ecs2602-Revision notes 2021

Learning unit 1: An overview of the South African Macroeconomic Environment Economic growth - Economic growth takes place when the total output (production) of goods and services in an economy increases. It is traditionally defined as the annual rate of increase in total output (production) or income in the economy. This definition has to be qualified in two important respects. 1. Production, or income should be measured in real terms – that is, the effects of inflation should be eliminated. 2. The figures should also be adjusted for population growth. In other words, they should be expressed in per capita terms. Real GDP growth rate = t is the second value and t-1 is the first value Gross domestic product The GDP is the total value of all FINAL goods and services (refer to those goods and services that are consumed by households and firms) produced within the boundaries of a country during a particular period (usually one year). GDP is an official measure of how much output was produced in a country or region during a specified time period. It is also the broadest, best-known and most frequently used measure of economic activity. Nominal GDP or GDP at current prices is the sum quantities of final goods and services produced, multiplied by their current price. An increase in nominal GDP might increase over time as a result of - An increase in the quantity of goods and services produced - An increase in the prices of goods and services produced Downloaded by Brenda First () lOMoARcPSD| Real GDP or GDP at constant prices is a measure of GDP in which the quantities produced are valued at the prices in a base year instead of at current prices. Real GDP therefore measures the actual physical volume of production. A base year is used to overcome the problem of price changes by expressing the prices of goods and services in terms of prices in a particular year. Real per capita GDP Positive economic growth actually occurs only when total real production or income grows at a faster rate than the population. If population growth rate exceeds the economic growth rate, a decline in real GDP per capita occurs Inflation – inflation is defined as the sustained rise in the general level or prices. In the goods market, financial market and IS-LM model we are looking at the short run and assume that the price level is fixed. However in the labour market we look at the relationship between workers’ nominal wage demands and the price level. This comes together is the AS-AD model where we see that expectations about the future price level can influence the actual price level in the economy Fiscal policy Fiscal policy is the government’s policy is respect of the nature, level and composition of government spending, taxation and borrowing, aimed at pursuing particular economic goals. The main instrument of fiscal policy is the budget, while the main policy variables are government spend and taxation. A distinction can be made between and expansionary and contractionary fiscal policy. An expansionary fiscal policy entails an increase in the demand for goods in the economy by increasing government spending and/or decreasing taxes. A result of such a policy is that the budget deficit increases. A contractionary fiscal policy entrails a decrease in the demand for goods in the economy by decreasing government spending and/or Downloaded by Brenda First () lOMoARcPSD| increasing taxes. A result of such a policy is that the budget deficit decreases Monetary policy This involves all deliberate actions by the monetary authorities to influence the monetary aggregates, the availability of credit, interest rates and exchange rates, with a view to affecting monetary demand, output, income, prices and the balance of payments. A distinction can be made between an expansionary and contractionary monetary policy. An expansionary monetary policy entails an increase in the money supply to bring about a decrease in the interest rate in order to increase the demand for goods in the economy. A contractionary monetary policy entails a decrease in the money supply to bring about an increase in the interest rate in order to decrease the demand for goods in the economy.