GRADE 11

ECONOMICS

PAPER 1

MACROECONOMICS
&
ECONOMIC PURSUITS

CORE NOTES AND QUESTIONS

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 GUIDELINES IN ANSWERING THE ECONOMICS EXAMINATIONS

The Economics examination question papers are structured in a specific manner.

Before attempting any examination questions (inclusive of test questions during the year), it is always
important to read the instructions carefully.

The instructions tell you what is required and if you deviate from them, it can count against you and thereby
causing you to miss out on marks.

In addition to the above, please note the following:

Use the 10 minutes Write only with a blue Always write neatly
READ

reading time (as provided

INK and / or black ink

WRITE
and legibly.
to you) at the beginning pen. Do not write in Marks are forfeited if
of the examination / test pencil. Any pencil
answers are handwriting is
to decide which illegible.
considered an
questions you will answer examination If the marker cannot
in Section B and C – irregularity. Use only decipher your
Remember, these are a pencil to draw handwriting (and
‘choice questions’. graphs, sketches, makes sense of it),
illustrations, curves, the answers are
etc. to draw (captions marked as incorrect.
must be in pen).

SECTION A COMPULSORY

QUESTION 1
This question is compulsory and must be completed by all candidates.
To answer this question, it is essential that the candidates know the economic concepts / terminology
and the definitions and/or descriptions.

Attempt an answer for all the questions, even if you do not know the answer.
If you are uncertain about the answer, continue writing the examination and return to the question at the
end of the examination. It may be that you can find clues for the unanswered question as you proceed with
the test/examination. (Remember to leave lines open for this – this also makes it easy to see where you
need to complete answers if you need to return.
If you do not know the answer, take an educated guess.

It is important to note the following: If you leave questions unanswered, you will get no marks. However,
if you write an answer which makes economic sense and answers the question, you can be awarded
marks.

1.3 Multiple choice questions

Read the question / statement thoroughly before attempting to answer.
FOUR options are provided as possible answers to a question or statement.
It is expected of learners to choose only ONE option / possible answer and write down only the letter next
to the question number.

Only ONE option / possible answer per question will be accepted. If more than one option/answer is
written, both will be marked as incorrect.

Hints on how to answer the multiple-choice questions:

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Read the entire question / statement.
First cover the possible answers to the question.
Formulate / anticipate the correct possible answer in your mind.
Open the possible answers / options given.
See if your choice to the answer is one of the options / answers.

If your answer is not available, then you must use a method of elimination.
Eliminate the answers which you know are totally wrong / nonsensical.
Select the best answer from the remaining possible answers.
If you are uncertain, go ahead with writing the examination and return to the multiple-choice questions at
the end of the examination. It may be that you can find clues to the answers as you proceed with the
examination.
It is sometimes good to make an educated guess if you do not know the answer – but never leave the
question unanswered.

1.2 Matching-type Questions

Read the question carefully.
The TERM is provided in COLUMN A and the DESCRIPTION is provided in COLUMN B.

Learners are expected to provide the description in COLUMN B next to the TERM in COLUMN A.
Only ONE choice / option / possible answer is accepted per term. E.g., Q1.2.1 A and not Q1.2.1 A or G –
Only ONE choice from COLUMN B is accepted for the match against the term in COLUMN A.
If two answers are chosen, both will be marked as incorrect.

The information that can be linked to each other includes:

Economic concepts with the definition / descriptions
Dates with events
Theory with the theorist
Problem with a solution, etc.

An example of how to answer the matching question.

Read all options in each column before answering.
Use logic – look for logical clues in the statement / description.
Use your knowledge and first answer the terms which you know.
Cross out the terms in both columns once you have made your choice – This is a form of elimination and
makes it easier to answer the rest.
Tackle the tougher choices now
See if you can find a match for the remaining terms.
If you are not sure, continue writing the test or examination and return to the matching question at the end
of the test or examination. It may be that you can find clues to the answers as you proceed with the test.
If you do not know the answer, it is always good to make an educated guess, but never leave the answer
open.

1.3 Give ONE term for each of the following descriptions.

A description is given, and it is expected of the learners to give only ONE term for the description.
The learners may not provide answers in the form of abbreviations, acronyms and examples.
If learners use abbreviations, acronyms and examples for this question in the test or examination, they will
forfeit the marks.

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 SECTION B - APPLICATION QUESTIONS
(INCLUSIVE OF AND NOT LIMITED TO DATA-RESPONSE QUESTIONS)

Candidates are given THREE questions of which they must only answer TWO.

If learners answer ALL THREE questions in this section, then only the first TWO questions will be marked
even if it appears that the learner did better in the third question. Learners must be told to follow to the
instruction
When candidates answer more than the expected number of questions, a red line is drawn through the
excess answer and the words “TOO MANY QUESTIONS” will be written at the excess question.

QUESTION: 2.1 / 3.1 / 4.1 - Answer the following questions

QUESTION: 2.1.1 / 3.1.1 / 4.1.1 - Give TWO examples / Name TWO institutions

These are lower order questions.

If the candidate answers three questions, only the first two responses will be marked. The rest will be
disregarded and not marked, even if they are correct and the first two answers were wrong.
If the question expects candidates to give ONE answer, and they have given more than one answer, only
the first answer will be marked, even if the second or third answer may be correct.

QUESTION: 2.1.2 / 3.1.2 / 4.1.2: Explain / How / Why / What

These are middle to higher order questions.

It is expected that candidates answer these questions in full sentences.

2.2 Data Response

It is important to note that the questions may sometimes have very little to do with the extract, especially
the first question or it could also be directly related to the data response.
The extract / picture / cartoon / table / diagram, etc. is merely a means to give the context of the content
covered to candidates. It merely serves as an introduction to the topic or a stimulus.

QUESTION: 2.2.1 & 2.2.2 / 3.2.1 & 3.2.2 / 4.2.1 & 4.2.2

These are lower order and may or may not come from the extract.
The answers to the questions may or may not come from the extract / graph / cartoon, etc.
Candidates must write their answers in full sentences.

QUESTION: 2.2.3 / 3.2.3 / 4.2.3

These questions are usually descriptive-type questions, testing your knowledge of terminology.
Candidates are normally expected to briefly describe a term / concept.
Candidates must write their answers in full sentences.

QUESTION: 2.2.4 / 3.2.4 / 4.2.4

These are How / Why / What questions.

They are normally middle order cognitive questions.
These questions can include but are not limited to the drawing of graphs, drawings, fact base, etc.
Candidates must write their answers in full sentences.

QUESTION 2.2.5 / 3.2.5 / 4.2.5

These are How / Why / What questions.

These are higher order questions.
These questions require learners to evaluate / analyse / examine, etc.

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Candidates must write their answers in full sentences and give their own opinion / understanding of the
question.
Many marks are lost because of the misinterpretation of the question or not responding at all.
Candidates must avoid the following when answering this question:
Candidates must not list their answer – will only be awarded 1 mark
Giving examples only – will only be awarded 1 mark
If the example is explained in a full sentence = 2 marks will be allocated

SECTION C: FINAL YEAR-END EXAMINATION

These are the Essay-type questions

TWO questions are given to learners and they must only answer ONE.

If the candidate does both essays, then only the first essay will be marked even if the candidate scores
more marks in the second essay.
Candidates will score no marks for writing an incorrect essay, even if that essay is substantial.
When candidates answer more than the expected number of questions, a red line is drawn through the
answer and the words “TOO MANY QUESTIONS” will be written at the excess question.
Check and practice all the possible essay- type questions that may appear from every topic as indicated in
the examination guideline.

Take Note:
Answer the question as stated, e.g., with graphs, without graphs, with diagrams, without diagrams.
Candidates who answer essays have a higher probability of passing the paper than those who do not
answer an essay.
Candidates who do not attempt the essays tend to perform poorly in the examination.
Candidates must structure their essays properly and write the following words as part of their answer:
o Introduction
o Body: Main Part
o Additional Part
o Conclusion

INTRODUCTION
A description or the definition of the topic examined is an example of a good introduction.
The description / definition must be a full sentence to obtain 2 marks.

BODY: MAIN PART

Candidates are required to write in full sentences.
Candidates need to use headings and subheadings where necessary / applicable.
8 marks are allocated for headings, merely listing of facts and examples in the Main Part of the essay.
Only content relevant to the question will be accepted.

ADDITIONAL PART (HIGHER ORDER)

These are mainly higher order but limited to evaluate / examine / analyse type questions.
Candidates who write something may be credited, however, many learners do not attempt this part of the
essay.
Evaluate – give positive or negative or a combination.
In this section, the candidates may express an opinion, give examples, make suggestions or give
advice, however, they must substantiate their facts with economically sound and relevant explanations.

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CONCLUSION
The conclusion is a summary related to the main part or additional part of the essay
The conclusion is a higher-order aspect of the answer and must be treated as such.

What is expected when learners are asked to “Evaluate” or “Analyse”

Evaluate
When you evaluate something, you're making a judgment, one that most likely results from some degree
of analysis.

In this regard, both positives and negatives are to be highlighted

For example: Evaluate South Africa’s use of Standard National Accounts

Positives
GDP is the most commonly used statistics to measure the economy.
As a member country, South Africa is adhering to the call by the United Nations to keep a record of its
national accounts.
South Africa is successful in using three methods to calculate its economic activity, the income method, the
expenditure method and the production method.
Measuring the economic activity, South African successfully determine whether there is economic growth
occurring or whether there is a negative economic growth rate.
The country has been successful thus far in determining whether South Africa is entering a recession,
depression, recovery of prosperity phase.
These national account figures together with indicators are used by the South African Reserve Banks’
Monetary Policy Committee to determine the repurchase rate (repo rate) to control inflation.

Negatives
GDP is the most commonly used statistics to measure the economy.
National income figures are NOT 100% accurate.
All the sectors are not fully included in the calculation of National accounts – e.g., the informal sector.
National accounts focus on production of goods and services and how the economy performed but the
values do not include the contribution of production towards environmental degradation.

Analyse
Analysis requires candidates to assess how successful or unsuccessful a specific policy, e.g., industrial
development zones, were.
It requires candidates to bring in research findings (including current statistics) and the impact of such
policies on economic growth and development.
It requires candidates to include such statistics and additional information in their answers.

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STRUCTURE OF THE FINAL EXAM PAPERS:

ECONOMICS GRADE 11
Paper 1 Paper 2
150 Marks – 2 hours 150 Marks – 2 hours
MAIN TOPIC MAIN TOPIC
MACROECONOMICS MICROECONOMICS
TOPICS TOPICS
 Factors of production, economic  Markets – utility of goods and services
importance and its remuneration  Relationships between markets
 Circular flow of goods/services  Effects of cost & revenue
 Economic goods & services – main  Market structures
aggregates  Price elasticity
 Economic systems
 South Africa’s economic structures

MAIN TOPIC MAIN TOPIC

ECONOMIC PURSUITS CONTEMPORARY ECONOMIC ISSUES
TOPICS TOPICS
 Economic growth  Globalisation
 Economic development  Environmental deterioration
 Money & banking

NOTE:

Section A question 1 is compulsory and you must answer all questions.

Section B & C
If your preferred topic is Macroeconomics, choose questions: 2, 4 and 5 for Paper 1
If your preferred topic is Economic Pursuits, choose questions: 3, 4 and 6 for Paper 1

If your preferred topic is Microeconomics, choose questions: 2, 4 and 5 for Paper 2

If your preferred topic is Contemporary Economic Issues: 3, 4 and 6 for Paper 2

MAIN TOPIC: MACROECONOMICS

TOPIC 1 CONTENT CONTENT DETAILS FOR

TEACHING, LEARNING AND
ASSESSMENT PURPOSES
Factors of Principles, processes and practices of Briefly describe and explain the
production economy relevant concepts.
Distinguish between economic and
Analysis of the factors of production and their free goods.
remuneration (relate to circular flow) Distinguish between non-renewable
and renewable recourses.

Natural resources/land Discuss in detail natural resources

- definition as factor of production
- characteristics Definition
- economic importance Characteristics
- remuneration (economic rent and The importance of natural resources
royalties) Remuneration
- factors that influence the price of natural
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 resources:
- supply and demand
- climate
- location
- quality of resources
- technology

Briefly describe and explain the

Labour relevant concepts.
- definition Classify labour in the three broad
- classification categories.
- characteristics (skilled/semi-skilled/unskilled)
- economic importance (quality)
- remuneration (nominal/real wages) Discuss in detail labour as factor
of production
The definition of labour
The classification of labour
The characteristics
The economic importance
Remuneration

Briefly describe and explain the

relevant concepts.
Distinguish between money and real
capital.

Discuss in detail capital as factor

Capital of production
- definition The definition of capital
- characteristics/functions The classification of capital
- importance remuneration The characteristics
The functions of capital
The economic importance
The remuneration
Entrepreneurship Briefly describe and explain the
- definition relevant concepts.
- characteristics
- economic importance Discuss in detail entrepreneurial
- remuneration skills as factor of production
The definition of entrepreneurship
The importance of entrepreneurship
The economic significance
The remuneration

Suitable for SBA tasks

Investigation of community participation in Briefly discuss 4 reasons/causes why

local economic planning and activities. people are marginalized

Economically marginalized groups: Briefly explain the accessibility of the

- Definition economically marginalized group
- Causes / reasons for marginalization through empowerment.
Briefly explain the accessibility of the
Accessibility of economically marginalized economically marginalized group
groups through through procurement.
- Empowerment Exclusion and skills development
- Procurement
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GRADE 11 ECONOMICS

PAPER 1

MACROECONOMICS

TOPIC 1: ECONOMICS: BASIC CONCEPTS, POPULATION AND LABOUR FORCE

The ultimate aim of economic activity is to satisfy human needs.

