Open Circular Flow Model

• The open circular flow model includes the foreign sector.
• The four-sector model incorporates the foreign sector.
• Households use factors of production (FOP) to make joint economic decisions.
• Firms use FOP to produce goods and services.
• The government also uses FOP to provide public goods and services.
• The foreign sector employs domestic FOP.
• Households, firms, and the government buy goods and services from the foreign sector, resulting in imports.
• Domestic firms sell goods and services to the foreign sector, leading to exports.
• The foreign exchange market determines exchange rates.
• Gross Domestic Expenditure (GDE) is calculated as consumption plus government spending plus investment plus net exports (exports minus imports).
• Markets exist in an open circular flow, including factor markets (where factors of production are exchanged) and goods markets (where goods and services are bought and sold).
• Financial markets are where short-term (money market) and long-term (capital market) funds are exchanged, including loans.

Different Flows

• Production flow signifies the flow of goods and services produced in the economy.
• GDP [P] represents the primary, secondary, and tertiary sectors of the economy.
• Income flow refers to the flow of income to owners of FOP for their use.
• GDP [I] encompasses compensation of employees plus net operating surplus plus consumption of fixed capital.
• Expenditure flow shows the flow of spending on goods and services by different participants.
• GDP [E] is the sum of consumption, government spending, investment, and net exports.
• Real flow involves physical items like goods, services, and factors of production.
• Money flow is a nominal flow representing the flow of money.

Participants (Essay)

• Households, as consumers, make financial decisions and receive remuneration when their FOP is sold.
• They buy FOP to produce goods and services, and their spending contributes to consumption expenditure.
• The foreign sector involves imports (buying goods and services from other countries) and exports (selling goods and services to other countries).
• Exports provide foreign currency, which is used to cover import costs.
• Firms are responsible for producing goods and services bought by participants and receive income in exchange for goods and services, which are reinvested to increase production.
• They also borrow from banks to invest in capital goods.
• The state provides public goods and services and buys factors of production to do so.
• Fiscal policy involves paying subsidies, making transfer payments, and levying direct and indirect taxes.
• Government expenditure is used to improve infrastructure.

Financial Sector

• The money market facilitates short-term savings and loans and includes inter-bank lending.
• Securities such as Banker's acceptances and treasury bills are exchanged there.
• The capital market handles long-term deposits and borrowing, such as mortgages and is a key institution - JSE.
• The Foreign Exchange Market is where a person buys foreign currency to travel abroad.
• The South African Rand is exchanged/traded freely in the market

Economic Injections and Leakages

• Economic injections occur when money enters the economic cycle, increasing the quantity of money in circulation: J = I + G + X (Investment + Government Spending + Exports).
• Economic leakages occur when consumer saving increases, reducing the quantity of money in circulation: L = S + T + M (Savings + Taxes + Imports).

Product/Output Market Characteristics

• Goods are tangible, and services are intangible.
• Consumer goods can be durable (used repeatedly), semi-durable (used more than once), or non-durable (cannot be reused).

Factor Market/Input Market

• Factors of production are purchased and sold in the factor market.
• Divided into: labour, money, financial and land markets.
• Money market deals with short-term savings and loans, involving instruments treasury bills and short-term government bonds.
• The capital market handles long-term deposits and borrowing, with Johannesburg Stock Exchange (JSE) being a key institution.
• Foreign exchange market: A transaction occurs in when a person buys foreign currency.
• These transactions involve electronic money transfers between accounts.
• Imports and exports are real flows, accompanied by expenditure and revenue flows in the forex market.

National Account Aggregates

• National accounts consist of records of total production, income, and expenditure.
• Gross Domestic Product (GDP) is the total value of final goods and services produced within a country in a year.
• Double counting occurs when intermediate products are added irregularly to final products, inflating the amount.
• Gross National Income (GNI) is the total remuneration of FOP received by people of a nationality in a given period.
• Gross Domestic Expenditure (GDE) is the total expenditure on final goods and services within a country in a given period.
• Nominal GDP is GDP at current prices and includes effects of inflation, whereas real GDP is GDP at constant prices and is adjusted for price changes.
• GDP at factor cost measures the price of a product based on the value added by factors of production, while GDP at basic price includes taxes less subsidies. GDP at market price reflects the final sales price.

Conversion Formulas and Calculations

• GDP to GNP: GDP + (Primary income to the world) - (Primary income from the world) = GNP
• Expenditure: total final consumption + Government Consumption + Investments + (Exports - Imports)
• GVA at factor cost + taxes on production - subsidies on production = GVA at basic price
• GVA at basic price + taxes on product - subsidies on product = GDP at market price

Topic 2: Business Cycles

• A business cycle shows the value of domestic output (GDP) over time, repeating every three to five years or longer.
• Most countries produce more goods and services over time, with GDP generally trending upwards.
• Inflation is a sustained increase in the general price level, reducing the purchasing power of money.
• A trend line indicates the general direction in which the economy is moving.

Key parts of the typical Business Cycle

• The period of depression is a time when many firms close, aggregate demand declines, and investments take place slowly .
• In recovery, economic activity starts to increase, business confidence grows, production and job opportunities rise, and households receive and spend more income.
• A prosperity period sees optimism, investment, production, employment, and increasing real GDP, which then leads to inflation.

