constant 2005 prices)
R million
Year
Primary sector
Secondary
sector
Tertiary sector
Gross
value added
2000
133 758
277 701
747 195
1 158 218
2001
132 346
284 859
774 319
1 191 429
2002
135 786
293 957
806 527
1 236 270
2003
139 425
293 500
840 204
1 273 129
2004
141 295
309 751
879 344
1 330 390
2005
143 394
330 669
927 004
1 401 067
2006
140 723
352 503
985 265
1 478 491
2007
141 637
374 511
1 045 262
1 561 410
2008
141 552
385 742
1 091 881
1 619 175
2009
136 076
358 197
1 100 063
1 594 336
2010
141 906
373 024
1 124 555
1 639 485
(Source: South African Reserve Bank, Online statistical query.)
R Millions
Gross value added by types of economic
activity, 2000 and 2010 (at constant 2005 prices)
Figure 2.8 shows the value added by
each kind of economic activity for
2000 and 2010. From this diagram it is
clear that, while more value has been
added in all sectors since 2000, the
largest change in value added was in
the tertiary sector.
Primary sector Secondary sector Tertiary sector
Economic sector
(Source: South African Reserve Bank, Online statistical query.)
Figure 2.8
Circular flow and quantitative elements: Economic goods and services • 43
Classroom activity 2.5 (6 marks)
Given the example of the production of orange juice below, answer the
following questions:
An orange farmer sells his oranges to the juice factory for R60 000.
The juice factory sells orange juice to the bottle factory for R130 000.
The bottle factory sells the bottled orange juice to the supermarkets for
R170 000. The supermarkets sell the bottled orange juice to their
customers for R200 000.
1
Calculate the value added by each participant.
(4)
2
What is the total value of the production of orange juice?
(2)
5.3 Gross national expenditure (GNE)
Gross national expenditure (GNE) is the expenditure by the citizens of a
country, in this instance South Africa. It therefore includes the spending by
South African citizens living abroad. The formula for the calculation of GNE is
as follows:
GNE = GDE + net primary income (primary income from abroad minus
primary income to abroad).
Gross domestic expenditure (GDE) provides us with a
measure of the expenditure that takes place within the
borders of South Africa. It is formally defined as the total
value of expenditure on final goods and services within the
borders of a country. The domestic part of the concept refers
to spending within the boundaries of a country.
Figure 2.9 shows final consumption spending by households,
gross fixed capital formation (investment) and final
consumption expenditure by government.
It is written in symbols as follows:
GDE = C + I + G
Figure 2.9
Part of the spending by households, firms and government within the borders
of a country is on goods and services that are imported from the rest of the
world (such as computers and DVD players). Figures for gross domestic
expenditure (GDE), therefore, include spending on imports. Exports are
excluded, however, since exports represent expenditure that takes place
outside the borders of the country.
44
• Circular flow and quantitative elements: Economic goods and services
Topic 2
The following table shows the previously mentioned values for South Africa
in 2010.
R millions at constant 2005 prices
Final consumption expenditure by households
1 184 324
61%
Final consumption expenditure by general government
383 223
20%
Gross capital formation
358 173
19%
Residual item
Gross domestic expenditure (GDE)
5 246
1 930 966
(Source: South African Reserve Bank, Quarterly Bulletin, September 2011.)
In 2010, South African households were responsible for 61% of the gross
domestic spending, followed by the government with 20% and gross capital
formation with 19%.
5.4 Expenditure on gross domestic product
Expenditure on gross domestic product provides a measurement of how much
is spent on the goods and services produced within the borders of South Africa.
To arrive at the expenditure on our gross domestic product, we need to add
exports and subtract imports from the gross domestic expenditure.
Exports (X) are goods and services that are produced inside the borders of the
country and sold to the rest of the world. Therefore, they form part of the
expenditure on goods and services produced in South Africa and must be added.
Imports (M), however, involve spending on goods and services produced by
other countries. Since final consumption expenditure by households (C), gross
capital formation (I) and final consumption spending by government (G)
already include spending on imports, imports must be subtracted to arrive at
the correct estimate for the expenditure on goods and services produced
within the borders of South Africa.
The total expenditure on the final goods and services produced in South
Africa is, therefore, the sum of:
l consumption expenditure by households (C)
l gross capital formation (I)
l final consumption expenditure by government (G)
l the difference between exports and imports (X – M), which is called
net exports.