Candidates should cover the following:

Analysis of the factors of Community participation in Economically marginalised

production and their local economic planning and groups – access to economic
remuneration: activities: activities:

- the principles, processes and - why community participation - the accessibility of

practices of the economy in local activities is important economically marginalised
groups.
- the importance of the factors
of production

- the characteristics of these

factors of production

- how these factors of

production are remunerated

Vocabulary List

Learners must first give a description of the following words in their notebook:

Brake-even analysis In-service training

Capital Labour
Capital formation Learnership
Depreciation Money capital
Entrepreneur Natural resources
Economic goods Nominal wage
Factors of production Profit
Fixed capital Procurement
Formal sector Rent
Free goods Real capital
Income Real wage
Informal sector Remuneration
Intellectual property Wages and salaries
Interest

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FOUR FACTORS OF PRODUCTION:

Natural resources: Natural resources are free gifts from nature.

Labour: Labour is all human effort, mentally and /or physically, provided by
people to earn a remuneration.

Capital: Capital are man-made resources that are used to produce more goods
and services.
Capital makes the production process easier.

Entrepreneurship: The entrepreneur is the person who takes the initiative to start the
business, organize its production and take risks.

NATURAL RESOURCES:
Definition:
Natural resources refer to the naturally occurring living and non-living elements of the Earth system – such
as water, land, plants, animals, ecosystems and minerals – that drive the economy and other human
activities.

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Economic goods vs Free goods:

Free goods Economic goods

Are freely available in unlimited quantities, sea Are available in limited quantities, often
sand, sun light. insufficient to meet needs, e.g., coal, petrol,
electricity.
Does not command a price because nobody Command a price – Consumer must pay for it.
wants to pay a price for it.
Has value in use but no exchange value. Has both value in use value, and exchange
The owner does not benefit from it. value?
The owner benefits from having it.

It is not controlled by human beings. It is controlled by human beings.

The possession and use of free goods do not The possession and use of economic goods
indicate wealth or prosperity. indicate wealth and prosperity.

Examples of natural resources: Land, fishing, forestry and mining.

Renewable resources: Non-renewable resources:

A resource which can be used repeatedly and A non-renewable resource is a resource that
replaced naturally. does not renew itself at a sufficient rate for
Examples include oxygen, fresh water, solar sustainable economic extraction in meaningful
energy and biomass. human timeframes.
Examples include coal, gas, or fossil fuels and
nuclear fuels.

CHARACTERISTICS OF NATURAL RESOURCES:

Natural resources are scarce:

 Natural resources are scarce in relation to people’s demands and the quality needed in the
production process.
 There are not enough natural resources in the world of the required quality to make all things that
the people might want.
 Plants grow back relatively quickly, but it takes the Earth millions of years to replenish oil.

Natural resources have a price:

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  For people to use natural resources they must pay for them.
 As an economic good, the remuneration (price/payment) for natural resources is rent.
 The rent will be determined by the quality and quantity of the natural resources.

Uneven distribution of natural resources:

 Natural resources are not spread equally across all countries e.g., S.A. has large deposits of gold
and other mineral resources, whereas Japan does not.
 The surplus of resources in one country and the scarcity thereof in another country lead to
international trade between countries.
 International trade will develop when one country exports excess products to countries, and imports
other items that are needed.
 Countries earn an income from exports and must pay for imports.

Adding value to natural resources:

 Most natural resources are not useful in their natural form.
 They need to be changed or transformed to make them useful for human consumption e.g., wood
must be transformed into furniture through a production process.

IMPORTANCE OF NATURAL RESOURCES:

To serve as inputs to produce goods and services:

 No production is possible without the resources that come from nature, e.g., land, water, animals
and plants. E.g., oil is used to produce petrol and gas.

To provide opportunities for international trade:

 When a country has a surplus of a particular natural resource, they can export it.
 Countries who lack a particular natural resource can import it.

Agriculture, forestry and fisheries:

 Important part of S.A.’s economy.
 Provide in all S.A’s needs.
 Offers employment opportunities.

Mining:
 S.A. has a large variety of mineral resources of high quality and in substantial quantities.
 Gold provides the country’s largest mineral income – S.A. earns millions.
 Coal is the next most important and the mining industry employs thousands.
 According to the World Economic Forum (WEF), the mining sector must be seen as the most
important role-player in the future economic development in Africa.

REMUNERATION OF NATURAL RESOURCES:

Natural resources are remunerated with rent.

Rent:
The minimum amount of money that an owner of land, labour or capital must receive in order to let
someone else use that land, labour or capital.

Economic rent:
The extra amount earned by a resource (e.g., land, capital, or labour) by virtue of its present use.

Royalties:
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A royalty is a payment to an owner for the ongoing use of their asset or property, such as patents,
copyrighted works, franchises, or natural resources. ... In most cases, royalties are designed to
compensate the owner for the asset's use, and they are legally binding.

Factors that influence the price of rent:

supply and Climate

demand

location quality of
resource
s

technolog
y

LABOUR
Definition:
 Labour includes all the work done by people, whether they are skilled or unskilled and whether they
provide physical or mental (thinking) work.
 Nothing can be manufactured without the inputs from people.
 Unemployed people are also considered to be part of a country’s labour force provided they are
willing and able to work.
 Intellectual property - When a person or company hires a designer, computer programmer, artist or
other independent contractor, the party that is hiring will own whatever work is created, including all
rights under any trademark, patent or copyright. Intellectual property examples would
include books, music, inventions and more.

Classification of Labour

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 Skilled labour Semi-skilled labour Unskilled labour
Includes all people who have Includes people who have They have finished primary
passed Grade 12 and have at passed at least Grade 9 and school or have not been to
least two years of training at a have undergone a few months school at all.
tertiary institution. of in-service training. Their contribution to the
Economists call this group of E. g. clerks, plumbers and production process is mainly
people the professional class. salespeople – get a weekly physical.
E. g. teachers, doctors, wage. E. g. cleaners, domestic
lawyers, dentist – get a workers, farm workers and
monthly salary. newspaper sellers.
There is a shortage of these Receive a wage at the end of
people in South Africa. the day or end of week – no
guarantee of their work
continuing for longer than the
day or week.
In South Africa we have a
surplus of unskilled labour.

CHARACTERISTICS OF LABOUR:

Income as a goal:
 When people work, their goal is usually to earn money and secure an income.
 They need the money to buy goods and services to satisfy their needs and wants.
 The work learners do at school is not regarded as labour, as they are not getting paid for it.

Is part of its owner:

 Labour cannot be separated from its owner.
 The labour and the person doing the labour is one and the same.

Not storable:
 Labour cannot be stored or kept.
 If a worker is unemployed for 3 years, he/she has lost 3 years of providing labour.
 If a worker goes on strike for 3 days, then 3 days of labour are lost.

Supply cannot suddenly increase:

 Labour force made up of people between the ages of 16 and 64.
 It often takes a long time for people to enter the labour market.
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  Education and training often take years to complete – then you can only start working.

ECONOMIC IMPORTANCE OF LABOUR

 Production cannot take place without physical and mental effort.
 An economy needs to increase its production in order to grow.
 It needs a suitable labour force in order to grow.
 The labour force needs to have the right number of skilled and semi-skilled labour available.
 Shortage of technically skilled labour is a big problem in South Africa.

REMUNERATION OF LABOUR
 Consists of salaries (per month) and wages (per week).
 Economists differentiate between nominal (monetary) and real (actual) wages.
 Nominal wages are the amounts (in Rands) that the worker receives each week.
 Real wages are the number of goods and services that a person can buy with a nominal wage –
buying power of your wages.

CAPITAL:

Definition:
 Can be defined as the money invested in machines and equipment that will be used in the
production process to change the form of materials into useful goods and services.
 Wealth in the form of money or other assets owned by a person or organization or available for a
purpose such as starting a company or investing.

CLASSIFICATION OF CAPITAL:

Money Capital:
 Entrepreneur needs money to buy the machinery or tools needed in the production process.
 The money to buy these capital goods is called money capital.

Real Capital:
 Includes the actual tools and machinery bought with money capital to use in the production process
to manufacture useful goods and services.
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  Real capital can be divided into fixed capital and working capital.
 Fixed capital includes land and buildings, vehicles, equipment and furniture – also called durable
goods because they are used more than once in the production process.
 Working capital is used only once in the production process and consists of items like raw materials
and semi-finished goods – also called non-durable capital goods.

CHARACTERISTICS OF CAPITAL:

Capital goods are made by people:

 As a factor of production, it is manufactured or made by people.

Machines wear out:

 Machines wear out or break down over time.
 They also lose value over time – you get less for it when you sell it.
 Depreciation takes place and businesses must be prepared for this – be sure they can repair and
replace capital goods to continue production.

Money capital can be changed to any type of capital:

 Money capital can be changed into any type of asset the business wants to buy.
 It is easy to move money from place to place and to use it for various purposes.

It is difficult or impossible to change real capital:

 Real capital loses its mobility – meaning it is difficult to move real capital for different purposes.
 A building is occupationally mobile because it can be used for various purposes but geographically
immobile because it is impossible to move the building to a different place.

Capital is expensive:
 Buying machine and other capital goods is very expensive.

FUNCTIONS OF CAPITAL:

Provides tools to add form utility:

 Tools are used to change resources into useful goods and services.
 Machines and tools are used in the production process.

Makes mass production possible:

 Machines are used to speed up production of goods.
 Machines can do work faster than people.
 More goods are produced; leads to greater demand, leads to increase in standard of living.

Improves the quality of products:

 Machines make less mistakes than people – less margin for errors.

Makes standardisation possible:

 Machines can produce goods that look the same and have the same quality.

Makes selling credit possible:

 Money capital allows retailers and manufacturers to sell their products on credit.
 Businesses can run into cash flow problems if they do not have sufficient money capital to fund
credit sales.
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ECONOMIC IMPORTANCE OF CAPITAL

 Economic growth is a direct result of an increase in the capital assets of a country.

 Savings create capital and a higher investment in capital goods.
 Savings, therefore, are the starting point for economic growth.
 To increase the economic growth rate of S.A., consumer spending will have to decrease.
 Resulting savings can be channelled to fixed investments.
 Financial institutions will have more money available to lend out to businesses which will result in
more job opportunities and less unemployment.
 Will lead to more jobs and less unemployment
 Increased income will again increase savings, and so cycle of economic growth will continue.

REMUNERATION OF CAPITAL:

 People, organisations or banks lend their money (money capital) to other people or organisations
and charge a price - this price is known as interest.
 If you borrow money from a financial institution, you pay interest.
 If you save/invest money at a financial institution, you earn interest.

ENTREPRENEURSHIP:
Definition:
 It is the process of bringing together natural resources, capital, and labour and using them to
produce or sell products or services.
 Are people who start, manage and control business – they take risks and make daily decisions to
ensure the successful running of the business.
 Start businesses to make money, and in the process, they create jobs, influence growth in the
economy and raise the standard of living.

CHARACTERISTICS OF ENTREPRENEURSHIP:

Combines the other factors of production:

 To produce goods and services to satisfy the needs and wants of consumers.
 Entrepreneurs need to source enough capital, natural resources and skilled labour at the right time
and place and the right quantities to make biggest profits.
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Demonstrates initiative:
 The entrepreneur does things without being told. They are able to spot and take advantage of
opportunities that others pass by.

Takes risks:
 The entrepreneur is responsible for all losses if the business idea fails or if the business goes
bankrupt.

Makes decisions:
 Make decisions on what to produce, where to set up the business and who to produce for
 On quality and quantity, buy land or lease premises, buy stock or raw materials and which form of
ownership to choose.

ECONOMIC IMPORTANCE OF ENTREPRENEURSHIP:

 Plays an important role in contributing to growth and progress in any economy.
 Formal sector cannot provide employment to all; therefore, the informal sector plays an important
role in providing income and employment.
 Introduces new goods and services.
 Increases competition.
 Reduces inflation.
 Tax revenue of government increases.

REMUNERATION OF ENTREPRENEURSHIP:
 Profit is the remuneration that the entrepreneur receives for taking the risk to start and run a
business.
 Two types of profit, namely, gross profit and net profit.
- Gross profit – the difference between sales and cost of sales.
- Net profit – gross profit plus all other income minus all expenses the business had to pay to
keep it running.
-
Factors that influence profits:

the skills of the entrepreneur:

 entrepreneurs must have the skills and knowledge in their chosen business industry.
 work long hours: do market research, determine prices for products, study competitors.

the demand for the product:

 will have an impact on the profit.
 If demand is high, sales will be high and profits will be large, and vice versa.
 profit on an expensive item will be large if only a few are sold.

18
Production processes and techniques:
 entrepreneurs decide on the methods of production.
 must decide whether to produce large quantities or produce according to orders received.
 type of machinery chosen will determine cost of production and the price of the products

19
COMMUNITY PARTICIPATION IN LOCAL ECONOMIC PLANNING AND ACTIVITIES:

 Community forums, together with local government, can play an important role in development of
entrepreneurs through skills development, financial assistance and making the best use of natural
resources.
 Can help reduce unemployment, alleviate poverty and turn around a low regional growth rate –
Expanded Public Works Programme (EPWP), the Small and Medium Business Development
Corporation (SMBDC) and local chambers are examples.
 Local Economic Development (LED) create job opportunities and thus reduce poverty in local
communities.

