This document summarizes key concepts from chapters in macroeconomics. It discusses the circular flow of production, income and spending. It introduces factors of production, the four entities that engage in spending (households, firms, government, foreign sector), and how their interaction is illustrated using circular flow diagrams. Measures of macroeconomic activity such as GDP, GNP and unemployment are also introduced. The relationship between these flows and macroeconomic objectives such as growth, employment and price stability are explored.

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Chapter 3
3.1 Introduction
 Micro- (microscope) vs Macroeconomics (mental picture)
3.2 Production, Income and Spending
 Production generates → Income (for various factors of production) → use for Spending on Production
(fig.3.1)
 Stock versus Flow variable → Time dimension difference (box 3.1) Once versus Continues
3.3 Sources of production: the factors of production
 Primary(Natural and Labour) vs secondary and Human(Labour and Entrepreneur) vs non-human
3.4 Sources of income: the remuneration of the factors of production
 Rent, wages, interest, and profit
3.5 Sources of spending: the four spending entities
 Households: people who make economic decisions and sells factors of production on the factor market
 Firms: employs factors of production and produce goods and services for the goods market
 Government: local + regional + national = Public Sector injection in economy (circular flow)
Taxes leakage or withdrawal from economy (circular flow)
 Foreign sector: Export addition or injection in the economy (circular flow) Import leakage or withdrawal in
the economy (circular flow)
3.6 Putting things together: a simple diagram (Production → Income → Spending)
 Figure 3.2 (factors of production + remuneration + spending entities)
3.7 Illustrating interdependence: circular flows of production, income and spending
 Figure 3.3 Households and firms(goods and services), figure 3.4 (income and spending), figure 3.5
government, figure 3.6 foreign sector, figure 3.7 financial sector, figure 3.8 major elements
 C = spending (Consumption) by households and consumers
 I = spending (Investment) by firms
 G = spending by Government
 X = spending (Export) by foreigners
 Z = spending (Import) by South Africans in another country (-)
 S = leakage (Savings) by households and consumers
 T = leakage (Tax) by government
 Financial institutions in the circular flow of income and spending (Standard Bank, ABSA, FNB, Pension
funds, stock exchange) Savings leakage or withdrawal from the economy (circular flow) Investments
addition or injection in the economy (circular flow)
3.8 A few further key concepts
 Three basic flows vs three main economic activities(production, exchange, consumption) specialization vs
division of labour,
 specialization, opportunity cost, comparative advantage and exchange Box 3.5 Charl not finish matric ?

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Chapter 14
14.1 The function of Money
 Medium of exchange (intermediary)/ unit of account (measure)/ store of value (deferred payment)
 Definition: anything accepted as payment for goods + services + debt
14.2 Different kinds of money
 Commodities: problem of uniformity/durability/divisibility/carry→ coins: problem of large transactions → paper
money: problem of fiduciary /credit money (more paper money than gold backing) therefore intrinsic value = 0
with only exchange value → cheque accounts + credit cards (Box 14.1)
14.3 Money in S.A.
 M1 = coins + notes + demand deposit (immediately) (bigger than others)
 M2 = M1 + short + medium term deposit’s
 M3 = M2 + long-term deposit’s
14.4 Financial Intermediaries (box 14-2)
 Link between surplus units and deficit units
14.5 South African Reserve Bank (Functions)
 formulating and implementation of monetary policy
 services to government (custodian of foreign exchange reserve)
 provision of economical and statistical services
 maintaining financial stability (issuer of banknotes + coins, Banker’s bank-cash reserve)
14.6 Demand for money
 Box 14.3 Bond = principal + maturity date + coupon rate (bond market part of capital market)
 Table 14.1 → Figure 14.1
 Box 14.4 Inverse relationship between interest rate and bond of price
14.7 The stock of money: how money is created
 Banks create deposits through loans – (Box 14-5)
 Figure 14.2 is demand determined money stock
14.8 Monetary policy
 Definition: measure/ monetary authorities/ money supply or Interest rate/ stable prices +full employment+
growth/
 (market –oriented) instruments of monetary policy: accommodation policy at repo, open-market policy
 Other instruments: reserve asset requirement, public debt management, credit ceilings, deposit rate and
exchange control

