Chapter 3 Information

Topic: Understanding changes in the economy

E-Book: Page 39-59
Activity: 17-45
Outcome:
• Circular flow
• Measuring inflation
• Measuring economic growth
• Measuring unemployment
• Measuring balance of payments stability
• Measuring income distribution
 Circular flow diagram

*E-Book video on page 42

 Inflation (1)
• Inflation = persistent increase in the general price level =
the percentage change in the general price level. *E-
Book vide on page 43
• CPI = consumer price index = measure prices that
influence people’s cost of living = % change = change in
CPI/Initial value of CPI x % = new CPI – initial CPI/initial
CPI x % = based on a weighted average of prices.
 Inflation (2)

• PPI = production price index = measure of prices that

influence firms’ cost of production = % change.
 Inflation (3)
• Problems in measuring inflation: i) difficult to
accurately determine = hundreds of products and
changes in consumer patterns ii) = average thus tell
us nothing about cost of living of specific groups +
tell us nothing about quality of products iii) CPI =
based on advertised prices and does not take
discounts into consideration.
• Must distinguish between nominal and real values.
Real value = nominal variable/price. Real variable
(at constant prices) = nominal variable/CPI x %.
 Inflation (4)

Headline inflation = inflation based on CPI.

Disinflation = when inflation rate declines = thus general prices
still increase but at slower rate.
Hyperinflation = inflation rate increases so fast that money
becomes worthless (more than 1000% per annum).
Deflation = persistent decrease in general price level = negative
inflation.
 Economic growth (1)
• GDP = value of final goods and services produced
within the borders of a country.
• Economic growth rate = % change in a country’s real
GDP from year to year.
• National accounts = systematic records of the
economic transactions in a country = sum totals of
these transactions = aggregates
• National accounts should balance.
• Calculating GDP and economic growth *E-Book
video on page 47
 Economic growth (2)

• Aggregate production = aggregate income =

aggregate expenditure
• Leakages (savings, taxes) = injection
(subsidies)
 Economic growth (3)
• Expenditure method: add value of all spending on
final products produced within the borders of a
country = C+I+G+(X-Z).
• Income method = sum of the income that production
factors earn = remuneration of employees + gross
operating surplus (total rent, interest & profit). GDP =
remuneration of employees + gross operating surplus.
• Production method: sum of the contribution that
each sector of economy made to the country’s
production = value-added approach.
 Economic growth (4)

Primary sector = industries involved in extracting natural resources from

land (agriculture, forestry & mining).
Secondary sector = process of raw materials (manufacturing,
construction)
Tertiary sector = producing services (financial services, retail).
Nominal vs real GDP = economic growth based on real GDP = exclude
effect of inflation.
Economic growth (5)
 Economic growth (6)
• GDP per capita = real GDP/population.
• Gross national product (GNP = GNI) = GDP –
primary income to rest of world + primary
income from the rest of the world.
 Unemployment (1)
• Unemployment rate = % of people who are willing
and able to work, but cannot find work = % of
economically active population that is jobless.
Economic active population = persons between 15
and 64 years of age and willing and able to work. In
SA StatsSA = uses Quarterly Labour Force Survey
(QLFS) to determine number of unemployed
people = interviews a representative sample of the
country’s population.
• Formal vs informal job markets.
 Unemployment (2)
• Unemployment rate = number of unemployed people/number of people
in the labour force x %. *E-Book video on page 53
• Labour force participation rate = tells us what proportion of people of
working age is part of the labour force (SA only 55.1% (18.4/33.4 x%).
 Unemployment (3)
• Frictional unemployment : people who are
between jobs.
• Seasonal unemployment: parts of economy only
need labour during certain times of the year.
• Cyclical unemployment: caused by changes in
the business cycle.
• Structural unemployment: lasting change in the
demand for labour in many sectors of the
economy.
 Balance of payments
• Closed vs open economy.
• BOP = systematic record of a country’s transactions with the rest of the
world = current account (exports & imports of goods and services) +
financial account (record of trade in assets, specifically inflow and outflow
of foreign investment).
• Balance on current account = exports of goods and services – imports of
goods and services. Surplus = X>Z and deficit X<Z.
• Balance on financial account = net inflow of portfolio investment + net
inflow of foreign direct investment (FDI). Positive vs negative net portfolio
investment and positive vs negative net FDI.
• Change in gold and foreign reserves = Balance on current account +
balance on the financial account.
 Income distribution
• Equitable distribution of income.
• Lorenz curve = graphically representation of income distribution.

Gini coefficient.
 Sources of economic data
• Best free sources of economic data on South
Africa are:
• South African Reserve Bank (https://
www.resbank.co.za/en/home/what-we-do/statist
ics/key-statistics
)
• Statistics South Africa (http://
www.statssa.gov.za/)
• *E-Book video on page 59