ECONOMICALLY MARGINALISED GROUPS:

Description: marginalised groups:

 Marginalised groups are worse off relative to the rest of the population in terms of income, and non-
income, which include basic services like water, sanitation and electricity.
 They earn less income than the minimum income required to satisfy basic needs.
 They are largely unemployed, lack basic skills and cannot be trained because they are unable to
read or write.

Marginalisation as an outcome (causes/reasons for marginalisation):

 Apartheid in S.A. effectively excluded black people from participating in the economy, resulting in
income inequalities between races.
 In year 2000, the poorest 20% of household received 1,6% of total income of the country.
 Dualistic nature of S.A. has also excluded women from the business world.
 Material deprivation is also a most common result of marginalisation.

Empowerment:
 Since 1994 laws have been put in place to protect rights of all employees e.g., law of Black
Economic Empowerment and the Employment Equity Act of 1998.
 Affirmative action plays an important part in empowerment.
 Skills development with help of SETAS (Sector education and training authorities) in primary,
secondary and tertiary sector.

Preferential procurement:
 Procurement is the purchasing of goods or services.
 Preferential procurement creates opportunities for the marginalised by giving them preference
during the awarding of tenders.
 Small and medium business can enter the market as suppliers to larger companies and
government.
 Procurement decisions have social, economic and political implications, such as distributing wealth
to the marginalised.

20
MAIN TOPIC: MACROECONOMICS

TOPIC 2 CONTENT CONTENT DETAILS FOR

TEACHING, LEARNING AND
ASSESSMENT PURPOSES
Economic Analysis of the uses of economic goods and Study the model of circular flow
goods & services in relation to the Gross Domestic Product and identify the different
services (GDP) GDP/GNI participants and explain each
Circular flow and quantitative elements participant’s contribution to the
economy.
NOTE: Revise the four-sector open
economy circular flow model as Identify the different flows.
Briefly describe and explain
discussed in Gr.10
relevant concepts.

Final consumption expenditure (C) Classify final consumption

- Definition expenditure by households (C)
- Classification (Analyse relevant tables from
- Importance SARB bulletin)
Briefly discuss the importance of
final consumption expenditure by
household (C)

Consumption expenditure by Government (G) Briefly describe and explain

- Definition relevant concepts
- Classification Classify final consumption
- Importance/reasons briefly expenditure by government (G)
- National Budget briefly
Briefly discuss the importance of
final consumption expenditure by
government (G)

Gross fixed capital formation (I) Briefly describe gross fixed capital
- Definition formation.
- Classification Discuss the classification of gross
- Importance fixed capital (I)
Briefly discuss the importance of
gross fixed capital formation (I)

The main aggregates Briefly describe and explain the

- Gross Value Added (GVA) main aggregates.
- Gross National Expenditure (GNE) Explain the role of the main
- Gross National income (GNI) aggregates.
Briefly discuss gross value added
(GVA), gross national expenditure
(GNE) and gross national income
(GNI) as main aggregates.

Detailed discussion on the

THREE methods used to
calculate main aggregates
(Tables/calculate)

21
 GRADE 11 ECONOMICS

PAPER 1

MACROECONOMICS

TOPIC 2: CIRCULAR FLOW AND QUANTITATIVE ELEMENTS – ECONOMIC GOODS AND

SERVICES

Candidates should cover the following:

Final consumption Consumption Gross fixed capital The main

expenditure (C) expenditure by formation (I) aggregates
government (G)

Final goods and Final consumption by Gross fixed capital GVA

services government: formation:
GDP
Final consumption - definition - definition
expenditure by GNE
household: - classification - classification
GNI
- definition - importance - importance

- classification

- importance

Vocabulary List

Learners must first give a description of the following words in their notebook:

National Aggregate
Balance of payment
Closed economy
Durable goods
Final consumption expenditure
Government spending
Gross domestic product (GDP)
Gross fixed capital formation
Intermediate goods and services
Non-durable goods
Open economy
Parastatals
Semi-durable goods
Services

22
Useful goods and services are created through production. These goods and services are used to satisfy
the needs and wants of all participants in the economy.

REVISE the four-sector open economy circular flow model as discussed in Grade 10 .

ECONOMIC CIRCULAR FLOW:

Description:
 The circular-flow model of the economy is a simplification showing how the economy works and the
relationship between income, production and spending in the economy.
 The circular-flow model of an open economy shows the workings of an economy that is open to
foreign trade.
 It is different to a closed economy because it includes the foreign sector.

23
Households:
 There is a flow of money and goods and services between the household sector and business
sector.
 Households are the owners of the services of factors of production and they place their factors of
production on the market so it can be bought.
 Households earn income in the form of wages by selling their factors of production to business.

Business Sector:
 Business uses factors of production to produce goods and services on which the household sector
spends their income.
 Businesses place goods and services on the product market which is bought by households to
satisfy their needs.
 Business receives an income.

State:
 There is a flow of money and goods and services between the household sector and state.
 Household sector provides the state with labour and receive income.
 The state provides the household with public goods and services (e.g.) parks, hospitals
 Households pay taxes to the state.
 This is income for the state.

There is a flow of money and goods and services between the business sector and state.
The business sector provides the state with goods and services for which the state pays.
The state provides the business sector with public goods and services (e.g.) Roads, Electricity, harbours,
etc.
Business pays taxes to the state.

Foreign Sector:
 There is a flow of goods (imports) to the business from the foreign sector.
 Businesses that import these goods, pay for it.
 This will be regarded as expenditure for the business.

There is also a flow of goods (exports) from the business in the country to the foreign sector.
Businesses export their goods and services to other countries and earn money for it.
This will be income for the business.

Financial Sector:
 The financial sector consists of banks, insurance companies and pension funds.
 They act as a link between households and firms who have surplus money and others in the
economy who require funds.
 The money which households and firms provide to the financial sector is known as savings.
 Businesses can borrow money from the financial institutions and use it to purchase capital goods.
 This spending on capital equipment by firms is regarded as investment.

Real Flow and Money flow

Transactions takes place on markets.
The exchange process has two components, namely
Real flow: Goods and services and Factors of production.
Money flow: The earning of money (income) and payments that is made.

Real flow:
 Consumers render production factors to producers and government via the factor market.
 Goods and services are supplied by producers via the product market to government and
consumers.
 Government provides public goods and services to consumers and producers.
 Producers receive goods and services (imports) from and deliver goods and services (exports) to
the foreign sector.

24
Money Flow:
 Consumers earn an income for their production factors via factors market from businesses.
 Business sector earn an income for goods and services via the product market from consumers and
government.
 Government earns an income from consumers and businesses.
 Businesses earn an income for exports from the foreign sector and make payments to the foreign
sector for imports.

LEAKAGES (L):

 A leakage represents the withdrawal of money from the economic cycle (local economy).
 It does not give rise to a further round of income.
 Domestic purchases on goods and services decrease.
 In an open economy, the leakages are taxes (T), the expenditure on imports (Z) and savings (S).

In other words:
L = S T + M
Leakages = Savings + Taxes + Import expenditure

25
INJECTIONS (J):

 Injections represent the injection of money into the economic cycle (local economy).
 It refers to the flow of any spending which is not derived from income. (Y)
 Additional money enters the economy and it increases income.
 Domestic purchases on goods and services increase.
 In an open economy, injections are government spending (G), the revenue earned from exports (X)
and investment spending (I).

In other words:
J = I + G + X
Injections = Investments + Government expenditure + Export Income

MARKETS:

Product market:
 These are markets for consumer goods.
 Buying and selling of goods that are produced in markets.

Factor market:
 On this market the services for factors of production are traded.
 Natural resources, Labour, Capital, and Entrepreneurship are traded on this market.

Money market:
 Here short-term loans and very short-term funds are saved and borrowed by the consumers and
business enterprises.
 Banks, Insurance companies are examples.
 Bank debentures, treasury bills, government bonds are traded here.
 SARB is the key institution in the money market.

Capital markets:
 Here long-term funds are borrowed and saved by consumers and business enterprises.
 E.g., mortgage bonds.
 The Johannesburg Stock exchange is a key institution in the capital market.
 Shares are traded here.

Foreign exchange market:

 E.g., It is when a person buys travellers cheques to travel abroad.
 Businesses buy foreign currency to pay for imported goods and services.
 In S.A these transactions occur in banks.
 The most important foreign exchange markets are in London, New York and Tokyo.
 The S.A Rand are traded freely on these markets and the SARB has no control over it.

26
ECONOMIC GOODS AND SERVICES:
 The ultimate aim of any good economy is to satisfy its population’s wants and needs.
 The welfare and prosperity of a country depend largely on the volume of production within it.
 When better and services are produced in a country, it leads to more people being employed.
 This in turn increases the level of income of the population.
 A higher income level leads to an increase in the standard of living.

FINAL GOODS AND SERVICES:

 Include all manufactured goods and services that satisfy human wants and needs.
 Have form utility.
 Are ready to be consumed.
 Final goods and services are divided up into:
- durable goods e.g., house, furniture and cars
- semi-durable e.g., clothes and domestic appliances
- non-durable goods e.g., food, petrol and gas
- services e.g., medical services

CAPITAL GOODS AND SERVICES:

 Include all goods and services that are not directly consumed.
 Help to manufacture other goods and to provide other services.
 Include machines and tools a manufacturer uses in the production process.
 Also included are goods and services that are half-finished.

FINAL CONSUMPTION EXPENDITURE BY HOUSEHOLDS (C)

Definition:
 Households constantly buy goods and services from businesses that produce these goods and
services. Households spend money trying to satisfy their unlimited wants and needs.
 Total of expenditure in a given year is known as consumption expenditure.

Classification:
 households spend their money on goods and services, including:
 durable goods
 semi-durable goods
 non-durable goods
 services

Importance of final consumption expenditure by households:

 Household are the most basic units in the economy.
 They consume goods and services, but also provide factors of production.
 Strong correlation between total income and total consumption by households.
 The more people earn, the more they spend.
 This is an injection in the circular flow of income.
 Consumption spending by households account for about 64% of total spending in the economy.
 Makes up a very large percentage of GDP.
 Consumption is positive even if income is zero.
 Consumption is a very important driver of economic growth.

27
FINAL CONSUMPTION EXPENDITURE BY GOVERNMENT (G):

Definition:
 Indicate how government uses its income to finance goods and services needed by the public
sector.
 Includes the spending of all departments of central, provincial and local government.
 Includes consumption expenditure on services rendered to the communities like salaries and
wages, well as investment expenditure, where government must pay for capital goods like roads
and building.

Classification:
Three divisions of government expenditure:
 Functional division – based on nature of services that is performed:
- Social services e.g., Education, Health, Housing.
- Economic services e.g., Research and government entrepreneur.
- Government debt expenses e.g., general administration.
- Protective services e.g., defence and police forces.
 Administrative division – deals with departmental expenditure.
 Financial division – state’s expenditure according to budget.

Importance of final consumption expenditure by government:

 Government provides a legal framework for the economy to operate efficiently.
 Much of its spending is on enforcing laws that entrench private ownership of property.
 This enables the market economy to function well, drive economic growth and create jobs.
 The government is responsible for important injections into the circular flow of income.

GROSS FIXED CAPITAL FORMATION (I):

Definition:
 Gross fixed capital formation (also known as investments) takes place:
 When there is an increase in the country’s capital stock.
 When money is contributed towards the economy’s ability to manufacture consumer goods and
services.

Classification:
 If we study the circular flow in a closed economy, investment takes places mainly in three areas:

Private Households:
Family savings in banks are borrowed by firms for investment purposes.

Business sector:
Businesses invest their profits in the production process.

State:
Government purchases of goods and services are intended to create future benefits, such as infrastructure
investment or research spending.

If we study the circular flow in an open economy, the foreign sector can also contribute.

Foreign sector:
Contributions are called injections.

28
Gross fixed capital formation:
 Classified by the kind of economic activity and by type of organisation:

 Mining and quarrying, manufacturing, electricity/gas and water, transport/storage and

communication, financial intermediation/insurance and community, social and personal services are
all examples of the classification by kind of economic activity.

 Capital formation can also be classified by type of organisation, for example, general government,
public corporations and private business enterprises.

Importance of fixed capital formation (I):

 Capital formation is important for economic growth.
 An increase in capital formation will expand production.
 Government can help to increase capital formation by lowering the interest rates.
 South Africa is rich in natural resources, we export high volumes of raw natural resources and
import many final products from other countries because we do not have the necessary skills or
capital formation to produce all the required final goods and services.
 The increase of capital formation through investments in the private sector will reduce
unemployment rate in the country.
 The more industries and factories we can sustain, the more work opportunities will be created.
 This will increase the income and welfare of the workers, resulting in an increase in the economic
growth rate of the country.
 Improved infrastructure like roads, transport and electricity, will ensure that the distribution of goods
and services through the existing markets will be easier.

NATIONAL ACCOUNT AGGREGATES:

Deriving national account aggregates:

 The national account aggregates are methods that are used to determine the value of economic
activity.
 The production method, income method and expenditure method are three different ways the
economic activity is measured.
 They are all used at different times and for different purposes.

