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Economics / Notes Grade 11 Nkangala District/2023 NKANGALA DISTRICT ECONOMICS NOTES TOPIC 8: ECONOMIC GROWTH GRADE: 11 YEAR: 2023 1  Economics / Notes...

Economics / Notes Grade 11 Nkangala District/2023 NKANGALA DISTRICT ECONOMICS NOTES TOPIC 8: ECONOMIC GROWTH GRADE: 11 YEAR: 2023 1  Economics / Notes Grade 11 Nkangala District/2023 TOPIC 8: ECONOMIC GROWTH Economic growth is the increase in the production capacity of a country over time. UNIT 1: WEALTH CREATION  Wealth is the monetary value of all assets that an individual or organisation owns. This includes items such as houses, cars, land, clothes etc.  Types of assets are tangible assets (such as houses, cars, land), non-tangible assets (intellectual properties such as patents and copyrights) and financial assets (e.g. money, shares).  Patents are protection of rights such as inventions, while copyrights protect original artistic work such as songs and books.  Sources of wealth  Individuals: can accumulate wealth when they save some of their income in various forms such as buying shares and bank deposits. Households can receive income by selling their factors of production, part of which they can save.  Businesses: can accumulate wealth when they invest their profits in expanding their businesses.  Government: can accumulate more wealth by making sure that they have a surplus on their budget and investing that surplus by buying land or saving it. Surplus is the money that is left after paying government expenses; when government income is higher than government expenses.  Distribution of wealth and income  Wealth distribution: refers to the way ownership of assets is shared among economic participants.  In market economies, wealth is often more unequally distributed than income.  This is because instruments used by governments seems less successful in dealing with wealth inequality than income inequality.  Income distribution refers to the way the income is divided among a country’s economic participants.  In market economies the division of national income is never equal, the income of the rich people is often higher than that of the poor people.  South Africa has the highest income inequality in the world. This means the gap between the rich and the poor is the highest in South Africa than in all countries of the world.  Causes/ reasons of income inequality  Unemployment: Many people have no skill and this results in them being unable to obtain employment. For those employed, unskilled workers earn lower wages compared to the skilled co-workers.  The income gap keeps on increasing as the skilled workers are in short supply and therefore they keep on being paid more. 2  Economics / Notes Grade 11 Nkangala District/2023  Wealth: Some assets are able to generate incomes (e.g. dividends from shares) for their owners. This income often increases as the value of such assets increase over time.  Owners of assets such as shares give incomes (dividends) that increase as inflation increases.  Discrimination: Even though the laws have changed, many black people still earn lower incomes than their white colleagues, doing the same jobs.  Women are still discriminated due to their gender in some firms, therefore, are paid less than men.  Consequences of income inequality  The very poor cannot have capital to start businesses (even small businesses) due to lack of money.  Absolute poverty will stay high.  Crime level can increase as some poor people can attempt to earn a living through criminal means such as stealing.  Low income earners will be unable to save; therefore, they can never create wealth.  Methods of measuring income inequality  Economists have two ways of measuring income and wealth inequality and they are: Lorenz curve and the Gini-coefficient.  1. Lorenz curve: is a graphical representation of a country ‘s distribution of income.  The cumulative percentage of population’s income and cumulative percentage of country populations (see the table below) are used to draw the Lorenz curve. % population % Income owned Cumulative % Cumulative % population income 20 5% 20 5% 40 15% 60 20% 20 20% 80 40% 10 20% 90 60% 10 40% 100 100% THE LORENZ CURVE Cumulative income percentage 100 80 60 40 Lorenz curve 20 0 0 20 40 60 80 100 3 Cumulative population percentage  Economics / Notes Grade 11 Nkangala District/2023  On the vertical axis, cumulative percentage of income is measured.  On the horizontal axis, cumulative percentage of population is measured.  The Lorenz curve indicate that 20% of population own only 5% of the total national income.  60% of population owns only 40% of the national income, while 80% of the population owns only 40% of the total income in the country.  90% of the population own a 60% of the income. This means the other 40% of the income in the economy belongs to only 10% of the population  This represents an unequal society, which is a common thing in market economies, however, some societies are still more unequal than others.  The line of perfect equality: divides the graph into two equal parts and represents the perfect distribution of income. The dots on the line shows that 20% of the population gets 20% of the income and 40% of the population gets 40% of the income and so on until 100% population owns 100% of the income. If there is perfect distribution, the Lorenz curve will merge with the line of equality.  Area of inequality; it is the space between the line of equality and the Lorenz curve. The larger the area of inequality, the larger the gap between the rich and the poor (the smaller the area of inequality, the smaller the gap between the rich and the poor).  