Circular Flow of Economic Activity

• Open circular flow includes the foreign sector.
• Households use factors of production (FOP) to make joint economic decisions.
• Firms use FOP to produce goods and services.
• Government also participates in the circular flow.
• Open Circular flow includes the Foreign Sector.
• The Foreign Sector employs domestic FOP.
• Households, firms, and government buy goods and services from the foreign sector, resulting in imports.
• Domestic firms sell goods and services to the foreign sector, resulting in exports.
• The Foreign Exchange Market determines exchange rates.
• Gross Domestic Expenditure (GDE) equals consumption plus investment plus government spending plus net exports (exports minus imports).
• Factor markets exchange factors of production for remuneration.
• Goods markets involve the buying and selling of goods and services.
• Financial markets facilitate short-term (money) and long-term (capital) loans.

Different Flows

• Production flow represents the flow of goods and services produced in the economy.
• GDP (Production) is categorized into primary, secondary, and tertiary sectors.
• Income flow represents the flow of income to owners of FOP for their use.
• GDP (Income) includes compensation of employees, net operating surplus, and consumption of fixed capital.
• Expenditure flow represents the flow of spending on goods and services by different participants.
• GDP (Expenditure) equals consumption plus government spending plus investment plus net exports.
• Real flow involves the flow of physical items like goods, services, and factors of production.
• Money flow is the nominal flow.

Participants

• Households refer to individuals living in one house making financial decisions.
• Owners of FOP sell them in the factor market.
• FOP receive remuneration when sold.
• Firms buy FOP to produce goods and services.
• Spending by households is consumption expenditure.
• Households pay tax (PAYE/VAT).

The Foreign Sector

• Imports are goods and services bought from other countries.
• X: Sell goods and services to other countries.
• Exports provide foreign currency to the country, which is used to cover import costs.

Firms

• Firms are responsible for producing goods and services bought by participants.
• Firms receive income in exchange for goods and services used to increase production.
• Deposits of households are borrowed from banks to invest in capital goods.
• Firms purchase capital goods, leading to investment expenditure.

The State (Government)

• Provides public goods and services.
• Buys FOP to use in providing public goods and services.
• Fiscal Policy.
• The state pays subsidies to reduce the cost of production.
• Makes transfer payments (disability or old-age grants).
• Individuals and households pay taxes to the government.
• Direct tax is levied on specific individuals (income tax).
• Indirect tax is levied on specific goods and services (VAT or fuel levies).
• Government expenditure is used to improve infrastructure.

Financial Sector

• Money market is used for short-term savings and loans.
• Securities exchanged include bankers' acceptances and treasury bills.
• Capital markets facilitate long-term deposits and borrowing.

Foreign Exchange Market

• Exists when a person buys foreign currency to travel abroad.
• The South African Rand is exchanged or traded freely in the market.
• Economic injections occur when money enters the economic cycle.

Economic Injections

• Increase the quantity of money in circulation.
• Government spending, investment, and export expenditure are examples of economic injections.
• Economic leakages decrease saving income, resulting in : savings, taxes, and import expenditure.

Definition

• Any contact or communication between actual or potential buyers of goods and services.
• 1. Product/Output Market.
• Goods and Services are exchanged for a price.
• Goods are tangible, while services are intangible.

Types of Goods

• Consumer goods and capital goods exist.
• Durable goods can be used over and over again.
• Semi-durable goods can be used more than once.
• Non-durable goods cannot be reused.
• 2. Factor Market/Input Market.
• Factors of Production are purchased and sold.
• Resource market
• Divided into:
• labor money and financial market
• Land market
• 3. Money + Capital Market
• Transactions occur in banks and consist of electronic money transfer from one account to another.

National Account Aggregates

• Information obtained by Stats SA, is published by SARB.
• 1. Production
• Total market value of all final goods and services production in a country within a year.
• Primary sector plus secondary sector plus the tertiary sector.
• Basic prices plus tax minus subsidies equals GDP at Market Price.
• Income
• Total incomes remuneration earned by residents of a country in the production process of goods and services.

Calculation

• Compensation of employees plus net operating surplus plus consumption on fixed capital equals GVA at factor cost plus tax minus subsidies equals GVA at market price
• Expenditure
• Includes residual items.
• Total expenditure on final goods and services produced in the domestic economy.

Calculation

• Conversion Formula 1.
• GDP equals Gross National Product (GNP).
• The equation is GDP + Primary income to the world – Primary income from the world = GNP.

Expenditure

• C+G+I+ (X-M)
• GVA @ factor cost + tax on production - subsidies on production = GVA @ basic price.
• Also, tax on product - subsidies on product = GDP @ market price.
• Plus Primary income to the world - Primary income from the world = GNP.
• A business cycle is a time series showing domestic output GDP over time.
• Can be repeated every three to five years or longer.

Definition

• Economic indicators. GDP shows an upward trend, meaning that most countries produce more goods and services. Sustained increase in the general price level. Economic indicator illustrating the economy's overall direction.

Recession

• Low demand for credit and low interest rates exist.
• Firms invest and produce less due to decreased business confidence.

Depression

• Numerous firms cease operations.
• a high degree of pessimism exists before the economy reaches a trough
• Shortage of money supply.

Recovery

• economic activity starts to increase
• Production increases with more job opportunities that help more income and buying more.

Prosperity

• Characterized by high levels of optimism.
• Leads to inflation and is at its height

Length

• The number of years it takes to move from one peak to the next

Amplitude

• The intensity of underlying forces and the size of any change

National Figures Info

• National figures is determining or measuring economic growth by use in a country. Examples a) Tax on product, business Licenses Trend Line
• Displays time vs. GDP Monetary Policy & Instruments Decreasing rate increase money supply Instrument 2. SARB increase cash reserve requirements of banks. Selling Securities to Banks.

4. Moral Persuasion Governor tries commercial banks to lend. Managed Floating is controlled by the CB.

Fiscal Policies

1. Demand becomes to low.

• Demand: Increase unemployment
• Raise:Raise Gov Spending, Decrease Taxes

2. Demand becomes to high

• Increase:inflation could Increase
• Reduce gov increase taxes. Expansionary fiscal policy is stimulate ecconomy through levels. Restrictive Is to decrease econo.
• Redcuing,increasing

Smoothing of Business Cycles

• Paradigm is possibly high rates extended , Without inflation.
• cycle are that taken to prevent from

Demand Side Policies

• fiscal,monetary
• An an changes agg demand will on employment. Increase with pressure of supply and Inflation The rate would again
• A.w Philips curve NRU not Increase in inflation)

Suppy Side Policys

Efficiency and efficient use of Factors Reducing Cost- service and energy are Cost

• Administing
• Subsidies

Efficiency of inputs

Measures low income/ high corporate discourge

• Free business activity
• Features Underpinning
• Proccess to forecast
• Give us Warning

Explore the open circular flow model including the foreign sector. Learn how households, firms, and the government interact within factor, goods, and financial markets. Understand the components of Gross Domestic Expenditure (GDE) and the role of the Foreign Exchange Market.