NATIONAL ACCOUNT CONVERSIONS:

 All countries use national account figures
 South Africa uses the SYSTEM OF NATIONAL ACCOUNTS (SNA) prescribed by the United
Nations.
 GDP, GDE, and GDI have a great deal to do with the prices we use such as nominal and real
prices, prices before or after taxes.
 Indirect taxes and subsidies are the most important determinants of the end values of the circular
flow aggregates.

Factor cost:
Factor cost is used with the income method of measuring economic activity.
GDP at factor cost plus other taxes on production minus other subsidies on production = GDP at basic
prices.

Basic prices:
Used with the production method.

29
Includes taxes on production and excludes subsidies on production.
Taxes on production are payroll taxes (SITE and PAYE), recurring taxes on land & buildings, business
licenses.
Subsidies on production include employment subsidies and subsidies paid to prevent pollution.

Market prices:
Used with the expenditure method.

Conversion of values from:

Basic prices to market prices:
GDP at basic prices + taxes on products – subsidies on products
= GDP at market prices.

Factor cost to market prices:

GDP at factor cost + other taxes on production – subsidies on production
= GDP at basic prices + taxes on products – subsidies on products
= GDP at market prices.

Taxes on products are payable per unit, e.g., VAT.

Subsidies on products include direct subsidies paid per unit.

Net figures:
Net operating surplus = surplus after taxes.
Net income = income after taxes.
Net fixed capital formation = After consumption of fixed capital (depreciation).
Net exports = exports – imports.

Conversion of domestic to national figures:

Domestic figures (GDP) relate to the income and production happening within the borders of the country.
National figures (GNP) relate to the income or production by the citizens of the country, no matter where in
the world they are.

NOMINAL VS REAL FIGURES:

Nominal figures:
 It is also known as market or money value.
 It is also known as national product at current prices.
 Nominal value of production is calculated by multiplying the volume of the final goods and services
by their prices.
 Inflation has not yet been taken into consideration.

Real figures:
 It is also known as national product at constant prices.
 The rate of inflation as expressed by the consumer price index (CPI) has been taken into account.
 Real values of production are the nominal values of national product adjusted for price increase.
 Real national product is the national product expressed in prices which applied in a certain base
year.

30
METHODS TO CALCULATE GDP/GVA:

The production (value added) method: - GDP (P) / GVA

The production method is a method whereby we determine the Gross Domestic Product at basic prices by
adding the final values of all goods and services produced in the primary, secondary and tertiary sectors.
In the national accounts Gross Domestic Product at basic prices is usually referred to as Gross Value
Added (GVA) at basic prices.

PRODUCTION OR VALUE ADDED GVA Current figures (R – millions)

Primary sector
+ Secondary sector
+ Tertiary sector
= Gross value added at basic price
+ Taxes on products
- Subsidies on products
= Gross domestic product at market price

The income method: - GDP (I) / GDI

The income method is a method whereby we determine the gross domestic product – GDP at factor prices
(factor cost) by adding all the income earned by the owners of the factors of production (gross domestic
income).
In the national accounts this is referred to as Gross Value Added at factor cost.
GDI = wages + profit + interest.

NATIONAL INCOME OR GROSS VALUE-ADDED Current figures (R-Millions)

AT FACTOR COST
Compensation of employees
+ Net Operating surpluses
+ Compensation of fixed capital
= Gross value added at factor cost
+ Taxes on production
- Subsidies on production
= Gross domestic product at basic prices
+ Taxes on products
- Subsidies on products
= Gross domestic product at market prices

31
The expenditure method: - GDP (E) / GDE
The expenditure method is a method whereby we determine the gross domestic product – GDP – at market
prices by adding the spending of the four main sectors of the economy – households (C), government (G),
businesses (I) and foreign sector (X – M).
Differentiate between GDE and Expenditure on GDP: GDE = C + I + G
Expenditure on GDP = C + I + G + (X – M).

GROSS DOMESTIC EXPENDITURE AND GDP AT Current figures (Millions)

MARKET PRICES
Final consumption expenditure by households
+ Final consumption expenditure by government
+ Gross capital formation
+/- Residual items
= Gross domestic expenditure
+ Exports of goods and services
- Imports of goods and services
= Expenditure on gross domestic product at
market price

Conversion of Domestic to National figures:

GDP at market price

+ Factor income earned abroad by South Africans
- Factor income earned in South Africa by foreigners
= GNI at market prices

Learners must be able to “Discuss” and “Examine”.

Discuss / Examine each of the following components: GDP = C + G + I + (X – M)
Discuss / Examine each of the following components: GDE = C + G + I
Discuss / Examine each of the following components: GDI = wages + profit + interest

32
MAIN TOPIC: MACROECONOMICS

TOPIC 3 CONTENT CONTENT DETAILS FOR

TEACHING, LEARNING AND
ASSESSMENT PURPOSES
Economic Explanation of the characteristics and foundations Define and explain the relevant
systems: of South Africa’s mixed economy and assessing concepts
The its efficiency in terms of socio-economic services. Briefly discuss the efficiency in
Mixed delivering socio economic services
economy
Economic systems Discuss the economic
- Market economy characteristics, advantages
- economic characteristics- disadvantages of a market
- advantages economy
- disadvantages

Centrally planned economy Discuss the economic

- economic characteristics- characteristics, advantages
- advantages disadvantages of a centrally
- disadvantages planned economy

Mixed economy Examine in detail a mixed

- economic characteristics- economy
- advantages Discuss the economic
- disadvantages characteristics, advantages
disadvantages of a mixed
economy

Efficiency in delivering socioeconomic services Evaluate South Africa’s current

position in social service
delivery focussing on the
provisioning of social and
economic services (Detailed –
additional part)

33
 GRADE 11 ECONOMICS

PAPER 1

MACROECONOMICS

TOPIC 3: ECONOMIC SYSTEMS

The methods used by countries to allocate their resources are known as economic systems. Many different
economic systems exist in the world and South Africa follows a particular system, which is known as a
mixed economy.

Candidates should cover the following:

Free market Centrally planned South Africa’s mixed Efficiency in

economy / Market / system / Socialism economy delivering socio-
Capitalism economic services

Definition Definition Definition South Africa’s current

position in social
Characteristics Characteristics Characteristics services delivery
Advantages Advantages Advantages

Disadvantages Disadvantages Disadvantages

Vocabulary list
Learners must first give a description of the following words in their notebook:

Resource allocation
Economic systems
Socio-economic
Free-market economy
Centrally planned economy
Mixed economic system
Poverty line
Monetary policy
Fiscal policy

DIFFERENT ECONOMIC SYSTEMS:

 The most important reasons for countries following a particular economic system are:
 The stages of development of a country.
 The system of government in a country.
 The preferences of the inhabitants of the country.
 Language, culture, tastes, customs and environmental factors such as what crops can be grown.

FREE MARKET SYSTEM:

34
Definition:
 A free market is a system in which the prices for goods and services are determined by the
open market and consumers, in which the laws and forces of supply and demand are free from any
intervention by a government, price-setting monopoly, or other authority.
 Also known as Capitalism.

Characteristics:
 Market forces of demand and supply determine what, how and for whom.
 Prices act as signals in the free market – prevents shortages and surpluses.
 Individuals can act on own initiative and have freedom of choice.
 Factors of production are privately owned and controlled.
 Profits, private ownership and private freedom are at the heart of the system.
 Business cycles are characteristic of free-market systems.
 Zero government intervention in the market.

Advantages:
 Private ownership are most important advantage and backbone of free market.
 Factors of production are managed and organised by the individual.
 Individuals can use the profits they make to enhance their personal welfare.
 Freedom of entry into markets results in competition.
 Businesses are not able to dominate market and exploit consumers.
 Huge profits and economic progress are features of upswing phases in the economy.

Disadvantages:

 The system can lead to high levels of inequality.

 Each individual within the free market system pursues the greatest possible satisfaction of his/her
needs, often to the detriment of others.
 Own self-interest weighs heavier than does the interest of the community.
 Enterprises produce only those goods and services for which there is a demand.
 Harmful products are overprovided, e.g., cigarettes and alcohol.
 Downswing phases in the economic growth rate often result in unemployment and poverty
CENTRALLY PLANNED ECONOMY:

Definition:
 The government determines what, how, and for whom to produce goods and services.
 Other terms used are communism and socialism.
35
  An economic system in which factors of production are viewed as communal property.

Communism, also known as a command system, is an economic system where the government owns
most of the factors of production and decides the allocation of resources and what products and services
will be provided. The most important originators of communist doctrine were Karl Marx and Frederick
Engels.

Characteristics:
 The state is the biggest economic entity in the economy, employing vast amounts of labour to
execute its economic policies from a central position.
 Bureaucracy is evident.
 Private initiative and free choice of the individual is limited or even non-existent.
 The state dictates to individuals what occupations they need to follow.
 Factors of production NOT privately-owned and controlled by individuals - state controls all.
 The state guides the needs and wants of the consumer by providing essential goods and services
for all in equal quantities.
 Limited access to most essential goods and services.

Advantages:
 System serves needs of community and not of individual.
 State works hard for equal distribution of income and resources.
 Long-term planning – economy can be controlled and steered in a particular direction.
 Less exploitation of natural resources.
 Environment experience less deterioration.
 Full employment as the state creates jobs for all.

Disadvantages:
 Leads to inefficient allocation of resources.
 Central planning requires a huge amount of administration by civil servants.
 Absence of private initiative results in low productivity and overall economic growth rate.
 Long-term planning may result in large surpluses and shortfalls.
 Limited scope for private initiative that leads to low productivity and low quality of output.
 Variety of goods and services may be too limited to satisfy customer’s tastes and preferences.
 Products standardised and luxury goods regarded as unnecessary.

36
SOUTH AFRICA’S MIXED ECONOMY:

Definition:
 S.A. has a mixed economic system, combining the advantages of both market economy and
centrally-planned economy.
 A mixed economy is defined as an economic system consisting of a mixture of either markets
and economic planning, public ownership and private ownership, or markets
and economic interventionism.

Characteristics of S.A.’s economic history includes:

 Early barter systems amongst the original inhabitants.
 Early form of trade introduced by colonialists.
 The expansion of agriculture.
 Domination of capitalism – during the 19th and 20th centuries.
 Job reservation for white people.
 Migrant labour.
 In S.A. the state intervenes in the production process as entrepreneur, organiser and lawmaker.

Characteristics:
 Most of the factors of production are privately owned, but government regulates it, meaning the
state will intervene when market inefficiencies occur.
 People use own initiative to manufacture and sell products and render services to satisfy
consumer’s needs and wants.
 Profit motive plays an important role.
 Extent to which economic activities are market-orientated depends on level of government
involvement.
 Public sector provides infrastructure and public services as there is little profit motive for these to be
provided by the free market.

Advantages:
 Private ownership is one of the most important advantages of this system.
 The size of the government does not have to be bigger than what is necessary.
 Individuals have the freedom of choice to buy whatever he/she wants leading to a wide variety of
choice available to consumers.
 Entrepreneurship and freedom of choice creates competition between businesses.
 State still provides essential public goods and services.

Disadvantages:
 Market failure occur when scarce resources are wasted or exploited due to incorrect production
decisions or greed by private businesses.
 Environmental deterioration is a problem and labour are often exploited.
 Too much state intervention hampering business activities or free markets failing when the state
lacks authority.
 Taxes are high to fund public goods and services.
 Most factors of production are privately owned.
 Individuals face risk of losses and bankruptcy.
 Quality of goods may be inferior.

37
EFFICIENCY IN DELIVERING SOCIO-ECONOMIC SERVICES:

S.A. current position in social service delivery:

More than 55% of the S.A. population can be categorised as a marginal group because they are living
below the poverty line (the minimum amount of money needed to satisfy the basic needs for survival)
The government’s socio-economic programmes to improve the situation, namely housing, education,
economic growth to lower unemployment, medical services like water and electricity, are examined every
year to try and improve this situation.
The state acts as an entrepreneur, lawmaker and organiser in cases where the private sector does not
have enough capital or where the area of production is not regarded as profitable.
The SABC, Post Office, museums, schools, state hospitals, Eskom and the transport services are typical
examples of government enterprises.

Assessing the provision of social services:

Government provides social services to promote individual welfare and enhance the economic prospects of
the country.
Includes welfare functions, as well as public and merit goods such as education and healthcare.

Following are examples of the state’s social services:

The education and training function, to increase literacy.
examples of these institutions are schools, universities, technical colleges and Technikons

The housing function, which includes the provision of housing for the needy.
According to the Government Communications report (GCIS) of 2010, more than 4 million
subsidies to build houses were approved during 2010.

The social security functions.

examples of this are state pensions and disability allowances.

The health function, to provide basic health services to the community

government spending on HIV/Aids programmes increased from R30 million in 1994 to more
than R7 billion in 2010.

Assessing the provision of economic services:

Regulating the economy to ensure economic stability by making use of monetary and fiscal policies.
Maintaining economic order by means of economic policies and legislation
Providing and maintaining infrastructure, like roads and telecommunication services.

