Economics chap 22

Question 1

Economic growth

Answer 1

Economic growth is traditionally defined as the annual rate of increase in total production or income in the economy
First, the production or income should be measured in real terms, that is, the effects of inflation should be eliminated. Second, the figures should also be adjusted for population growth

Question 2

Positive economic growth

Answer 2

Positive economic growth actually occurs only when total real production or income is growing at a faster rate than the population. In practice, however, economic growth is usually simply measured by determining the annual growth in real production or income.

Question 3

Some problems associated with GDP

Answer 3

GDP and the other national accounting totals all have certain shortcomings
(“grossly deceptive product” or the “grossly distorted picture”

Question 4

Non-market production

Answer 4

It is difficult to measure or estimate the value of activities that are not sold in a
market. This problem applies, for example, to the production of goods and services by the government. It is assumed, for example, that the value of the output of a public servant is equal to his or her salary. Another example of non-market production is farmers’ consumption of their own produce

Question 5

Unrecorded activity

Answer 5

many transactions or activities in the economy are never recorded. Such transactions or activities are described by terms such as the unrecorded economy, the underground economy, the shadow economy and the informal sector Unrecorded activities range from smuggling, drug trafficking and prostitution to cash transactions aimed at evading taxation(black market). The existence of such unrecorded activities may result in a serious underestimation of the value of GDP. As a result, GDP figures are nowadays adjusted by including estimates of the total value of unrecorded activity

Question 6

Data revisions

Answer 6

the original estimates are frequently adjusted as new and better data become available. This may be quite frustrating for analysts, since they are never sure whether or by how much the figures are going to be revised

Question 7

Economic welfare

Answer 7

Many economists argue that GDP and the other national accounting totals are not good measures of economic welfare. They point out, for example, that unwanted by-products (also called negative externalities) such as pollution, congestion and noise are not taken into account. They argue that the value
of these “bads” should be subtracted from the value of “goods” included in GDP
Growth in real GDP may also be accompanied by an increase in the inequality of the distribution of income.

Question 8

The business cycle

Answer 8

The business cycle is the pattern of upswing (expansion) and downswing (contraction) that can be discerned
in economic activity over a number of years. One complete cycle has four elements: a trough, an upswing or
expansion (often called a boom), a peak, and a downswing or contraction (often called a recession).

Question 9

Causes of business cycles

Answer 9

Classical economists
Keynesians
Structuralist or institutionalist

Question 10

Classical economists

Answer 10

Argued that the source of fluctuating in the growth of the economy are due to external factors that are outside the market system since markets are inherently stable
Jevons-changes in weather conditions affecting agricultural activity which was one of the main economic activity of the 19th century
The monetarists, for example, ascribe the fluctuations to faulty or inappropriate government policy which results in fluctuations in the rate of increase in the money stock. These fluctuations then cause changes in the rate of increase in prices, production and employment.

Question 11

Keynesians economists

Answer 11

Keynesian economists, on the other hand, do not believe that the business cycle is caused by exogenous factors that governments have a duty to intervene in the economy by applying appropriate monetary and fiscal policies
they believe that the business cycle is an endogenous phenomenon. For example, if business conditions improve, such an improvement is reinforced by mechanisms such as the multiplier. A strong upswing therefore results. However, the upswing carries the seeds of its own destruction. As the economy grows, interest rates increase, imports increase, foreign exchange reserves fall, and so on, until a peak is reached. The whole process is then reversed and an economic decline sets in. As the economy declines, interest rates fall, imports decrease, foreign exchange reserves increase, and so
on. This continues until the economy reaches a trough.
government intervention to smooth the peaks and troughs as far as possible. When the economy is in a cyclical downswing, expansionary monetary and fiscal policies are recommended.
When the economy is booming, restrictive measures are proposed.

Question 12

Structuralist or institutionalist

Answer 12

Changes in economic fluctuations are caused by various
structural or institutional changes. Changes in structure or institutions appropriate economic response will vary from time to time

Question 13

Measuring business cycle

Answer 13

Economists are regularly confronted by people who want to know whether economic conditions are improving or worsening. What people are really asking is where the economy is on the business
cycle. It takes time so to overcome this problem, economists try to identify certain critical variables or indicators that possibly reflect or predict movements in overall economic activity. These variables are called business cycle indicators.