In symbols:
Expenditure of gross domestic product = C + I + G + (X – M)
Circular flow and quantitative elements: Economic goods and services • 45
In the national accounts of South Africa, the expenditure on gross domestic
product for 2010 is calculated as follows:
R millions at constant 2005 prices
Final consumption expenditure by households
1 184 324
Final consumption expenditure by general government
383 223
Gross capital formation
358 173
Residual item
5 246
Gross domestic expenditure (GDE)
1 930 966
Add exports of goods and services
421 589
Subtract imports of goods and services
518 120
Expenditure on gross domestic product
1 834 435
(Source: South African Reserve Bank, Quarterly Bulletin, September 2011.)
5.4.1 Expenditure method
In the calculation of GDP according to the expenditure method, only
the value of final goods and services is included. This is done to avoid the
problem of double counting.
If we look at our example of the production of bread, it implies that by
measuring the value of bread bought by households in the final stage,
we have a measure of the production that has occurred. In our example,
it is equal to R50 000, which is the amount the shopkeeper sells to
households – the final consumer.
It’s important to note that using the expenditure approach when
calculating the GDP gives the same value as using the value-added
approach. In our example of the production of bread,
the expenditure = value added = R50 000.
Classroom activity 2.6 (6 marks)
Given the following information for South Africa for 2009, calculate the
gross domestic expenditure and expenditure on gross domestic product.
R millions at constant 2005 prices
Final consumption expenditure by households
1 134 152
Final consumption expenditure by general government
366 519
Gross capital formation
341 538
Residual item
11 031
Exports of goods and services
403 304
Imports of goods and services
472 927
(Source: South African Reserve Bank, Quarterly Bulletin, September 2011.)
46
• Circular flow and quantitative elements: Economic goods and services
Topic 2
5.5 Gross national income (GNI)
Gross national income provides us with a measure of what is happening to
the income and living standards of South African citizens and residents. While
gross domestic product provides us with a measure of the value of production
produced within the borders of the country, it doesn’t tell us by whom the
goods and services are produced.
Part of the production of goods and services in South Africa is carried out by
foreigners (Americans, Congolese, Germans, etc.) who own some of the
factors of production with which they derive an income. This is a common
situation in all countries; economists provide for this when they measure
income totals.
An important question that economists would like to answer is what is
happening to the income and living standards of the citizens or permanent
residents of South Africa? Income is derived from owning the factors of
production and making the factors of production available for the
production of goods and services. Since some of our resources are owned
by foreigners, who derive an income from them, it’s necessary to subtract
this income from the gross domestic product to calculate the gross
national income.
Income earned by foreign-owned factors of production includes the profits
made by foreign-owned firms in South Africa, the interest we pay to foreign
lenders, and the salaries and wages of foreign workers engaged in domestic
production, for example mineworkers from Mozambique and Malawi.
South African citizens, however, also own factors of production that are
used in other countries to produce goods and services for which they
receive an income. This income that South Africans receive from the
rest of the world has to be added to arrive at the gross national income.
Income that South African citizens earn from the rest of world consists of the
profits earned by South African-owned companies that operate in other
countries, dividends received from owning shares in foreign companies
(Microsoft, McDonald’s), and salaries and wages earned by South African
citizens involved in production in other countries.
To determine what is happening to the income earned by South African
citizens or permanent residents, the gross national income can be calculated
from the GDP by adding all income earned from the rest of the world by
South African factors of production and subtracting all income earned from
South Africa by foreign-owned factors of production. In other words:
Circular flow and quantitative elements: Economic goods and services • 47
GNI = GDP + income earned from the rest of the world by South Africans –
income earned from South Africa by foreigners
In South Africa, the gross domestic product has always been greater than the
gross national income (GNI), because the income earned from South Africa by
foreigners exceeds the income earned from the rest of the world by South
Africans.
Income from and to the rest of the world at current prices (R millions)
Year
Income from the rest of
the world
Income to the rest of
the world
2000
17 432
39 456
2001
21 125
53 301
2002
22 711
52 111
2003
21 373
56 244
2004
20 973
48 823
2005
29 550
60 975
2006
41 207
75 982
2007
48 448
117 266
2008
48 254
122 129
2009
34 075
87 593
2010
34 099
87 022
(Source: South African Reserve Bank, Online statistical query.)