POSSIBLE ESSAY TYPE QUESTIONS:

Argue in detail favour of a mixed economy against a centrally planned economy.
Draw a comparison between the market and centrally planned economy.
Critically evaluate South Africa’s current position in social service delivery focusing on the provisioning of
social and economic services.
Examine in detail a mixed economy

38
MAIN TOPIC: MACROECONOMICS

TOPIC 4 CONTENT CONTENT DETAILS FOR

TEACHING, LEARNING AND
ASSESSMENT PURPOSES
Economic Analysis of the economic structure of South Africa Briefly describe and explain the
structure relevant concepts
of South
Africa Primary Sector Distinguish between the TWO
- Definitions different operations in the primary
- Composition sector
- Economic importance Distinguish between the THREE
different industries in the primary
sector
Discuss in detail the economic
importance of each sector in the
economy
Detailed discussion of the
economic importance of the
primary sector

Secondary Sector Define and explain the relevant

- Definitions concepts
- Composition Discuss the composition of the
- Economic importance secondary sector
Detailed discussion of the
economic importance of the
secondary sector

Tertiary Sector Briefly describe and explain the

- Definitions relevant concepts
- Composition Discuss the composition of the
- Economic importance tertiary sector
Detailed discussion of the
economic importance of the
tertiary sector

South Africa’s infrastructure Discuss in detail South Africa’s

- Definition economic importance of
- Communication infrastructure
- Transport Briefly discuss communication as
- Energy part of SA infrastructure
- Exclusion Briefly discuss transport as part of
SA infrastructure
Briefly discuss energy as part of
SA infrastructure.
Briefly discuss exclusion as part of
SA infrastructure

39
 GRADE 11 ECONOMICS

PAPER 1

MACROECONOMICS

TOPIC 4: BASIC ECONOMIC PROBLEM, BUSINESS CYCLES AND PUBLIC SECTOR:

ECONOMIC STRUCTURE

The economic structure divides all economic activities into different categories or sectors. The three major
sectors are the primary, secondary and tertiary sector. These sectors contribute to the national income of
the country.

Candidates should cover the following:

Primary sector Secondary sector Tertiary sector S.A.’s infrastructure

 Definition  Definition  Definition  Communication

 Composition  Composition  Composition  Transport
 Economic  Economic  Economic  Energy
importance importance importance  Exclusion and
discrimination
in services
provision

Vocabulary list:

Learners must first give a description of the following words in their notebook:

Primary sector
Secondary sector
Tertiary sector
Genetic operations
Exploitative operations
Manufacturing
Infrastructure
Communication
Energy
Transport

40
Types of industry:
Economists classify industry into three types or sectors: Primary, Secondary and Tertiary sectors.
They use this classification to distinguish between different complexities of the production process, as well
as other aspects, such as the inputs and outputs or the resources and the products of the particular
process.

The primary sector usually involves:

 Unprocessed raw materials, such as minerals or trees, farm produce, etc.
 The product that is produced is usually very basic, such as timber, unprocessed fruit and vegetables
or various metals.

The secondary sector usually involves:

 Manufacturing products using the output of the primary industries or that of other secondary
industries to produce a range of goods.
 Examples include canning factories, assembly plants, clothing factories, etc.

The tertiary sector usually involves:

 The services that support the economy such as selling and distributing those items produced in the
secondary industries.
 Examples include transport services, courier services and computer network services.

THE PRIMARY SECTOR:

Definition:
 Primary sector industries are industries that get raw material from nature.
 Primary means that it is the first stage of production.
 The products supplied by this sector can be delivered to the consumer just as they are, or they can
undergo processing in the secondary sector.

There are two kinds of primary sector operations:

Genetic operations – which can return to nature what has been taken from it, such as farming or
forestry.
Exploitative operations which cannot return to nature what has been taken from it, such as mining
and fishing.

Composition of the Primary Sector:

Cultivation of products –
agriculture

Exploitation of minerals –
mining

Collection of products –
forestry and fisheries

41
Economic importance of the primary sector:

Provides food and minerals:

 Although SA has a poor quality of soil and low rainfall, the agriculture sector produces a wide range
of products.
 Some agricultural products need to be imported.
 Mining has been the driving force behind the history and development of South Africa’s economy.
 SA almost self-sufficient in minerals and only import crude oil and oil products from other countries.

Earn foreign exchange:

 SA earn foreign income by exporting primary sector products.
 Major exporter of fruit, nuts, grain, sugar, animal fibres and various minerals.
 We use the foreign exchange earned from these exports to pay for imports like oil.
 SA is one of the top 5 countries in terms of mineral reserves.
 China is SA’s biggest trading partner.

Train workers and create job opportunities:

 Workers need to be trained to use the machinery used in the primary sector.
 Using machinery and training workers to use the machines increase the productivity and profitability
of farms and mines.
 In 2009, SA’s mining industry was the largest contributor to BEE.

Provisions of raw materials for secondary industries:

 Agriculture, fishing, forestry and mining play an important role in the development and
establishment of manufacturing industries in SA.
 Sasol, Arcelor-Mittal and canning factories are examples of industries that were established to
process raw materials such as coal, iron and fruit.

Contribution to GDP:
 Despite the decline in the contribution of the agricultural sector to the GDP, it still provides job
opportunities.
 Agriculture, forestry and fishing contributes to 2,3% to the GDP in 2009, mining accounts for 6% of
GDP.
 SA is the second largest producer of gold in the world.

Sources of capital formation:

 Both agriculture and mining industries need a lot of capital goods in the production process.
 Foreign investment plays an important role in the growth of these industries.
 Mining sector was responsible for almost 18% of gross investment.
 Capital formation in the agriculture sector steady, due to high commodity prices.

Stimulation of research and development:

 Examples of research institutions:
 Department of Agricultural Development
 Veterinary Research Institute at Onderstepoort
 South African Bureau of Standards (SABS)
 Council for Scientific and industrial Research (CSIR)

Sources of state income:

 All industries in the primary sector pay taxes to SARS.
 Special taxes are also paid by mining industries.
 Mining leases are sold and the state shares in profits of these sales.

Positive influence on infrastructure:

 Discovery of minerals in SA and development of agricultural regions played a major part in the
development of roads, railway lines and the generation of electricity in the country.
THE SECONDARY SECTOR:

42
Definition:
 Secondary sector industries are those industries that change natural resources into a form that is
suitable for human use.
 The process that takes place to transform raw materials into consumer goods are known as
manufacturing.
 Examples of industries in the manufacturing sector are car-manufacturing industries and food-
processing industries.

Composition of the secondary sector:

Manufacturing industries:

Processing of natural resources take place in

factories.
Factories are often located close to the natural
resources.

Electricity, gas and water supply:

Electricity is generated from coal. In addition,

hydroelectric power plants and nuclear power
station contributes to supply of electricity.
Refineries, e.g., Stanvac and Sasol provide large
quantities of liquid petroleum gas.

Construction:

Includes industries that build roads, buildings,

dams, houses

43
Economic importance of the secondary sector:

Makes a significant contribution to GDP:

 In 2008, the contribution of the secondary sector to the GDP of SA was 21,7%.

Create job opportunities:

 Factories and other secondary industries provide thousands of jobs for a range of skills levels.
 Example unskilled labour (e.g., cleaners) and skilled workers (e.g., engineers)

Ensures economic independence:

 SA is regarded as the industrial giant in Africa and is independent in most areas.
 Sector includes industries in metal production and engineering, food and beverages, production of
chemicals and automotive industry.

Earns foreign exchange:

 Sector is diverse and many of our industrial outputs are exported.

It is an important area for investment:

 Secondary industries require very expensive machinery and equipment.
 Foreign and local investment allows for this.

Ensures strategic importance in Africa:

 SA has the necessary minerals, technological expertise and infrastructure to play an important role
in the development of the rest of Africa.

THE TERTIARY SECTOR:

Definition:
 Tertiary sector distributes goods (makes goods available) and provide services.
 Also referred to as the service sector and activities include public, commercial and professional
services.
 Examples include transport services and financial services.

44
Composition of the tertiary sector:

Commercial services Provided by wholesalers and retailers.

Offered each time consumer goods are bought or sold.

Transport services Used to take goods from places where the consumer wants
to buy or use them.
Transport services provide place utility to products and
services.

Storage services Ensures customer goods are available when needed.

Storage facilities provide time and place utility to products.

Communication services Ensures the transfer of market information.

Include media reports, telephone lines, internet services,
etc.

Banking and financial services Plays an important part in the finance of transactions
between buyer and seller.
Includes loans, hire-purchase, mortgages, underwriting of
shares, etc.

Personal services Examples: legal services, insurance, education, medical

services, tourism.

45
Economic importance of the tertiary sector:

Contributes to GDP:
 Tertiary sector contributes 62% to the overall GDP of SA.
 With technological changes it is predicted that the growth in the tertiary sector will play a bigger role
in the GDP contribution in the future.

Creates job opportunities:

 Sector dominates employment, accounting for 60% of total employment.
 Job opportunities created for all levels of labour.
 Examples unskilled (e.g., cleaners); semi-skilled (e.g., machine operators) and skilled (e.g., dentists
and teachers)
 Many SA entrepreneurs choose to start their own businesses in the tertiary sector.

It is a source of income for the state:

 Companies must pay taxes to SARS.
 Money used to provide basic services to South Africans, example infrastructure (roads, housing and
public transport) and welfare services (healthcare and education).

Creates a market for consumer goods:

 Sector tells the consumer which goods are available through advertising.

SOUTH AFRICA’S INFRASTRUCTURE:

Communication, transport and other infrastructure are the backbone of economic activity in any country.
The infrastructure of a country ensures that the factors of production, as well as consumer goods and
services, will be available at the right place and the right time.
Three infrastructures: Communication, Transport and Energy

Communication:
 Advances in communication technology have done for world economies what jet travel did in the
1960’s.
 The world has become an increasingly smaller place.
 The use of superfast internet, satellite communications technology and cheap, reliable mobile
phones has made it possible for people to do business from anywhere in the world – without having
to physically be at the point of sale or negotiation.

Economic importance of communication:

 Cell phones and wireless technology have enabled entrepreneurs in remote and rural parts of the
country to set up small businesses.
 Knowledge is gained through communication, which helps entrepreneurs to make the correct
business decisions.
 The sector makes an important contribution to the gross domestic product of the country.
 It is a source of employment for all levels of labour.

Transport:
 Transport sector in any growing economy is the driving force for all economic activity, and therefore
needs constant upgrading.
 This means investing in roads, rail, harbours and airports.
 Transnet provides an extensive rail commuter system to the South African business world.
 Economist often see transport as the firth factor of production.

46
Economic importance of transport:
 It brings the consumer and the manufacturer together.
 Apart from increasing the standard of living of domestic consumers, our international transport links
make valuable contributions to the GDP of the country.
 Projects like Gautrain and the upgrades to our international airports act as a spur to tourists to enter
the country and travel around internally in speedy and efficient comfort.
 The new harbour at Coega near Port Elizabeth has created a hub for new businesses to set up that
can benefit from tax free imports.

Energy:
 Most people’s energy needs are met by the provision of electricity, which is generated from coal
fired power stations.
 Eskom is South Africa’s major provider of electricity.
 Task is to provide electricity to households and business sectors in South Africa.

Economic importance of energy:

 Energy is crucial to the functioning of modern society.
 This includes energy for industry, domestic consumption, transportation and the business world.
 The energy supply problem in South Africa since 2005 has highlighted how reliant businesses,
households and the state are on electricity.
 Energy takes various forms, including the burning of wood and coal, the burning of oil and gas, the
provision of energy from nuclear power plants and hydroelectric plants.
 Using technology to generate electricity from renewable sources such as wind, solar and wave
energy is one of the growth sectors identified by the state.

Exclusion and discrimination in service provision. (Access to economic opportunity)

 The policies of the previous government resulted in inequalities in society especially in terms of the
exclusion of Africans from full participation in the different sectors of the economy.
 Many Africans were disadvantaged where the provision of services and infrastructure was
concerned.
 Communities were often living in poverty, mostly without running water and electricity.
 Since 1994, government has aimed to correct the social and economic injustices of the past by
implementing several black empowerments programmes and affirmative action in the workplace,
with a focus on needs of the previously disadvantaged.

Following are examples of programmes:

 RDP (Reconstruction and Development Programme) has set out to correct the service provision
backlogs including the provision of electricity, water, housing, roads, education and health services.
 The newly established Job Fund managed by the Development Bank of South Africa aims to create
150 000 jobs over three years
 In areas of South Africa where electricity had traditionally not yet been provided, state subsidised
solar panels and solar powered hot water cylinders have been installed on houses to harness the
power of the sun to electricity houses.