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Chapter 15
15.1 The government or public sector
 Figure 15.1
15.2 Role of government in the economy
 Private sector is more efficient in the production of goods and services.
 Free market cannot function without government enforce rules (contracts)
 Free market are not efficient (fair) as market fails (monopoly)
 Free market does not produce equitable outcome
15.5 How does government intervene?
 Public provisions (national defence)/market participant (largest employer)/government spending (child
grants)/taxation (tobacco products) /regulation (anti-tobacco law)
15.6 Government failure
 Politicians/bureaucrats/rent-seeking
15.7 Nationalisation and privatization
 Definition and arguments for and against
15.8 Fiscal Policy and the budget
 Definition: level + composition of government spending and taxation versus monetary: quantity of money +
interest
 Demand Management: Monetary + Fiscal to manage Y (Total goods + services)
 Expansion (stimulate) versus restrictive (reduce)
15.9 Government Spending Increases: → Table 15.2
 Causes: changing preferences/ shocks( military) / redistribution/ misconceptions (popular demand)
population growth
 Changes: defence , police, social services, interest Table 15.3
15.10 Financing of Government Expenditure
 Income: property, fishing and mining rights →very small; Taxes: main source
 Borrowing: International/Domestic: issue bonds, Reserve Bank, 20c interest of every R1 taxed
15.11 Taxation
 Criteria for a good tax: neutrality (minimum effect) equity horizontal and vertical) Administrative simplicity
(cost)
 Direct (company + PAYE=wealth) versus Indirect (VAT+ custom duties=consumer)
 Progressive: personal income tax (Y% tax) versus Proportional: company tax (% tax fixed) versus
Regressive: vat (Y  % tax)
 Marginal vs average tax rate
 Taxation in South Africa: Rise in tax burden → Table 15.5

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Chapter 16
16.2 Why countries trade
 Absolute Advantage: specialize in what do best (p302)
Shirts cellphones
Zimbabwe(100) 5
South Africa50 (10)
 Comparative (Relative) Advantage: relative price (opportunity cost) must be different and worse than
international ratio (1 Car : 5 Wine) (Example p302)
Cars Wine
Germany 2 (1) 8 (4)
SA 1 6
 Equal advantage: opportunity cost are the same no international trade.
 Sources of comparative advantage: technology (superior), resource endowments (capital/labour),
differences in tastes or demand (rich/poor countries)
13.6 Balance of Payment
 Current Account = Goods (Import and Export) + Gold + Services (Import and Export) + Transfer (Net)
 Financial Account = financial assets + Loans + Borrowings
 Gold and foreign reserves = sum of the above
16.4 Exchange Rates
 Definition: rate at which currencies are exchange on the foreign exchange market
 Demand and Supply of foreign exchange figure 16.2 (quantity of dollars and dollars price in Rands)
 Table 16.1 Movement of demand and supply curves of dollar. (US is supply curve and RSA is Demand
curve)
 Appreciation versus Depreciation - examples
 Table 16.2 Impact of changes in R/$
 ability of SARB to intervene depends on foreign reserve.
 Exchange Rate policy: nothing, intervene, interest rate
16.5 The terms of trade
 Definition: ratio between X prices and Z prices. Formula p.311
 Welfare increase if ↑terms of trade because gold prices (X) ↑

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Chapter 13
13.1 Macroeconomics Objectives
 Economic Growth: increase in goods and services
 Full Employment: to achieve social and political stability
 Price stability: inflation (change in prices) as low as possible
 Balance of Payment stability: Balance between Z and X
 Equitable distribution of income: to achieve social and political stability
13.2 Measure the level of economic activity: Gross Domestic Product (GDP)
 GDP: /total value/ final goods and services/ a country/ period/
 3 Methods of calculating: (table 13.1)
1. Production: value added at each stage
2. Expenditure: final value of goods and services
3. Income: earned income by owners of production factors
 Basic prices= Factor cost + taxes on production (payroll) – subsidies on production (training)
 Market prices= Basic prices + taxes on products (per unit: vat) - subsidies on products (per unit: export)
 Current prices (nominal)= prices ruling during that period
 Constant prices (real) = prices ruling during previous base year (purchasing power) Box
13.1(Nominal/real/purchase power) + 13.2 (example calculation of nominal/real)
13.3 Other measures of production, income and expenditure
 GDP= C + I + G + X – Z
 GDE= C + I + G
 GNI(GNP)=GDP +f actor receipts (SA overseas)–factor payments (foreigners in SA) Example: Table 13.4
13.4 Measuring employment and unemployment
 Unemployment rate: % of people willing + able, but do not have jobs
 Difficult to measure: part-time, seasonal, housewives, illegal activities?
13.5 Measuring prices: the consumer price index
 Index of prices/representative “basket”/consumer goods and services/ to calculate inflation. Box
13.5(current/previous x 100)
13.6 Measuring the links with the rest of the world: balance of payments
 Record of transactions with the rest of the world
 Current account(goods and services import and export, income receipts and payments) + Financial
account(financial flows)
13.7 Measuring inequality: the distribution of income
 Lorenz curve (figure 13.1), Gini coefficient (figure 13.1), Quartile ratio (table 13.7)

