ECS1601 Short Summary.

CHAPTER 1: Basic concepts Total production, income and spending in the mixed economy Total production in the economy: GDP = C + I + G + X – Z. Gross domestic expenditure (GDE) refers to total expenditure in the domestic economy by consumers, firms and the government. GDE = C + I + G. The difference between nominal and real values Nominal means “in terms of the name”. The nominal value of something refers to the value that you can see. E.g. the nominal value of your salary refers to the amount that you can see that is paid into your account. Real means “actual” or “essential”. The real value of a salary refers to the actual value in terms of what you can buy with it, or the purchasing power of your salary. Macroeconomic policy The 5 objectives of macroeconomic policy (measure the performance of the economy): • Economic growth • Full employment • Price stability • Balance of payments stability • Equitable distribution of income CHAPTER 2: Money and monetary policy The functions of money • Money as a medium of exchange Money is anything that is generally accepted as payment for goods and services or that is accepted in settlement of debt. • Money as a unit of account • Money as a store of value Money in South Africa The conventional measure (M1) M1 = coins and notes (in circulation outside the monetary sector) as well as all demand deposits (including cheque and transmission deposits) of the domestic private sector with monetary institutions. M ≡ C + D Where M = quantity of money C = cash (coins & notes in circulation outside monetary sector) D = demand deposits (bank deposits accessed on demand, eg by debit card, EFT or cheque) D is by far largest component of M1 (90%). A broader definition of money (M2) M2 = M1 plus all short-term & med-term deposits of domestic private sector with monetary institutions. M2 = money + quasi money. The most comprehensive measure of money (M3) M3 = M2 plus all long-term deposits of domestic private sector with monetary institutions. The demand for money TABLE 2-1 The demand for money (liquidity preference) Function Motive Active/passive Main determinant Medium of exchange Transactions Active balances Income Store of value Speculative Passive balances Interest rate