47
48
MAIN TOPIC: ECONOMIC PURSUITS

TOPIC 8 CONTENT CONTENT DETAILS FOR

TEACHING, LEARNING AND
ASSESSMENT PURPOSES
Economic Wealth creation process and patterns of Briefly describe and explain the
growth distribution relevant concepts

Wealth creation process Differentiate between wealth and

- Definition of wealth income
- Difference between wealth and income Briefly explain the different
- The sources of wealth sources of wealth
- Methods to create wealth (Focus on the wealth Explain the methods to create
creation through saving) wealth through savings

Distribution Briefly describe and explain the

- Income distribution relevant concepts
- Wealth distribution Briefly explain income distribution
- How much inequality? Briefly explain wealth distribution
- The uses of the Gini Coefficient and the Lorenz Explain the use of the Gini
Curve Coefficient to measure income
- Redistribution methods inequalities
Explain the use of the Lorenz
curve
Use the Lorenz-curve and explain
the unequal distribution of income
in South Africa

International redistribution methods Discuss in detail the different

Taxes methods used to redistribute
Cash (social) Grants income and wealth
Natura (free) benefits Taxation
Labour market policy Social security programmes
Macroeconomic policy Minimum wage
Redress policies
Affirmative redistribution methods (action) in South Evaluate the SA government’s
Africa effort to redress economic
inequality
- Broad based black economic empowerment
Act. (BBBEE)
- Land restitution and land redistribution
- Property subsidies

Economic growth Briefly describe and explain the

- Meaning and calculation relevant concepts
- Importance Discuss Economic growth
- Methods (Explain the difference –
- Constraints on growth nominal GDP and real GDP)
- South Africa’s recent growth experience Explain the importance of
economic growth figures
Briefly describe and explain the
relevant concepts

49
 Standard of living Briefly discuss the standard of
- Definition living
- Population size Analyse the use of the per capita
- Per Capita income income as economic indicator
(Discuss the detail the methods
used to increase economic
growth in detail)

GRADE 11 ECONOMICS

PAPER 1

ECONOMIC PURSUITS

TOPIC 8: ECONOMIC GROWTH: WEALTH CREATION PROCESS AND PATTERNS OF

DISTRIBUTION

Learners should cover the following:

Wealth creation Distribution Economic growth Standard of living

process
Definition of wealth Income distribution Meaning and Definition
Difference between Wealth distribution calculation Population size
wealth and income How much inequality Importance Per-capita income
The sources of wealth The uses of the Gini Methods
Methods to create Coefficient and the Constraints on
wealth Lorenz Curve growth
Redistribution methods South Africa’s
recent growth
experience

Vocabulary List

Learners must first give a description of the following words in their notebook:

Wealth BBBEE
Physical wealth Progressive income individual tax
Financial wealth Wealth tax
National wealth Estate duties
Tangible / real assets Cash grants
Intangible / monetary assets Natura benefits
Savings Land restitution and redistribution
Income Property subsidies
Discrimination Economic growth
Income distribution Economic growth rate
Wealth distribution Real GDP
Gini Coefficient Productivity
Gini index Standard of living
Lorenz curve Per-capita income

50
 Area of inequality

WEALTH CREATION PROCESS

Definition of wealth
Wealth is …
 all the accumulated physical and financial assets which enable people and businesses to earn an
income.
 related to the monetary value of what you own at a particular point in time.
 assets that are owned by individuals, businesses and the government.

Physical wealth – are tangible or real assets, such as clothes, furniture, houses, vehicles, trading stock,
land and buildings.

Financial wealth – are intangible or monetary assets; such as cash, bank deposits, investment, shares
and loans.

Wealth is owned by THREE groups:

Individuals - own clothes, furniture, cellular phones, house, cash national
Businesses - own furniture, machines, buildings, investments wealth!
State - owns buildings, equipment, harbours, land

DIFFERENCE BETWEEN WEALTH AND INCOME

Income Wealth
Income is the remuneration earned by the Wealth refers to the stock of both real and
factors of production for participating in monetary assets that have been accumulated
economic activities. over time.
Income can take the form of:
Wealth is anything that enables people to
Wages from an employer; yield an income.

Interest from investments; Although we measure wealth in terms of

money, money in itself is not wealth.
Profit from a successful business and
Money cannot be used to produce goods and
Rent from land and natural resources. services. However, we use money to buy the
51
The total income in the economy includes factors of production and their output.
wages, interest, rent and profit.

SOURCES OF WEALTH

Savings
 Wealth is created by means of savings
 Income (Y) – Consumption (C) = Savings (S)
Luck also plays a part in wealth as some people win money.
Inheritance- even if a person inherits wealth, it came originally from savings by a previous generation.
Income is the earnings people receive for the work they do or the assets they own.

METHODS TO CREATE WEALTH THROUGH SAVINGS

Savings is income that is not spent.
Thus, the equation for savings is:

Savings (S) = Income (Y) - Consumption expenditure (C)

Therefore, an increase in income might result in an increase in savings or buying of assets.

To increase savings, income must increase, or spending must decrease.
Savings only becomes wealth when the money is invested.

People save to accumulate wealth.

DISTRIBUTION

INCOME DISTRIBUTION
Income distribution refers to the way in which income earned is divided amongst households.

Reasons for unequal distribution of income:

Unequal ownership of wealth: wealth generates income in the form of profits, interests and dividends. A
difference in wealth creates differences in income.

Differences in skills and qualifications: those with advanced skills and qualifications earn higher income.

Discrimination: exists where income of some groups is adversely affected in terms of employment, pay and
promotion opportunities.

52
WEALTH DISTRIBUTION
There are THREE major reasons for the inequality in the possession of wealth in South Africa.

Inequality of income
 In South Africa during colonialism and apartheid, blacks were subjected to inferior education and
professions.
 They were also not allowed to do professional work in white areas and were barred from managerial
positions.
 Low income resulted in no or minimal savings, thus no wealth creation.

Inheritance
 Inheritance of wealth is only possible if people have a general right to own property.
 For many decades in South Africa only white people had property rights.
 Blacks were denied this right and were forcefully moved to homelands and lost the little wealth they
had.

The market system

 The market system rewards successful people.
 Generous reward motivates people to use and develop their entrepreneurial talents, acquired better
skills, work hard and to save.
 In a market system, wealth is essential to combine with other factors of production to produce more
goods and services.
 This system uses wealth to create more wealth which is essential for economic growth and
development.

Figure 1: Income Inequality Figure 2: Inheritance

Figure 3: Market System

53
HOW MUCH INEQUALITY?

There are TWO methods to measure the extent of income inequality:

 Lorenz curve
 Gini coefficient

The Lorenz curve

The Lorenz curve is a graph which an American statistician, Max Otto Lorenz introduced in 1905.
To draw a Lorenz curve, we need data showing the distribution of income among portions of a population.

TABLE:

PERCENTAGE CUMULATIVE PERCENTAGE

POPULATION INCOME POPULATION INCOME info used for
Lorenz curve
Poorest 20% 3 20 3
Next 20% 7 40 10
Next 20% 15 60 25
Next 20% 25 80 50
Richest 20% 50 100 100
Table 1: Distribution of income % plot on % plot on
Horizontal axis Vertical axis
GRAPH:

Lorenz curve
120
B
Cumulative % van income

100
80
60 d
40 c
20 b
a
0
20 40 60 80 100
Cumulative % of population

By plotting the cumulative income and population percentages, the points of intersection give a convex
curve along 0, a, b, c, d, B.
This show for instance, that at c the poorest 60% of the population earns 25% of the income.
The 45 ° line (diagonal) serves as a reference point.
It is called the line of equal distribution OR perfect equality.
It shows a perfect equal distribution of income.
Along this line the first 20% of the population receives 20% of total income; the first 40% receives 40%, etc.
Like the equal distribution line (curve), any Lorenz curve must start at the origin 0, (since 0% of the
population will earn 0% of the income) and ends at B (since 100% of the population will earn 100% of the
income)
The greater the distance between the lines of equal distribution and the Lorenz curve, the greater the
degree of inequality.
The area between the line of equal distribution and the Lorenz curve is called the area of inequality.
The greatest possible inequality will be where one person earns the total income.

54
The Gini coefficient

The Gini coefficient is calculated from the information provided by the Lorenz curve.
The Gini coefficient measures the exact degree of inequality.
This is the ratio of (a) the area between the Lorenz curve and the line of equal distribution (0B, d, c, b, a, 0)
to (b), the total area below the line of equal distribution (triangle 0BA0)
The value of the Gini coefficient can range between 0 and 1.
If the income is distributed perfectly equally, the Gini coefficient is zero.
The other extreme is, if the total income goes to one individual or household (if the income is perfectly
unequal distribution), the Gini coefficient 1.

In practice the Gini coefficient usually ranges between 0.3 (highly equal) and 0.7(highly unequal)
In 2010, South Africa's Gini coefficient was 0.65 according to the SAIRR and it was estimated that of the
USA was 0.41, Brazil 0.65 and Malaysia 0.51.
The Gini coefficient is sometimes multiplied by 100 to get the Gini index, which ranges between 0
and 100.
The higher the value, the greater the inequality.

55
REDISTRIBUTION METHODS
In South Africa the government has introduced an arsenal of interventions in the economy to redress the
inequalities created by past policies. These redistribution methods are grouped under the following:

International redistribution methods

Taxes High-income earners and wealthy people are taxed in order to provide
benefits and benefits in kind to low-income earners and poor people
Progressive income tax: high-income earners are taxed at higher rates.
Wealth taxes: Capital Gains Tax (CGT) is levied on gains (profit)
earned on the sale of capital goods, e.g., property and shares
Estate duties: 20% is payable on the estate of every person who dies
and whose nett estate is in excess of R3,5 million.

Cash (social) grants In South Africa, old-age pensions, disability grants, child support grants
and unemployment insurance are the most important cash grants.

Natura (free) benefits Poor households receive free health care, education, school meals,
municipal services and infrastructure.
Limited quantities of free electricity and water are also provided.

Labour market policy Minimum wages, antidiscrimination acts and training subsidies reduce
income inequality.

Macroeconomic policy These policies influence the distribution of income and wealth.
Expanded Public Works Programme (EPWP) create employment
which benefit low-income households
Regional development policies, such as SDI aim to reduce
geographical inequalities of income and wealth.

Affirmative redistribution methods (action) in South Africa

Broad Based Black The Broad Based Black Economic Empowerment Act, No.53 of 2003,
Economic Empowerment provides legal basis for transformation of SA economy so that number
(BBBEE) of black people that own, manage and control country’s economy can
increase significantly, and income inequalities will decrease
substantially
DTI published scorecard used to measure empowerment and
transformation progress of business and industries
Elements on scorecards include equity ownership, management and
control, employment equity, preferential procurement, enterprise
development and social responsibility

Land restitution and land The purpose of land restitution is to return land to those who lost it as a
redistribution result of racial discriminatory laws and practices after 19 June 1913.
Land redistribution focuses on land for residential and productive use.
Government’s aim was to redistribute 30% of agricultural land to
previously disadvantaged individuals and groups by 2014.
Although there were some successes since 1994, large tracts of land
still remain in the hands of very few people.

Property subsidies Subsidies are used to help beneficiaries acquire ownership of fixed
residential property.
The government housing scheme provides funding options to all
eligible people earning less than R3 500 per month.
In 2021 there is still a backlog of an estimate of 2 million homes
needed for 12 million people – average household of 6.

56
ECONOMIC GROWTH

MEANING OF ECONOMIC GROWTH CALCULATION OF ECONOMIC GROWTH

Economic growth means an increase in
the production of goods and services in The formula for calculating economic growth rate is:
a country over a year.
= real GDP in year 2 – real GDP in year 1 x 100
Economic growth MUST BE measured real GDP in year 2
and expressed in terms of real GDP.

Real GDP is GDP after the increases in

the general price level have been taken
into account.

IMPORTANCE OF ECONOMIC GROWTH

Achieving a high economic growth rate is one of the five major objectives of the macro-economic policy.
The significance of economic growth lies in its contribution to the general prosperity of the community.

The aim of National accounts:

It is to provide a systematic and comprehensive record of national economic activities.
National income figures are NOT 100% accurate.
There are many shortcomings or problems when we calculate or determine national income figures.
Despite these problems and shortcomings, it remains important economic statistics.
South Africa uses the System of National accounts (SNA) - as suggested by the United Nations (UN).
The SNA is the internationally agreed standard set of recommendations on how to compile measures of
economic activity. It records how production is distributed among consumers, businesses, government and
foreign nations. It shows how income originating in production, modified by taxes and transfers, flow to
these groups and how they allocate these flows to consumption, saving and investment.

GDP is important because it gives information about the size of the economy and how an economy is
performing. The growth rate of real GDP is often used as an indicator of the general health of the economy.
In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. When real
GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their
factories and people have more money in their pockets. When GDP is shrinking, as it did in many countries
during the recent global economic crisis, employment often declines. In some cases, GDP may be growing,
but not fast enough to create enough jobs for those seeking them. But real GDP growth does move in
cycles over time. Economies are sometimes in periods of boom, and sometimes in periods of slow growth
or even recession (with the latter often defined as two consecutive quarters during which output declines).

What GDP does not reveal

It is also important to understand what GDP cannot tell us. GDP is not a measure of the overall standard of
living or well-being of a country. Although changes in the output of goods and services per person (GDP
per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it
does not capture things that may be deemed important to general well-being. So, for example, increased
output may come at the cost of environmental damage or other external costs such as noise. Or it might
involve the reduction of leisure time or the depletion of non-renewable natural resources. The quality of life
may also depend on the distribution of GDP among the residents of a country, not just the overall level. To
try to account for such factors, the United Nations computes a Human Development Index, which ranks
countries not only based on GDP per capita, but on other factors, such as life expectancy, literacy, and
school enrolment.

57
METHODS OF ECONOMIC GROWTH

Increase in productivity. Productivity can be defined as the relationship between real output
(the quantity of goods and services produced), and one unit of factor
input.

Productivity increases are signalled in five ways.

 Output increases while input remains the same.
 Output increases while input declines.
 Output increases faster than input.
 Output remains constant while input declines.
 Output declines at a slower rate than input.

Availability and utilisation of In terms of the labour force, economic growth occurs when the ratio of
production factors the working population to the total population increases.

In terms of land and natural resources an increase is rarely possible.

Land can still be used for new purposes that will render better returns,
e.g., to grow canola rather than wheat.

In terms of capital, capital widening and deepening must be pursued.

Technological change Technology is any instrument or technique, or method used which

extends human ability.