The calculation for the gross national income for South Africa for 2010 was
performed as follows:
GDP (R millions)
2 664 269
+ factor payments from the rest of the world
+
34 099
– factor payments to the rest of the world
–
87 022
= GNI
2 611 346
(Source: South African Reserve Bank, Quarterly Bulletin, September 2011.)
5.5.1 Income method
The income method adds up all the income generated by the production of
final goods and services to calculate GDP. It focuses on the value of the factors
of production used in the production process. This method also measures the
return to all the owners of the factors of production in the form of wages and
salaries, rent, interest and profit.
48
• Circular flow and quantitative elements: Economic goods and services
Topic 2
In our example of the production of bread, the participants all had to pay for
the factors of production. For example, the baker had to pay the following
factors of production:
Wages
= R10 000
Interest
= R 1 000
Profit
= R 4 000
Total factor payment = R15 000
Classroom activity 2.7 (26 marks)
1
Use the table, ‘Income from and to the rest of the world at current
prices’ on page 48 to calculate the following:
The gross national income for South Africa for 2009, seeing that the
GDP for 2009 was R2 395 969.
(3)
2
Write a short report on gross capital formation in South Africa. In
your report, you should refer to:
a)
b)
c)
d)
3
the changes since 2000
the reason for the decline in 2009
the importance of the business enterprises
the importance of real investment for the economy.
(12)
Indicate whether the following statements are true or false:
a) Consumption spending is the largest component of expenditure
in South Africa.
b) A part of final consumption expenditure in South Africa is on
imported goods.
c) Final consumption expenditure by government does not include
the remuneration of public sector employees.
d) Part of government spending (G) in South Africa is on imported
goods.
e) Financial investment and real investment are the same thing.
f) Gross domestic product provides a measure of the total
production in a country.
g) Imports are included in the GDP.
h) Exports are included in the GDP.
i) Exports are not included in the expenditure method.
j) According to the income method, GDP is estimated by adding
up the income earned by the various factors of production.
k) Using the value-added method or the expenditure method to
calculate GDP gives the same value.
(11)
Circular flow and quantitative elements: Economic goods and services • 49
Homework activity 2 (20 marks)
1
a) Make a short list of the durable, semi-durable and non-durable
goods you consume.
(3)
b) On which one of the goods mentioned in 1 a) do you spend most
of your income/pocket money?
(2)
2
Use the information in the following table on an imaginary country,
called Paradiso, where the currency is the econ and calculate the
following:
a) gross domestic expenditure
b) expenditure on gross domestic product
c) gross national income.
Millions
Final consumption expenditure by households
60
Final consumption expenditure by general
government
25
Gross capital formation
30
Exports of goods and services
15
Imports of goods and services
12
Factor payments to the rest of the world
6
Factor payments from the rest of the world
4
(12)
3
Indicate whether the following statements about the economy of
Paradiso are true or false:
a) The total production within the borders of Paradiso forms part
of the GDP of Paradiso, even if some of the production is done
by foreigners.
b) If the GDE of Paradiso is greater than its expenditure on GDP,
it means that the value of its exports is greater than the value of
its imports.
c) If the GDP of Paradiso is greater than the gross national
income, it means that the income earned by citizens of Paradiso
from the rest of the world is greater than the income earned
by foreigners.
(3)
50
• Circular flow and quantitative elements: Economic goods and services
Topic 2
Extra practice activity 2 (25 marks)
1
2
3
Give an example of a final good and an example of an
intermediate good. Explain the difference between the two.
(6)
Explain what is measured by final consumption expenditure
by households, final consumption expenditure by government
and gross fixed capital formation.