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Chapter 17
17.1 Production, Income and Spending
 National Accounts: Measures → production = income = spending versus Macroeconomics: explanation of
the above flows.
 3 Possibilities: Aggregated Spending (A) = Production = Income (Y); Spending > Production and Income
(increases); Spending < Production and Income (decreases)
 Say’s Law: Supply creates own demand (Y → A) versus Keyn’s: Demand (G) creates own supply (A → Y)
 Box 17.1 Synonyms for Y
17.2 Basic Assumptions
 Box 17.2
17.3 Consumption Spending
 C = C + cY, C = autonomous consumption, c = marginal propensity to consume, Y = income, cY = induced
consumption (figure 17.1)
 S = - C + (1 – c) Y, S = Savings (Box 17.4)
17.4 Investment Spending
 Definition: production + purchase of capital goods
 Autonomous: not determined by income, but cost of capital, interest rate, and expected revenue. Figure
17.3 and 17.4 and Box 17.5 rate of return on investment
17.5 Simple Keynesian Model – Without a Government
 45 – degree line: Aggregated Spending A (C + I) (figure 17.6) = Y (production) Excess demand: A > Y;
Excess supply: A < Y (figure 17.5+7)
 Equilibrium level of income determined through: Using words on page 326 (change in inventory); Using
symbols A = C + I and Y = A (solve Y); Using numbers A = 200 + 0,8Y and table 17.1 (only one value
where A = Y); Using graphs figure 17.8
17.6 Algebraic Version
 Only the results (17-6a)
17.7 The Multiplier
 Only need to know in the study guide
1. Ratio between ΔA → ΔY
2. α = 1÷(1-c)
3. Additional income spend (c) in the next round
4. Graphically figure 17.10
17.8 A Brief Summary
 Repeat of the above and Box 17.9 Paradox of thrift

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Chapter 18
18.1 Introducing Government into our Model
 G = Autonomous (political issues)
 A = C + I + G; Graphically figure 18.2
 Impact of G: Increase A, leaves α unchanged, increase Y (Y = α.A)
 Proportional Tax: T for the economy as a whole is a certain proportion of Y.
 Disposable income (Yd): Income that households have available after they have paid taxes.
 Impact of T: Leaves A unchanged, reduce the multiplier → 1÷[1-c (1-t)]; reduce Y
 Equilibrium level of income in an economy with G and T → figure 18.5
18.2 Foreign sector into the model: Open Economy
 X = Autonomous (economy of the rest of the world, international competitiveness, exchange rates)
 Impact of X: increase A, leaves α unchanged, increase Y
 Z = induced imports (mY) (m) marginal propensity to import
18.3 A brief summary
 Repeat of the above

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Chapter 19
19.1 Aggregated demand (AD) aggregated supply (AS) model
 Definition: General levels of prices and total production versus Micro Economics: Demand and Supply of a
particular commodity
 Shifts of the AD: Δ in any aggregate spending items (A), Fiscal (G + t), Monetary (i); Table 19.1
 Shift of the AS: Δ any factor prices, productivity Table; 19.2
 Expansionary / Contractionary monetary and fiscal → ΔAD (Figure 19.4)
 Supply shock (example, high increase in oil prices) → ΔAS (Figure 19.5)
 Box 19.1
19.2 Monetary transmission mechanism
 Definition: Change in the monetary sector (i) → change in the rest of the economy (real sector : Y)
 With graphs: Figure 19.7 (a) interest rate change→ (c) change prices and income/production
 With symbols: Δi → ΔI→ ΔA → ΔAD →ΔY and ΔP
 Crucial links in transmission mechanism: interest elasticity of investment and slope of AS figure 20.1
19.3 Monetary and fiscal policy in the AD-AS framework
 Demand management (monetary policy with interest rate and fiscal policy with G and t) can be contraction
and expansionary
 Monetary and fiscal policy lags: recognition, decision, implementation and impact.
 Effectiveness of monetary (dampen) and fiscal (stimulating)
 Policy dilemma in a open economy: (Figure 19.10) Reduce unemployment (Y0→Yf) increase deficit.
Reduce deficit (Y0 → YB) increase unemployment.