If new ways are discovered, so that more goods and services are
produced with the same inputs, technology has improved.
E.g., cell phones, internet, computers etc.

Effective government Effective policies mean policies that will ensure that pre-set objectives
policies and administration are met.
Government should have policies in place that will realise for example
more exports, growth in tourism and the expansion of manufacturing
industries.

Efficient administration means that the policies are executed in a

manner that minimises time wastage, inconvenience and costs.

Nepotism (favouring family and friends), corruption (using public office

for personal gain) and laziness increase transaction costs for
businesses.

Investment An increase in capital per worker will generally increase output.

In other words, the more equipment workmen used, the greater will be
their production.

To increase capital requires investment and that investment requires

savings (S = I)
A country's production depends on its capital stock. (K)

58
CONSTRAINTS ON ECONOMIC GROWTH

1. Low levels of savings and investment

Savings are needed to finance investments.
1.1 Savings:
South Africa's savings amount to about 15% of GDP.
Savings by households is very low.
A savings rate of 21% of the GDP is needed to annually grow at a rate of 6%.

1.2 Investment:
South Africa's fixed investment rate would have to increase from at least 15% to at least 25%, for
the economy to grow by more than 5% per year.

2. Insufficient qualified labour

Highly skilled workers are in demand.
It is a serious constraint on economic growth in SA.

2.1 School education

The number of candidates who qualify for university admission decrease.
School literacy and numeracy are low in terms of international standards.
Only 20% of the number of candidates who have passed the senior certificate, got admissions to a
bachelor's degree at a university.

2.2 Learnerships
Although more candidates wrote in 2009 the learnership (apprenticeship) trade test, only 40% of them
passed.
The numbers who qualify is too low to meet the needs of the economy.

3 HIV / AIDS
South Africa is one of the largest HIV-infected populations in the world.
3.1 Population of working age
People in their economically active years are more infected than others.
Once they are infected, they become less productive and when they die, their knowledge and
experience is destroyed.

3.2 Medical expenses

Treatment for those infected is escalating at an enormous rate.
It will have an increasingly negative impact on savings, taxes and profits.

SOUTH AFRICA'S RECENT GROWTH EXPERIENCE – TO BE UPDATED BY TEACHER

South Africa's economic growth averaged 2.2% per year between 2000 and 2011.
The highest growth rate was 2006, when it was 5.6%.
Higher growth rates are needed to improve the living standards of all people in South Africa.
In terms of the Accelerated and Shared Growth (Accelerated and Shared Growth - AsgiSA) program, a
sustained growth rate of 6% as the minimum was identified, to significantly reduce unemployment.

The South African economy grew by 1,1% in the first quarter of 2021 (January–March), translating into an
annualised growth rate of 4,6%.1 This follows a revised 1,4% (annualised: 5,8%) rise in real gross domestic
product (GDP) in the fourth quarter of 2020.
The finance, mining and trade industries were the main drivers of output on the production (supply) side of
the economy, while household spending and changes in inventories helped spur growth on the expenditure
(demand) side.
Despite this being the third consecutive quarter of positive growth, the South African economy is 2,7%
smaller than it was in the first quarter of 2020.
59
STANDARD OF LIVING
Economic growth is desirable because it enables a society to consume more goods and services.

There are several factors that should be kept in mind regarding the standard of living, which include:

 the size of the population

If the population grows at a higher rate than GDP growth, everybody may even be worse off despite
increases in goods and services are produced.
If we want to talk about standard of living, we need to adjust the economic growth rate to accommodate the
growth in the population.
In other words, we need to calculate the growth on a per capita basis.

 Per capita income

Similarly, to dividing the economic growth rate by the population number, we can also divide real GNI by
the population number.
This gives us the standard of living – the quantity of goods and services consumed by each individual.
The formula for calculating the per capita GDP is:

Per capita GDP = real GDP

total population

Per capita GDP is used to:

Compare the standard of living from year to year within a country and between countries
Show changes in welfare and the level of economic development

TOPIC 9 CONTENT CONTENT DETAILS FOR

TEACHING, LEARNING AND
ASSESSMENT PURPOSES
Economic Economic development. Briefly describe and explain the
developmen relevant concepts
t Compare: Economic growth and Economic Compare economic growth and
Development economic development
Methods of development Briefly discuss the strategies to
increase economic development

Common characteristics of developing Discuss in detail the

countries: characteristics of developing
- Low standard of living countries
- Low levels of productivity
- High population growth and dependency
burdens
- High levels of unemployment
- Dependence on the primary sector
- Deficient infrastructure

Developing strategies Discuss in detail strategies to

increase economic
60
 development:
Human resources
Natural resources
Capital
Technology
(Source: Enjoy – Pg. 210)

Critically evaluate South Africa’s

South Africa’s endeavors’ endeavours:
Reconstruction and development
(RDP)
Growth, Employment and
Redistribution programme
(GEAR)
The joint initiative on priority skills
acquisition (JIPSA)
The accelerated and shared
growth initiative for South Africa
(AsgiSA)
National Skills Development
Strategy (NSDS)
Financing Entrepreneurship
Promotion Programmes
(Source: Focus: Pg. 190)

Briefly discuss the importance of

Indigenous knowledge systems indigenous knowledge systems

61
 GRADE 11 ECONOMICS

PAPER 1

ECONOMIC PURSUITS

TOPIC 9: ECONOMIC DEVELOPMENT

Learners should cover the following

Compare: Economic Methods of Common characteristics Developing strategies

growth and Development of developing countries
economic
development
Low standard of living Human resources
Low levels of productivity Natural resources
High population growth Capital
and dependency burdens Technology
High levels of Entrepreneurship
unemployment
Dependence on the
primary sector
Deficient infrastructure

South Africa’s Indigenous

endeavors’ knowledge
systems

Meeting basic needs

Developing the
economy
Developing human
resources
Advancing freedom of
choice
Government’s
economic
interventions

Vocabulary List

Learners must first give a description of the following words in their notebook:

Economic growth Underemployment

Economic development Open unemployment
Real GDP Human resources
Real per capita GNI Capital Formation
Per capita income NGP
Gini coefficient: NDP
Quintile ratio SDI
Poverty line income IDZ
Head count index SETA
Literacy rate IKS
Dependency burden

62
COMPARE ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

Economic growth is a prerequisite for economic development!

ECONOMIC GROWTH ECONOMIC DEVELOPMENT

Exists when there an increase in real GDP. Exists when there is an increase in real per
capita GNI (GDP)
Implies an increase in the capacity of the
economy to produce more goods and Implies an increase in the capacity of the
services. population to produce more goods and
services.
The emphasis is on increasing GDP, perfect
markets, maximum profit, etc. The emphasis is on higher standards of
living, more employment, less poverty, etc.

DEVELOPMENT METHODS

1. Attracting new businesses: more new businesses create employment opportunities that promote
diversity and growth of the local economy.

2. Building community capacity: by developing their own skills, people will be in a position to make
the most of available opportunities.

3. Expanding local markets: the local government should expand and promote local products and
markets (export promotion and import substitution)

4. Use of outdated facilities: be transformed so that they can meet the new needs of the local
community.

5. Promoting direct investment: government needs to upgrade infrastructure and build new facilities
to create more jobs

6. Natural resources: must be used effectively to improve the standard of living of local people.

63
7. Attract new businesses: more new businesses create jobs that promote diversity and growth of the
local economy.
8. Build community capacity: by developing their own skills, people will be able to make the most of
available opportunities.
9. Expand local markets: local government must promote and market local products (export promotion
and import substitution)
10. Use of obsolete facilities: must be converted so that it can meet new needs of local community.
11. Promote direct investment: enable government to upgrade infrastructure and build new facilities to
create more jobs
12. Natural resources: must be used effectively to improve the standard of living of local residents.

COMMON CHARACTERISTICS OF DEVELOPING COUNTRIES

1. Low living standards

 Low per capita income: about 80% of the world's population is living on less than 1/5 of the world's
income.
 Low growth of per capita income: developing countries have a slower growth of per capita real GNI
than developed countries
 Greater unequal distribution of income, income gap between rich and poor in the same country is
generally greater in developing countries than developed countries.
 Income inequality is measured by the
 Gini coefficient: the bigger the co-efficient the more the inequality.
 Quintile ratio: it is the ratio of the income of the poorest 20% of the population compared to the
richest 20%.

 More poverty: low living standards is an indication of poverty.

 Poverty line income: People are poor when they earn an income that is less than the amount
required to satisfy their basic needs.

 Head count index: It is used to indicate the magnitude of poverty. This is the % of people with an
income living which is less than the poverty line income

 Low life expectancy: many people in developing countries are fight a battle against malnutrition,
diseases etc.
 Low levels of education: low living standards are related to low levels of education.
 Adult literacy rate refers to the % of people aged 15 years and above who can read, write and
speak.
 Literacy rates in developing countries are lower than in developed countries.

2. Low levels of productivity

Levels of labour productivity (output per worker) in developing countries are extremely low
compared to developed countries.
This is mainly due to the lack of management, lack of education and training and malnutrition during
childhood.

3. High population growth and dependency

Population growth: In developing countries, birth rates are very high and mortality low due to
availability of medicines
Dependence burden: children under the age of 15 represent almost 29% of the population. People
over 64 years are also dependent on family.

4. High levels of unemployment

Underemployment: people who are working less than they are able.

64
 Open unemployment (visible unemployment): people who are able to work, want to work but cannot
find work

5. Dependence of the primary sector

Agriculture: Most people in developing countries live and work in rural areas.
Exports: Primary goods e.g., agricultural products, minerals etc. are the main export goods.

6. Deficient (Poor) infrastructure

Deficient infrastructure in developing and especially low-income countries.
The economies of developing countries are held back through deficient infrastructure. The
governments did not invest enough in the following:
 Physical infrastructure like transport, communication, electricity and water
 Social infrastructure like health, education and training
 Financial infrastructure like the banking system.

DEVELOPMENT STRATEGIES / METHODS

Human resources:
 refers to the labour force.
 are the most important asset of a country.
Can be improved in various ways:
 Education and training: Improvement in literacy levels contribute to economic growth and
development.
 Health: Healthy people are more energetic and productive and contribute to economic development.
 Population planning: Unplanned families are often the main cause of poverty and unemployment.
 Motivation: Human resources need to be motivated and must strive towards self-improvement.

Natural Resources:
Land: Land ownership is a strong incentive to improve the quality of the soil.
Minerals and fuels: The establishment of secondary industries which can process the raw primary products,
and hence add value to labour.

Entrepreneurship:
For a country to be develop, entrepreneurship should be encouraged.
A country can only perform at its best if managers / owners are willing to take risks.

Capital:
When a country increases their stock of capital, it is known as capital formation.

Capital formation can be increased by:

 Increase voluntary savings.
 Increase forced savings through taxation.
 Attract foreigners to invest
 Negotiate foreign loans from development institutions such as the World Bank

Technology:
Technological development makes countries more competitive.
The expansion of communication, e.g., computers can improve productivity in developing countries.
Science training must be included in school curricula to train technicians and engineers.

65
SOUTH AFRICA'S EFFORTS

Macroeconomic policies
SA is a developing country and since 1994 the government followed an economic development policy:

 The Reconstruction and Development (RDP) was the original route map.
 This was followed by GEAR, which was reinforced by ASGISA.
 New Growth Path (NGP) was accepted and established in 2010, focusing on economic growth and
job creation.
 National Development Plan (NDP) was announced by the Planning Commission in 2011.
 Focus on the challenge of reducing poverty and income inequality in South Africa.

a) Satisfaction of basic needs

 All people have certain basic needs without which life would be impossible:

 Food, clothing, and housing

 SA's social security grants is the main source of income for those (people) who are in need.
 The poorest 20% of the population received the largest portion of these grants.
 Many households receive benefits in kind.
 Free water and electricity, housing and school feeding.
 Access to clean water, energy, sewerage system, roads, and housing has improved the quality of
life of millions of people.

 Health Care
 The government focus on primary health care.
 Poor people receive free hospitalization, medicines, etc.

b) Development of the economy

 Regional Development
 SDI's (Spatial Development Initiatives) - is spatial areas that offer particular advantages to mining,
manufacturing and other businesses.
 The advantages include the presence of existing or potential infrastructure and specialization of
products and / or services.
 Businesses in the SDIs can also qualify for a variety of financial assistance, which, for example.
based on establishment costs, number of people employed and skills training.
 SDIs are regarded as regional development programs because provincial and local authorities are
responsible for them.

 Export Industries
 IDZ (Industrial Development Zones) - it is industrial areas that were created for a specific purpose,
physically enclosed and linked to an international airport.
 Five (5) IDZ has been already approved: Coega (steel and auto components) East London (motor
vehicles) Gauteng (high tech and light industries) Richards Bay (coal) and Saldanha Bay (steel).

