NOTES

TERM 1 - 4


The structure of the SA economy

Primary sector:  Smallest contributor to GDP –roughly 10 % of GDP.

Declining importance of mining due to low commodity prices, striking workers, disinvestment by mining companies.  Agriculture – drought has reduced food output.  High wages and unskilled workers together with uncertainty over land ownership (possible land grabs) have reduced the output of SA farmers. 

Secondary sector:  Second largest contributor with about 25% of GDP.   Lack of skills and lack of investment in capital have reduced the impact of manufacturing.  Lack of investment is partly due to trade unions that prolong strike action.   Electricity output is not reliable either and has led to lower factory output.   The government is trying to industrialise the country by subsidising new businesses and setting Industrial development zones eg Coega and Saldanha.  The key to our success is to take the minerals from the primary sector and to process them into semi-finished and finished goods for export (this is called mineral beneficiation)

Tertiary sector:  The sign of a developed economy is one where the service sector contributes in excess of 60% of GDP. SA is not developed – we are an emerging, middle income country with high poverty levels.  Yet the middle class (due to very high levels of income inequality) are able to afford first world services such as banking, finance, entertainment and communication services.  Companies such as Discovery, FNB, Showmax, DSTV, Pick n Pay and many others drive the SA economy.  However, they cannot provide employment for the majority of SA’s who are uneducated and unskilled.

CIRCULAR FLOW OF INCOME AND NATIONAL ACCOUNTS

 

The main participants in a modern economy are:

• Households
• Firms
• Governments
• Foreign Sector
   
  We will also look at the main markets and flows, and show how they are all related:
• Markets for goods and services 
• Factor markets
• Financial markets
• Flows of production (real flows), income and spending  (money flows)
   
  1.1    Production, Income and Spending
   
  The economic process is as follows:
• Households own the factors of production
• Firms use factors of production (scarce resources) to produce goods and services
• Firms pay income (returns on factors of production) to the households for the factors of production
• Households use the income to spend on goods and services.
   
  The participants of a modern mixed economy are – households, firms, government and the foreign sector. They all spend and, therefore, they all earn an income. Exchange is the term economists use to explain what basically happens in the market place, either in the goods and services market or the factor market.
   
   
  
   
  1.2  The Interdependence Between Households and Firms
   
   
  Main Participants (Simple model):
  Households:
  Households are defined by economists as people who live together and who make joint decisions or are subject to the economic decisions of others. A household can consist of an individual, family or married couple. Every person in the economy is deemed to be part of a household. It is the household that is the basic decision making unit in an economy. The members of the household are called consumers, since they engage in the consumption of goods and/or services produced by the firms. All factors of production are owned by individuals, who are members of households. The households (individuals) sell their factors of production (for example labour) to the firms. They then receive an income and use this to engage in consumption.
  Firms:
  Firms make the goods and services that consumers demand.  They do this by employing or utilising the factors of production in a transformation process. Firms are the productive units in an economy. Firms will decide how goods and services are produced, via the pricing mechanism. A firm operates with the sole intention of realising a profit.
   
        
  Markets:
  Goods: The goods market in macro-economics is a single market which represents markets for all goods and services.
  Factor: The scarce resources required by the firms to produce the goods and services are purchased from the households on the factor markets. The incomes earned by the owners of the factors of production are as follows:
  Land / Natural Resources              -           Rent
  Labour / Human Resources          -           Wages
  Capital                                               -           Interest
  Entrepreneurship                            -           Profit
   
  CIRCULAR FLOW OF PRODUCTION
  
  

  		The Circular Flow of Income and Spending

   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

3.3    Introducing the Government

 

This is includes national to regional and local. Also referred to the “public sector" which is a term used to indicate anything government owned. Naturally government also participates in the circular flow of production, income and spending.

 

 

 

 

 

 

 

 

 

MEASURING THE PERFORMANCE OF THE ECONOMY

 

2.1    Macroeconomic Objectives

 

The following macroeconomic objectives are used to assess the performance of the economy:

• Economic Growth – An increase in total production of goods and services. Not an easy task, especially under the additional pressures of a rapidly growing population.
• Full Employment – In the ideal situation a country’s resources (particularly labour) should be fully utilised. In reality, the situation can be very different. Unemployment leads to social problems.
• Price Stability – Keeping inflation under control (as low as possible).  The SARB has an inflation target of 3% - 6% per annum.
• Balance of Payments Stability – Ensuring that the balance of payments does not run a prolonged deficit OR surplus
• Equitable Distribution of Income – This relates to a socially acceptable distribution of income.

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