2. Gini – coefficient: it is the mathematical representation of inequality in a society. It is calculated using the information on the Lorenz curve.  Gini coefficient is a number between 0 and 1. The closer the number is to 1 the more unequal the society is. The closer to 0 the less unequal the society is.  If the Gini = coefficient is 0, it means the society is perfectly equal and every household has the same amount of income. This is an impossible situation as no country in the world has perfect equality among its people.  If the Gini –coefficient is 1, it means the country is perfectly unequal and the income in the country belongs to one person. This is also an impossible situation as there is no country where everything is belongings to only one person.  All countries have a Gini coefficient of between 1 and 0.  South Africa has the Gini coefficient of 0.63 and this is the highest in the world. This means South Africa has the largest gap between the rich and the poor. 4  Economics / Notes Grade 11 Nkangala District/2023 METHODS TO REDISTRIBUTE INCOME AND WEALTH (Possible essay)  Governments often use various methods to reduce the gap between the rich and the poor members of their societies. In south Africa those methods are:  Progressive personal income tax: a tax system whereby the lower income group pay less tax than the higher income group.  In other words, the higher the income the higher the tax percentage, and the lower the income the lower the tax percentage. This means richer people will have more money taken from their incomes as tax than lower income earners.  This results in the after tax income (disposable income) of higher income earners being reduced much more, therefore the gap between the higher and the lower income earners being reduced.  The revenue from the taxes are often used to benefit the income situations of the poor.  Social grants (cash benefits):  Old age pensions, disability grants, child support and unemployment insurance are cash grants.  They help the recipients to afford some basic goods and services, thus improving their quality of life.  Minimum wages  Minimum wage is the lowest wage which by law an employer can pay an employee.  The minimum wage policy was introduced in 2019 in South Africa.  Minimum wage helps many workers who were paid very low wages to afford an increased quantity of goods and services.  Unskilled workers such as domestic workers and farm workers are among those who benefited from the minimum wage policy.  Wealth taxes  Wealth tax is levied on an individual’s personal assets e.g. shares, properties, estate etc.  Properties are taxed according to their market values, the higher the value the higher the tax rate. Transfer duties are paid when properties worth R1,1 million or more are bought.  Securities (Shares) are taxed when traded. Capital gains tax is levied on sale of capital goods (e.g. properties, shares).  Estate duties are paid on the estates of a deceased person.  These taxes are used to finance expenditures which improves the lives of people and this benefit the poor more often.  Benefits in kind (natural benefits)  These include the provision of healthcare, education, school meals, protection, infrastructure etc.  When user fees are charged, low income earners pay less or nothing.  Limited quantities of free electricity and water are provided. 5  Economics / Notes Grade 11 Nkangala District/2023  Black Economic Empowerment  BEE is a policy that was created to increase the economic participation by the previously disadvantaged people.  The policy entails that black people be given preferences in economic activities. While the policy promotes black people in general, it empowers black women much more as they were more disadvantaged than everyone (even black men) economically.  Land restitution and land redistribution  Land restitution is the return of land to those that have lost it due to discriminatory laws in the past.  Land redistribution focuses on land for residential and production farms for previously disadvantaged groups. The money for these programmes is provided in the main budget. The main objective is for the recipients to use the land to contribute towards production and employment.  Subsidies on properties  It helps people to acquire ownership of fixed residential properties. E.g. government’s housing subsidy scheme provides funding to all people earning less than 3500 per month. UNIT 2: ECONOMIC GROWTH  DESCRIPTION: economic growth is the increase in a country’s production capacity over a period of time.  It is when a country produces more goods and services in a year compared to the previous year.  Economic growth is measured by Gross Domestic Product. Two forms of GDP are nominal GDP and real GDP  Nominal GDP is when the monetary value of final goods and services produced is counted in the price of the year of production. It is also called GDP at current prices.  Real GDP is the GDP from which the effects of inflation have been removed. It is also called GDP at constant prices.  In South Africa the base year is 2015, this means to get real GDP the current prices should be compared to the prices of 2015. This will then tell whether the economy has grown or not. 6  Economics / Notes Grade 11 Nkangala District/2023 CALCULATION OF ECONOMIC GROWTH RATE  Since economic growth is measured in GDP, calculating economic growth rate involves comparing the GDP of one year to the GDP of the previous period.  