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Chapter 20
20.1 Definition of Inflation
 Definition: continuous and considerable rise in prices.
 Aspects of definition: neutral (not the cause), process (continuous), considerable (more than 3%), general
(not a particular good)
20.2 The measurement of inflation
 Definition of CPI: cost of (living) representative basket of consumer goods and services
 Definition of Core Inflation (headline inflation): underlying inflationary pressure which excludes highly
volatile prices.
 Definition of PPI: Measure prices at the first level of commercial transaction (cost of production) Table 20.2
 Implicit (side effect) GDP deflator: measure prices of all final goods and services. Difference between
current and constant GDP
20.3 Effects of inflation
 Distribution: creditors (lender) → debtors (borrower) (purchase power)
Elderly → young (income)
Private → government (bracket creep and outstanding debt)
 Economic effects: new production → anticipating inflation
Savings → speculative practices
Balance of payment (X down, Z increase)
 Social and Political effects: cost of living increases (rent, service charges, taxi fares etc.)
 Greatest cost: inflation expectations causes inflation
20.4 Causes of inflation
 Demand pull: C + I + G + X + Ms (Monetary an Fiscal policies) Fig. 20.1
 Cost push: increase in wages, import, profits and disasters; decrease in productivity Fig 20.2
 Conflict approach to inflation: imbalance between demand and production in economy. Use inflation to
inflate nominal production or decrease real demand

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Chapter 21
13.4 Measuring employment and unemployment
 Employment: how many people have jobs
 Unemployment: how many people are willing and able but do not have jobs
 Difficult to measure: part-time, seasonal, housewives, illegal activities?
21.1 Unemployment
 Cost of unemployment: Individual (psychological cost, experience) versus Society (crime, damage to
social and political structure, opportunity cost)
 Types of unemployment: voluntary or involuntary (Box 21.1)
1. Frictional (between jobs)
2. Seasonal (part of each year)
3. Cyclical (recession or business cycle)
4. Structural (change in job requirement)
 Policies to reduce unemployment:
1. Supply side (limit population growth, immigration, wrongly skilled)
2. Demand side (increase government spending, stimulate consumption and investment, labour
intensive production, special projects, informal sector, tax incentive, relative price, labour legislation)
 Unemployment in the Keynesian and AD-AS models: horizontal axis is Income (Y) for both models and
Y↑ → N↑ figure 21.1 except for structural and frictional unemployed, capital intensive growth and too
much new entrance.
21.2 Unemployment and inflation: the Phillips curve
 Figure 21.2
 Trade of principal and stagflation

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Chapter 22
22.1 Definition and measurement of Economic growth
 Definition: Annual (real) rate of increase (per capita) in total production (GDP)
 Problems with GDP:
 Non market production (G)
 Unrecorded activity (informal sector)
 Data revision (new + better)
 Economic welfare (by-products, distribution)
 Calculating economic growth: real term (- inflation) + per capita (per person)
The Business cycle (Study Guide only)
 Definition: pattern of upswing (expansion) and downswing (contraction)
 Stages: Trough (A), Upswing (AB), Peak (B), Downswing (BC)
22.3 Sources of Economic growth
 Supply factors:
 Natural Resources (discover, techniques)
 Labour (quality: education, health, nutrition, attitude)
 Capital (buildings, machines, equipment) widening (increase for more workers) versus deepening
(increase for more per worker)
 Entrepreneurship (identify opportunities)
 Demand factors:
 Domestic Demand (C+I+G) increase through inward industrialization (worsen BOP and increase
CPI) NO
 Export Demand (Economic conditions elsewhere) YES
• Import Substitution (capital goods imported, protection of local market) NO