(3)
To answer this question, you will need the most recent Quarterly
Bulletin of the South African Reserve Bank. You can access it at:
www.resbank.co.za/Publications/QuarterlyBulletins/Pages/
Quarterly-Bulletin.aspx
Use the information for the past two years, provided in the national
accounts, to complete the following table:
R millions at constant prices
Year
before last
Last
year
%
change
Final consumption expenditure by
households
Final consumption expenditure by
general government
Gross capital formation
Residual item
Gross domestic expenditure (GDE)
Exports of goods and services
Imports of goods and services
Expenditure on gross domestic
product
(16)
Circular flow and quantitative elements: Economic goods and services • 51
Summary
l
We’ve analysed the uses of economic goods and services by
drawing a distinction between final goods and services, and
intermediate goods and services. We took a closer look at final
consumption expenditure, government expenditure and gross
capital formation.
l
This was followed by a discussion of related concepts, namely
gross value added, gross domestic product, gross national
expenditure, gross domestic expenditure, expenditure on gross
domestic product and gross national income.
l
There are three methods that can be used to calculate the gross
domestic product:
Method
Explanation
Value-added method The value-added
method measures the
total output of final
goods and services
produced in a year.
52
Measure
Market value of a firm’s
output less the
value of the inputs
bought by the firm.
Expenditure method
The expenditure
C + I + G + (X – M)
method adds up all the
actual expenditure made
on final goods and
services produced within
the borders of a country.
Income method
To calculate the GDP,
the income method
adds up all the income
generated by the
production of final
goods and services.
Rent + Interest + Profit +
Salaries
• Circular flow and quantitative elements: Economic goods and services
T
3
c
opi
Economic systems:
Mixed economy
What you will learn about in this topic
l
l
l
An explanation of the characteristics and foundations of
South Africa’s mixed economy and an assessment of its
efficiency in terms of socio-economic services.
The market economy, centrally planned economy and South
Africa’s mixed economy:
– economic
characteristics
– advantages
– disadvantages.
Efficiency in
delivering socioeconomic services.
Let’s talk about this topic
l
l
Do you know how the South African economy works, i.e.
what is provided by the government and what is provided by
private businesses?
Our economy is run very differently to that of both China and
the USA. In this topic you will learn about at different
economic systems and how they operate.
53
What you know already
In Grade 10, you learnt that the three basic economic questions are:
l What goods and services should be produced?
l How should resources be used?
l For whom should the goods and services be made available?
You also learnt about perfect and imperfect markets, and that governments
often need to intervene in the economy to correct imbalances and improve the
quality of life for all citizens.
1. Draw a diagram illustrating how the circular flow model of the
k
economy works.
Chec f
l
e
2. Explain who the economically marginalised groups are, and
mys
what the problems are that South Africa faces in redressing past
inequalities of opportunity.
Word bank
ABC
Black market is a market that develops for a good in short supply and at
a higher than normal price.
Business cycles are fluctuations in the economic activity of a country.
Economic system is a set of methods used for solving the questions of
what to produce, for whom and with what.
Exchange rate is the price of one currency in terms of another currency.
Free market system is an economy with no government intervention.
Inflation is a persistent increase in the general level of prices.
National budget is the planned income and expenditure by the state for a
given year.
Nationalisation is the transfer of ownership of a business from the private
sector to the state.
Privatisation is the transfer of ownership of a business from the state to the
private sector.
Progressive taxation system is a system that uses tax rates that increase as
income increases.
Public sector is made up of state-run activities or businesses.
Subsidies are incomes given by the state to individuals or businesses for a
specific purpose. For an individual, it helps those who are unable to earn a
higher income due to a disability, for example. For businesses, it is an
incentive to help them meet their monthly expenses if the business is
benefitting the community.
54
• Economic systems: Mixed economy
Topic 3
What you still need to know
1. Introduction
In economics, we deal with the scarcity problem and people’s attempts to
satisfy unlimited wants with limited means. In this topic, you will learn about
three different economic systems: the market economy, the centrally planned
economy and the mixed economy. Countries use these economic systems to
address the economic problems of allocation, distribution and the utilisation
of resources.
An economic system is the way in which a country tries to solve the questions
of what should be produced, with what and by whom.
You will also study the mixed economy of South Africa and study how our
government deals with current socio-economic problems.
1.1 The market economy
A market economy is also known as the free market system or capitalism
(because owners of capital can dispose of it as they wish). Most of the factors
of production (especially land and capital) are owned privately and the profit
motive drives both producers and workers.
How does this work?
l Levi’s and Wrangler have the freedom to make and sell jeans in whatever
styles and at whatever prices.
l Private firms provide hospitals for patients. They also decide how much to
charge them.