Example: if country X ‘real GDP was 680billion in 2020 and it increased to 720 billion in 2021. The calculation of economic growth will be:  Economic growth = GDP (new) - GDP (initial) x 100 GDP (initial) = 720 - 680 x 100 680 = 40 x 100 680 = 5, 88% The economic growth rate is 5.88% IMPORTANCE OF ECONOMIC GROWTH  Sustained economic growth leads to an increase in employment.  Increased government revenue from taxation  Increase in social spending such as education and health.  Increase in household spending which will help to sustain the growth in the economy  The standard of living improves and poverty decreases  It helps a country to attract more foreign direct investments (more firms from foreign countries will like to operate in a country with a high growth rate) and this further improves the economy. METHODS OF INCREASING ECONOMIC GROWTH (Possible essay)  Availability and use of factors of production  Higher economic growth can be achieved if all factors of production employed are productive.  Improved education and training can lead to increase in the skills of labour, therefore increases their employment and productivity.  Natural resources should be used effectively, e.g. instead of exporting gold, South Africa can process it into finished products before exportations.  Entrepreneurship should be encouraged, because the more businesses opened, the more production increases.  Innovation and technological improvements  Improved technology leads to better methods of production.  New and improved machinery often result in increased productivity, and therefore economic growth. 7  Economics / Notes Grade 11 Nkangala District/2023  Increase in productivity  Productivity is the increase between products produced and resources used to produce them.  If every factor of production employed produces more from the resources used, economy will grow.  Investment in appropriate machinery and equipment as well as human resource training is important. Other ways of encouraging productivity include profit sharing incentives with workers.  Improved government policies  Policies should be designed to encourage entrepreneurship and improved education and training.  The effective implementation of government policy is important for the economy to benefit.  Investments and savings  Increased investment by businesses, government and foreign sector is important for achieving economic growth.  Businesses invest mainly in capital goods which are important for production of goods and services.  Foreign direct investment especially in the manufacturing sector can contribute to an increased economic growth. Foreign direct investment is when firms from foreign countries establish firms in a country. CONSTRAINTS (BARRIERS) ON ECONOMIC GROWTH The following factors can lead to a limitation of economic growth:  Low capital investment: low investment in infrastructure and factories can be a barrier in economic growth.  Shortage of skilled labour: can result in lower productivity as unskilled labour may not be as efficient as needed.  Under-developed financial markets: may lead to financial services which are poor may struggle to facilitate trade. If trade is slow, firms will not be able to produce as fast as they would like to and this limits economic growth.  Poor technology: the use of machinery and equipment that are slow and inefficient can slow down production and economic growth. 8  Economics / Notes Grade 11 Nkangala District/2023 ECONOMIC GROWTH IN SOUTH AFRICA IN RECENT YEARS  In the past six years South Africa has been experiencing very poor growth rates, at times even experiencing decreases in economic growth. Year Real GDP growth rate (economic growth rate ) 2016 0.4% 2017 1.4% 2018 0.79% 2019 0.15% 2020 -6,7% 2021 4.9%  The growth rate has been low even before the Corona pandemic in 2020 when the economy decreased by more than 6% (-6,7%)  In the years from 2016 to 2019, the growth rate has been below 1% on average.  The population growth rate of South Africa has been above 1.3% over the period 2016 to 2021. Therefore, the population grows faster than the economy, and this means poverty is likely to increase as more people are likely to be unemployed. STANDARD OF LIVING  Standard of living is the level of wealth and material comfort available to a country’s citizens.  The per capita GDP is the basic measure of the standard of living in a country.  Per capita GDP is obtained by dividing a country’s real GDP by the population.  It gives the quantity of goods and services that can be available per every individual if everyone consumed the same amount of products (theoretical situation).  If the population growth rate is higher than economic growth rate, it means the standard of living in the country decreases. Calculation of per capita income the Year Real GDP POPULATION PER CAPITA GDP 2007 $299 billion 47 millions 299 000 000 000 47 000 000 = $ 6361,70 (Per capita income) 2019 $351 billion 59 millions 351 000 000 000 59 000 000 = $5 949,15 (Per capita income) 9  Economics / Notes Grade 11 Nkangala District/2023  The per capita GDP for 2007 is higher than that of 2019, even though the real GDP of 2019 is higher. This is because the percentage population growth between 2007 and 2019 was higher than the percentage increase in the real GDP.  This means the standard of living was higher in 2007 than in 2019. WAYS TO MEASURE STANDARD OF LIVING  Real income per person / real per capita GDP: the higher the per capita income, the higher the standard of living.  The quality and quantity of goods and services that are available to people in a country  Access to quality health care and education  The living conditions of people e.g. housing, availability of electricity, television etc. 10