Business Cycle Characteristics

• Length is measured by the number of years it takes for the economy to get from one peak to the next.
• Amplitude indicates the intensity of underlying forces and size of changes, reflected in the vertical difference between the trough and trend along with the trend to peak movement.
• Trends show the relationship between GDP and time and the general direction of economic growth.

Types of Business Cycles

• Kitchin cycles last 3-5 years, Juglar cycles 7-11 years, Kuznets cycles 15-25 years, and Kondratiev cycles 45-60 years each relating to varying economic factors.
• Monetary policy involves actions from the central bank regarding the money supply and interest rates.
• The SARB decreases interest rates to make borrowing cheaper for firms, impacting the money supply.
• Instruments include interest rates, cash reserve requirements, open market transactions, and moral persuasion.
• The managed floating exchange rate is where the central bank interferes in the forex market.

Fiscal Policies

• Economic growth: an expansionary policy may include an increase in government spending and/or reduce taxation, . increasing aggregate demand for G/S
• Price Stability: An expansionary policy may have an inflationary affect on the economy. The increase in disposable income puts inflation pressure on G/S
• Crowding-out-effect: If an increase in gov Spending is financed by borrowing,it can cause a sharp increase in interest rates
• Income distribution: Progressive taxation is used to make the income distribution more even while regressive tax makes the income less evenly distributed. An increase in proportional tax leaves income distribution unchanged.
• If implemented, high and progressive taxation rates could lead to decreased income distribution..

Business Cycle Policies

• Governments aim to achieve economic growth, but focusing solely on growth could increase inflation.
• Decreasing interest rates makes it cheaper for firms to borrow money, increasing money supply in the economy.
• SARB can increase cash reserve requirements of banks so that they will have less money to lend.
• SARB uses government bonds and treasury bills to control the money supply.
• To increase money in circulation, it buys securities back from banks.
• SARB attempts to keep the inflation rate between 3% to 6% per year.

More Policies

• Demand becomes too low: L > Î increasing unemployment so government should raise government spending and decrease taxes.
• Demand becomes too high: inflation could increase so government should reduce government spending and increased taxes.
• Monetary Policy - If there is an intention to decrease the level of economic activity government should encourage economic activity.
• Fiscal Policy instruments that can acheive are: increasing government spending/reducing the level of taxes.
• Restricitve policy - In reaction to the previous situation there should be an attempt to decrease the level of economic activity so government should use less government spending or increase the level of taxation

Smoothing of Business Cycles & Supply/Demand

• Smoothing involves taking actions to prevent dramatic economic shifts.
• Traditional monetary and fiscal policies focus on managing aggregate demand.
• A change in aggregate demand can affect inflation and employment, pushing producers to adjust production and potentially sparking inflation.
• When aggregate demand increases, unemployment decreases as prices increase,
• When prices increase government can reduce aggregate demand.
• Supply-side policies focus on efficient resource allocation and production, especially for labor and capital.

Economic measures for efficiency

• Reducing production costs helps supply larger outputs at any given price level.
• Measures to support bettering Infrastructure, administration or cash incentives.
• Greater efficiency is achieved through lower tax rates and HR development to ensure fair conditions.
• Deregulation involves the removal of laws and regulations that interfere with markets.
• Competition encourages new businesses and foreign direct investments.

Forcasting & Indicators

• Forecasting involves predicting future economic conditions.
• Leading indicators change before the economy, offering advance warnings of activity changes.
• Coincident indicators change simultaneously with the economy and provide information about current conditions.
• Lagging indicators change after the economy and indicate what has already happened.

Composite Indicators

• Compiling these indicators is often used to calculate a single measurement to benchmark performance.

Government Intervention

• Intervention is to provide community goods that are non-rivalry and non-excludability to those who do not pay for using.
• They include protecting resources people can use for free, achieved.

Arguments for the State to Intervene.

• Protecting community goods that are non-rival and non-excludability to those who do not pay for using is important
• Achieving a wealthy, more fairly served tax system of wealth + employment

Protection of Resources

• Protecting resources people can use for free so intervening with things such as Tax legislation benefits all involved

Protecting consumers

• To avoid consumers getting exploited there must be monopoly prevention and intervention by the state.
• In the Public Sector it is important to take into account public opinions and try to get accurate measurements.

Considerations within a Public Sector

-Apathy , Management and overall ,Motivation , Corruption , are common failure points. -Prices of goods are often at a set value but there can be many admin issues.

Positive and Negative Outcomes

• SOE can give rise to many issues like: -Unemployment that it solves via service delivery.

Overall and important Gov objectives

• Economic growth is an important aspect that cannot clash with poverty reduction and the state sector needs to aim for the highest level of performance that it can to prevent failure
• Prices need to be stable so use the fiscal and monetary system to achieve such state -Fairness of distribution of wealth and overall service quality is important

The open circular flow model includes the foreign sector. Gross Domestic Expenditure (GDE) is calculated as consumption plus government spending plus investment plus net exports. Markets exist in an open circular flow.