 International competition / Global competitiveness

 IMS (Integrated Manufacturing Strategy):it was established in 2001.
 SA's businesses need to compete to succeed internationally, and therefore the above plan was
established.

c) Development of human resources

 Economic development emphasizes an increase in the capacity of the population to produce more
goods and services.
 e.g., After 1994 education were served equally for all.
 SETAs were established to facilitate vocational and technical training.

d) Promoting /Advancing freedom of choice

 For real development, people should be free to choose (e.g., their jobs and careers)
66
  The Employment Equity Act (no. 55 of 1998) prohibits unfair discrimination.
 The Consumer Affairs Act (No. 71 of 1988) protects the rights of consumers.

e) Government intervention in the economy

 The South African government's intervention in the economy for three reasons:
 To strengthen the functioning of markets
 To promote economic growth and development
 To ensure a redistribution of income and wealth

Analyse the marginalised people in South Africa and explain the effects of marginalisation.
Marginalisation describes both a process, and a condition, that prevents individuals or groups from full
participation in social, economic and political life. As a condition, it can prevent individuals from actively
participating. There is a multidimensional aspect, with social, economic and political barriers all contributing
to the marginalisation of an individual or group of individuals. People can be marginalised due to multiple
factors; sexual orientation, gender, geography, ethnicity, religion, displacement, conflict or disability.
Poverty is both a consequence and a cause of being marginalised.

THE IMPORTANCE OF INDIGENOUS KNOWLEDGE SYSTEMS

IKS…
are a complex set of knowledge, skills and techniques.
that exist and have been developed around specific conditions in populations and communities,
indigenous to a particular area.

IKS IS IMPORTANT FOR

ECONOMIC DEVELOPMENT PROBLEM – BOTH LOCAL THE LIVELIHOOD OF

DEVELOPMENT PROCESSES ON SOLVING COMMUNITIES THE POOR
3 LEVELS STRATEGIES AND THE The lives of the rural
Rural IKS address FOR LOCAL GLOBAL poor depend on
communities poverty in local COMMUNITIES COMMUNITY specific skills and
depend on IK for communities, and Local The impact of knowledge essential
survival. is recognised, communities sustainability for survival
valued and utilise IK to could be effective
appreciated address many if they adapted to
national and problems that local indigenous
internationally. concern them, practices.
Eg pest and
weed control.

TOPIC 10 CONTENT CONTENTS DETAILS FOR

67
 TEACHING, LEARNING AND
ASSESSMENT PURPOSES
The composition of South
Money & Banking Africa’s money and its Banking

• Money  Briefly discuss the value of

- Description of Money money
- The value of money  Briefly discuss the stabilising
- Functions of money of the value of money
- Money-associated
instruments
- Stabilizing the value of
money

• Banking  Briefly discuss credit

- The basic principles of creation
credit creation  Discuss interest rates in
- Interest rates detail
 Types of interest rates
 Factors influencing interest
• Central banking rates
- Monetary policy
- Definition ● Loan amount
- Purpose ● Duration of loan term
● Creditworthiness
● Economic conditions

Monetary policy  Discuss in detail the aims of

- Interest rates monetary policy
- Cash reserve  Briefly discuss the monetary
requirements policy instruments
- Open market transactions  In depth discussion of the
- Moral suasion basic functions of the Central
bank
 Evaluate the SARB's
inflation targeting policy

Bank failures and consequences

GRADE 11 ECONOMICS

68
 PAPER 1

ECONOMIC PURSUITS

TOPIC: 10 MONEY AND BANKING

Candidates should cover the following:

Money Banking Central banking

Definition of money Basic principle of credit creation

Value of money Interest Rates Basic functions of money
Stabilizing the value of money Monetary Policy

Vocabulary List

Learners must first describe the following concepts and write it in their notebooks:
(Some of these terms may be found in your grade 10 notes)
Money Interest Rate
Store of value Repo Rate
Unit of account Micro Loan
Deferred payment Central bank
Deposit money Cash Reserve
Financial intermediary Monetary policy
Credit Instrument Open market transactions
Loan Liquidity
Exchange value Risk
Inflation Invest
Consumer Price Index (CPI) Capital
Credit Creation Credit
Deposit
Shareholder
Depreciation

Definition of money
Is something that is generally accepted and serve as medium of exchange.
Not only important for people but also for banks.

THE VALUE OF MONEY

Refer to money's exchange value. Money's value should remain relatively stable ...

Exchange value - refers to what money can buy. Depends on prices of goods and services. When prices
rise it decreases the value of money and the when the value of money rise it because the prices fall.

Quantity theory of money - According to the theory, when the amount of

money increases, ceteris paribus, prices will rise and therefore the value of
money will decline. In other words, if the amount of money increased by 15%, all other things equal, the
value of money will fall by 15%. Is it described by the following equation: M = P, where M = the quantity of
money and P = the average (or general) price level.
69
Note: The general price level can be calculated by dividing the amount of money
(M) by the number of transactions in the economy (T)

M
P=T

The velocity of circulation of money - the rate at which money circulates. If the velocity of money doubles
the effect is exactly the same as when the quantity of money doubles.

Stabilising the value of money - Consumers and producers find it very difficult if the value of money
changes in big leaps because it leads to uncertainty.

The relationship between the value of money and prices - Implies when the value of money, ceteris
paribus, is expressed by the prices of goods and services. If prices rise, the value of money declines, and
vice versa. This is an inverse relationship.

Measurement of the value of money - Measure the value of money by looking in the real economy how the
prices change over time. Use price indexes. Of these, the most important is the Consumer Price Index
(CPI) and prepared by Statistics South Africa (SSA). The CPI measures the change in the average price of
goods and services purchased by a typical urban household. Specifically measure changes in the cost of a
basket purchased by urban households

Inflation - Inflation is defined as a continuous increase in the general price level over a specific period. The
CPI shows inflation for consumers. The lower the inflation rate, the better it is for the consumer and how
higher this is how disadvantageous for the consumer. It is the responsibility of the South African Reserve
Bank (SARB) to stabilize the inflation rate. The SARB has an inflation target of between 3% and 6%.

DEFINITION OF MONEY

 Is something that is generally accepted and serve as medium of exchange. Not only important for
people but also for banks

FUNCTIONS OF MONEY

Medium of exchange –
 is the most important role.
 Workers exchange labour, shops exchange goods, factories and farmers exchange products for
money.
 If not such a medium exchange of goods for goods would have to be exchanged - barter

Bearer of value –
 Individuals, businesses keep their money
 Income is held to make payments and buy goods and services
 Also used to store personal wealth
 If money keeps its value it is served as value of money

Unit of account –
 Goods and services have always a price - expressed in terms of the standard of money in this case
rands and cents
 If prize is awarded to something, money therefore serves as unit of account
 Also, when transactions are recorded in a business's books.
 Benefits:
♦ Trade simplified
- avoid chaos in trade
♦ Relative values of

70
 goods and services are expressed
- If a shirt cost R120 and shoes R240 it means the shoes are 2 times more expensive than the shirt

Standard of deferred payments -

 Money used as a store of value, transactions are often arranged to that goods and services that are
 bought now are paid for pay later.
 E.g., Furniture is paid in monthly instalments over a period
 If it is no longer allowed to a lot of businesses will not be able to sell goods
 Modern economy is based on the function
 Keep close relationship with extension of credit

MONEY- ASSOCIATED INSTRUMENTS

Sometimes considered as money:

Cards.
Consumer cards – issued by consumer organisations and retailers and gives consumers access to credit.
Bank transaction cards - used to withdraw cash or to deposit at cash ATM’s and to transfer deposit money
between accounts or to pay bills electronically
Credit Cards -to creditworthy customers given to by banks
Debit cards - issued to clients who maintain cash balances on their accounts.

Internet Banking - Clients access their accounts through the

Internet website of the bank. Can transfer money to other accounts.

BANKING

Banking institutions deal in cash and credit. They lend the funds deposited with them, hold cash
reserves and investments.

PRINCIPLE OF CREDIT CREATION

When an accountholder deposit money into their bank accounts banks money assets increase of banks but
liabilities increase by the same amount. Banks must hold cash reserves if the accountholder wants to
withdraw it. Keep only a small portion e.g., 10% cash reserve and most of the other percentage (90%) is
used to lend out and invest. Banks must hold cash in their safe and with the SARB.

71
INTEREST RATES

Definition:
Is the price that borrowers must pay for the use of cash that is not their own, and the return (income) a
lender enjoy for deferring consumption, or in other words, by parting with their liquidity. Interest is usually
expressed as a rate (percentage).

Repo rate: is the rate at which the central bank of a country lends money to commercial banks in the
event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Prime interest rate: The prime rate (prime) is the interest rate that commercial banks charge their most
creditworthy customers, generally large corporations.

Fixed interest rate: A fixed interest rate is an unchanging rate charged on a liability, such as a loan or
mortgage. It might apply during the entire term of the loan or for just part of the term, but it remains the
same throughout a set period.

Variable interest rates: A variable interest rate (sometimes called an “adjustable” or a “floating” rate) is an
interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark
interest rate or index that changes periodically.

MICRO-LENDING ACTIVITIES

Micro-lenders lent money over short periods and ask very high interest rates. Borrowers must make sure
that a micro-lending business is accredited.

Die Micro-Finance Regulatory Council (MFRC)

Founded by the state in late 1990s to regulate Micro lenders and to protect borrowers.

Services
LOANS
Provides loans to R10 000 (36 months)

Two Type micro lending namely Cash Loans(1 to 6 months) and Term loans (6 to 36 months)

Conditions for any loan includes:

72
  Emergency Financing (1 to 6 months, Education Needs (12 months), Debt consolidation (12 to 24
months), Furniture / home improvement (24 months)

Insurance:
Insurance to cover loans on death and other types of insurance such as Costs and funeral cover

CENTRAL BANKING

The South African Reserve Bank (SARB) was founded in 1920 with the primary function to protect the
value of the currency (the rand). Is a private company with limited liability and its independence is protected
by the Constitution.

BASIC FUNCTIONS

Bank of issue
 Sole right to issue notes and coins
 Notes are printed from 1963 by the
 South African Bank Note Company
 Coins coined from 1989 by the South African Mint Company
 Both of these companies are subsidiaries of SARB

Government’s banker
 Render services to the state as commercial banks do to their customers
 Government Departments deposit their funds at SARB and draw checks against their accounts
 Provide loans, foreign exchange and financial advice to the state

Custodian of gold - and other foreign reserves

 Custodian of country's gold and foreign exchange reserves.
 A country should have enough reserves of gold and foreign reserves to pay for imports from other
countries.
 Foreign exchange earned by the sale of gold has to be surrendered to the Bank in exchange for
Rand’s
 Commercial banks can hold small amounts of foreign exchange because they are allowed to be
authorised foreign exchange traders

Banker of other banks

 All banks keep accounts with the SARB’ for the reasons of
 Cash reserve balance’s – Cash reserves that commercial banks by law must keep is held at the
SARB.
 According to the Banking Act the SARB are authorized to change these balances
 Bank of settlement - Banks owe each other money when cheques are paid and when the cheques
are paid in their accounts compensation takes place
 Lender of last resort – Known as the repurchase tender system
 Under this system banks tender weekly to borrow money through Repurchase agreements. They
offer
 highly liquid securities to the SARB and undertake to repurchase them after a week (7 days).

73
  When they get repaid after a week, they pay the loan amount plus the repo rate of interest.
 Supervision - The Registrar of Banks, at the SARB, ensures that banks are managed in terms of
the Banks Act and certain capital and liquidity requirements are met.

MONETARY POLICY FUNCTOINS

Definition:
Monetary policy consists of decisions made by the monetary authorities to influence the interest rates and
the supply of money (or credit) in the economy.
Aim: Done to ensure economic growth, foreign exchange and price stability and full employment

Monetary policy instruments

Interest rate changes

Commercial banks borrow money from the Reserve Bank. Use the repurchase tender system. This is
where the repo rate kicks in.

Open Market transactions

Can increase or decrease the supply of money in circulation directly buying or selling government securities
in the open market to. This is called open market transactions.
If SARB wishes to limit credit they will sell bonds. Buyers pay by cheques and these cheques are deposited
and the deposit money will flow from the banks back to the SARB. Banks have less money to lend and
cannot lend as much credit as before.
If the SARB would like to encourage the expansion of credit, they buy bonds in the open market. Money
flows back to the banking system and is used to create credit.

Cash reserve requirements

The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than
lend out or invest. This is a requirement determined by the country's central bank.

Moral suasion
SARB can, through consultation and moral persuasion, influence the banks to act in a desired manner,
depending on the prevailing economic conditions.

BANK FAILURES AND CONSEQUENCES

Reasons for bank failures relate typically to banking risks

Credit risk Banks 'business is to lend money.

When there is doubt about repayment of loans the banks’ ability to
pay back deposits is questioned, e.g. The collapse of Saambou bank
Liquidity risk Banks borrow over short periods and lend it out over
long periods. If a large depositor withdraws his money
will rumours of a liquidity squeeze will encourage other depositors to
do the same.
Interest rate Interest rate changes on which banks are not prepared cause
risk problems. Deposit rates can immediately be reduced but not lending
rates and this put pressure on profits. Losses will cause depositors to
withdraw their money
Investment risk Banks invests some of their funds also in properties. When
interest rates rise there is a decrease the market value of properties
and thus is investment. The losses must be recovered from profits and

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 depositors withdraw their money to be safe.
Capital Risk Banks must maintain capital and undistributed profit
reserves and, if a bank's capital reserve ratio break outside the
boundary shareholders can sell their shares.
Depositors do not feel comfortable and withdraw their money

Consequences of bank failures

Depositors When a bank fails there, the bank will stop repaying deposits when it
run out of cash
Has no more assets to make use of the SARB's repurchasing facility.
SARB appoint a trustee to sell the bank's assets and pay the
proceeds to return to depositors.
Shareholders Depositors will or will not get back their full deposits
Shareholders come last to recover proceeds from a bank failure.
The board will attempt to sell the bank as a going concern when
there are signs of problems.

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