1.1.1 Characteristics of a market economy
l
l
l
l
l
Private ownership of the factors of production.
The allocation of resources by the market. Entrepreneurs allocate resources
through the forces of demand and supply, with prices being determined
by the market.
Freedom of choice. People are free to make their own decisions about
their economic activity, what they will buy and where they will live and
work.
The absence of a central plan. The government’s role is limited to
providing public goods, such as defence and law enforcement.
The profit motive. Businesses tend to specialise and produce only goods
that give them the greatest profit. This gives rise to trade between different
regions and countries.
Economic systems: Mixed economy • 55
1.1.2 Advantages of a market economy
l
l
l
l
l
Efficiency. Resources are allocated automatically, without the need for
government intervention. Producers are motivated by profit, so they
respond quickly to changes in consumer preferences.
Greater economic growth. Economic growth is stimulated by businesses
striving to make greater profits.
Innovation. Innovation occurs because producers strive to produce new
goods and services that consumers will want to purchase.
Wider choice. By using ‘money votes’, the consumer dictates to the
producers through the market what must be produced.
Freedom of action and ownership. In a market economy, people are free to
start any business in any place, live where they want to and own property.
They also have freedom of speech.
1.1.3 Disadvantages of a market economy
l
l
l
l
l
Uneven distribution of income. Those
with higher incomes have larger votes.
The government may need to intervene
to protect the poor.
Market failure. The market mechanism
generates competition between
producers, but monopolies may form
and operate against the public interest,
charging higher prices than in a
competitive situation.
Externalities may occur, which are costs
or benefits resulting from production,
Negative externalities, such as traffic congestion, can occur
which fall on a third party, such as
in a market economy.
pollution and traffic congestion.
Certain goods or services, called public
goods, may not be provided, because there is no benefit to the producer,
for example, free education and flood control.
Business cycles. In a market economy, the government doesn’t use fiscal
and monetary policy to control the economy. Downturns in the economy
lead to little or no economic growth and unemployment. Upturns in the
economy lead to greater economic growth, but also rising prices.
1.2 The centrally planned (command) economy
A centrally planned economy is organised and controlled by the state. All
decisions about the development of the economy are made by the state and all
resources are owned by the state. Socialism and communism are both forms of
centrally planned economies.
56
• Economic systems: Mixed economy
Topic 3
How does this work?
l The government would tell factories which jeans to produce and at what
price to sell them.
l The government would provide hospitals for patients. The hospitals
would probably be free to use.
1.2.1 Characteristics of a centrally planned economy
l
l
l
l
l
There is no private ownership of factors of production. All land and
resources are owned by the state.
There is central planning. The state decides what must be produced, how
much and for whom.
The state is the only entrepreneur and no private businesses exist.
Coercion is used to achieve goals.
There is a lack of private initiative, as all decisions are taken centrally, on
behalf of the inhabitants of the country.
1.2.2 Advantages of a centrally planned economy
l
l
l
l
l
l
There is a more equal distribution of income. Workers are paid according
to their needs and no one is exploited.
There is no wastage caused by competition. The central planning office
decides what will be produced and when.
Externalities are dealt with. The state can deal with externalities such
as pollution.
Government services. The state provides all the social services, such as
schools, housing, education and healthcare. It also owns and provides
services, such as transport, electricity and water.
Full employment. The state employs everyone of working age and there
is no unemployment.
Administration of prices. Prices of goods and services are set by the state.
1.2.3 Disadvantages of a centrally planned economy
l
l
l
l
Shortage of consumer goods and services. Planners may misjudge the
preferences of consumers, and black markets and queues develop when
shortages occur. Resources may all be allocated for defence or
infrastructure development, leaving too few for consumer needs.
Lack of consumer choice because of lack of competition between
producers. Additionally, goods are often of poor quality.
Lack of incentive. There is no motivation for workers to work harder, as
they can’t earn better wages, so they are less productive.
Low economic growth. Some planned economies, such as those in Russia
and Eastern Europe, failed to achieve the high rates of growth of capitalist
countries, due to poor planning by government and the lack of motivation
of workers.
Economic systems: Mixed economy • 57
l
l
Development of an overlarge bureaucracy for which consumers must pay.
Misuse of resources. Resources may be misallocated due to poor planning
or lack of understanding of consumer needs.
