Changes in the economy

Circular flow diagram

 Inflation (1)
• Inflation = persistent increase in the general price level =
the percentage change in the general price level.
• 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.
• https://www.youtube.com/watch?v=-IvsuVtzGko

Basket= price X weight of consumption

year CPI
2008 99.7

2009 100
2010 111.6
2011 105.3
2012 94.5
 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.
 Calculus
Consider Activity 19 – 22 on pp. 13 – 14 in the Workbook
1. You bought some financial stock for R20 000 in the beginning of 20X4. What is the
real value of the financial stock at the end of 20X4?
Answer: Remember that the person had the stock for 1 year. Thus, you need to
calculate the inflation rate for that year and then deflate the nominal value by the
inflation rate.
Inflation rate: 111.5 – 106.2 ÷ 106.2 x % = 5%
Thus real value : R20 000 ÷ 1.05 = R19 047.62

2. Assume that you bought some financial stock for R40 000 at the beginning of 20x2.
What is the real value of the financial stock at the end of 20x4?
Answer: This is different from the previous calculation because CPI index = 100 when
you started.
111.5-100/100 *100

Thus, real value : R40 000 ÷ 111.5 x 100 (1.115)= R35 874

Real value R40 000/ 1.115

 Year CPI index
20X2 100
20X3 106.2
20X4 111.5
3. Assume that the CPI index is forecasted to be 116.9 at the end of 20x5. You started
in the beginning of 20x2 with a growth-induced financial asset worth R10 000. This
financial instrument guarantees the protection of the purchasing power of the initial
investment to be paid back at the end of 20x5. What is the amount that you can
expect to be paid out at the end of 20x5?

Answer: Again you started with your investment when the CPI index was 100. Thus,
the inflation rate for the period was 116.9 – 100 ÷ 100 x 100 = 16.9%. Thus to protect
your investment against inflation your asset must be worth:

R10 000 x 1.169 = R11 690 at the end of 20x5.

4. Assume that your nominal salary at the beginning of 20x4 is R600 000 per annum.
What is your real wage at end of 20x4? What is your loss in purchasing power?

Answer: Inflation rate for 20x4: 111.5 – 106.2 ÷ 106.2 x % = 5%. Thus your real wage =
R600 000 ÷ 1.05 = R571 428.57. You have lost R600 000 – R571 428.57 = R28 571.43 in
purchasing power!!!
 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.
 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 %.
• 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.