Two schools of thought
Adam Smith was an eighteenth-century Scottish philosopher who wrote An
Inquiry into the Nature and Causes of the Wealth of Nations in 1776. He believed
that people, acting in their own economic self-interest, would maximise the
economic situation of society as a whole, as if guided by an ‘invisible hand’. He
believed government should take a hands-off approach to a nation’s economy.
Karl Marx was a German philosopher, who explained his theory of communism in
his book, The Communist Manifesto, published in 1848. He believed that
communism was destined to replace capitalism, because history was full of class
struggles that would eventually produce a revolution, resulting in communism.
Who do you agree with?
Adam Smith, philosopher, considered the
father of modern economics
Karl Marx, considered the father of
communism
2. South Africa’s mixed economy
2.1 The market
Both free market and centrally planned economic systems are theoretical
concepts that don’t really exist. Almost all countries operate on a mixture of
these two systems. South Africa has a mixed economy.
A mixed economy contains features of both a market and a centrally planned
economy. It allows the market to operate, but with some state intervention.
Some countries, such as Sweden and China, have more centrally planned than
58
• Economic systems: Mixed economy
Topic 3
market features. Others, such as the USA and South Africa, are more market
economies than centrally planned economies.
In such a mixed economy:
l Most leisure and household goods are produced by private firms.
l Certain essential services are provided free of charge by the government,
for example, hospitals and schools.
2.2 Characteristics of a mixed economy
l
l
l
l
l
Competition exists between businesses and there is a profit motive.
Democracy and freedom exist.
There is public and private ownership of resources, but businesses are
mainly privately owned.
The government intervenes in the running of the economy and passes
laws to improve the running of the economy, such as the Labour Relations
Act and the Basic Conditions of Employment Act. It uses a progressive
taxation system to redistribute income.
The state operates a public sector, which provides some goods and
services, such as healthcare, infrastructure and education. In South Africa,
the state owns and operates several businesses that provide infrastructure
services, such as Eskom, SA Post Office (SAPO), the SABC, SAA and
Transnet.
2.3 Advantages
l
l
l
l
l
l
l
l
Freedom of choice. In South Africa’s mixed economy, a wide range of
goods and services are produced.
Control of the economy. Because there is private ownership of land and
businesses, individuals have control of the economy.
Improved social welfare. The state provides goods and services, such as
law and order, education and health services, which might have been
underprovided for if left to the market. This means that they are available
to everyone, regardless of income.
Economic growth is encouraged. Booms and slumps in the business cycle
can be levelled and the government works towards creating a stable
economy. The state can also work towards providing a well-developed
infrastructure and encouraging the development of trade.
Monopoly power can be monitored and controlled.
Inequalities in income and wealth can be corrected through the taxation
system.
Negative externalities, such as pollution, can be controlled. The
environment can be protected.
Foreign investment is encouraged.
Economic systems: Mixed economy • 59
2.4 Disadvantages
l
l
l
l
l
Because the profit motive exists, there will always be self-interest and a
lack of regard for the poor and the environment.
Poverty still exists. South Africa has one of the largest gaps between rich
and poor in the world. About 45% of our population don’t have enough
income to meet their basic needs.
In mixed economies, state-run enterprises generally don’t allow
competition. Therefore, they act as monopolies and lack efficiency.
Sometimes, the state interferes too much in the running of the economy,
for example, with too much taxation or too many labour laws. This
discourages employment and economic growth.
Excessive government spending may result in inefficiency and an
overlarge bureaucracy.
South Africa’s mixed economy allows private and state-run enterprises to co-exist.
?
Do you think that the government should run businesses that the
private sector could run, such as Metro suburban trains? What about
schools and hospitals?
Classroom activity 3.1 (12 marks)
‘Will the South African economy get a kick from the World Cup?’
by Sandeep Mahajan on Tuesday, 8 June 2010 (http://blogs.worldbank.org)
As the month-long FIFA 2010 World Cup tournament
kicks off on June 11, all eyes will be on South Africa.
Quite literally, since the 2006 tournament in Germany
had a global viewership of around 30 billion.
The event is an opportunity for South Africa to
showcase itself, not just as an attractive destination for
tourism and investment, but also as the Rainbow
Nation, home to people of every race, colour, and creed.
60
• Economic systems: Mixed economy