Question 14

Business cycle indicators

Answer 14

Leading indicators
Coincident indicators
Lagging indicators

Question 15

Leading indicators

Answer 15

which tend to peak before the peak in aggregate economic activity and reach a trough before the trough in aggregate economic activity. They thus give advance warning of changes in aggregate economic activity
1. No. of new cars sold
2.No. of new companies registered
3.Merchandise exports.

Question 16

Coincident indicators

Answer 16

which tend to coincide with movements in aggregate economic activity

Question 17

Lagging indicators

Answer 17

tend to lag such movements

Question 18

To establish which indicators are leading indicators

Answer 18

economists examine the movements of different variables in relation to the overall changes of economic activity.

Question 19

Sources of economic growth

Answer 19

These sources may be grouped into two broad categories: supply factors and demand factors. Economic growth requires an expansion of the production
capacity of the economy, as well as an expansion of the demand for the goods and services produced in the
economy.

Question 20

Supply factors

Answer 20

The supply factors are those which cause an expansion in production capacity, also called the potential output of the economy. As you have probably guessed, they relate to the factors of production: natural resources, labour, capital and entrepreneurship.

Question 21

Natural resources

Answer 21

Minerals have to be discovered, either by accident or through exploration; arable land has to be cultivated, and so on. In addition, new techniques or price increases may, for example, make it profitable to exploit certain mineral deposits which were previously impossible or unprofitable to exploit
On the other hand, minerals are non-renewable or exhaustible assets and the deposits may become exhausted or too expensive to exploit.

Question 22

Labour

Answer 22

size and quality of the labour force. The size of the labour force depends on factors such as the size and the age and gender distribution of the population. The growth of the labour force depends on
the natural increase in the population and migration between countries
quality of the labour force. The quality of the labour force depends on factors such as education, training, health,
nutrition and attitude to work.

Question 23

Capital

Answer 23

quantity and quality of the country’s capital (ie the manufactured means of production such as buildings, machinery, equipment and roads)
Capital widening occurs when the capital stock is increased to accommodate an increasing labor force
Capital deepening occurs when the amount of capital per worker is increased, that is, when the growth in the stock of capital is greater than the growth in the number of workers. Such a situation is referred to as an increase in the capital intensity of production.
The quality of capital is increased by applying new technology to capital equipment, skilled labor and are tech interdependent. Additional capital should be financed.

Question 24

Entrepreneurship

Answer 24

A country needs people who can identify opportunities and exploit them by combining the other factors of production. The entrepreneur is the driving force behind economic growth
Entrepreneurial talent should therefore be fostered. At the very least there should be no obstacles (such as unnecessary laws, rules and regulations) that could act as a deterrent to the development of entrepreneurship. If the necessary entrepreneurship is lacking, the government may also have to act as an entrepreneur, particularly in the earlier stages of economic development.

Question 25

Demand factors

Answer 25

As we have seen, the total demand for goods and services consists of consumption demand (C), investment
demand (I), government demand (G) and net exports (X – Z). The various components of aggreg-ate spending or
demand may be used to distinguish between three sets of demand factors:
1.Domestic demand, which consists of consumption (C), investment (I) and government spending (G)
2.Export demand (X)
3.Import substitution, which involves attempts to reduce imports (Z)
Economic growth can thus be stimulated by a rise in domestic demand (C + I + G), a rise in exports (X) or a reduction in imports (Z)

Question 26

Domestic demand

Answer 26

In principle it is always possible to increase domestic demand by increasing government spending. Any expansion in
domestic demand should, however, be matched by an increase in supply, otherwise it could result in inflation and
balance of payments problems. This is the major weakness of the strategy of inward industrialization that has often
been propagated in South Africa

Question 27

Inward industrialisation

Answer 27

is essentially a growth strategy that is based on meeting the wants of the
rapidly growing poor population in the urban areas of South Africa. These wants, which include the need for basic consumer goods (food, clothing, etc), low-cost housing, sanitation, roads and electricity, constitute a large potential source of demand

Question 28

To transform these wants or needs into an effective demand

Answer 28

the proponents of inward industrialization propose a redistribution of income in favour of poorer households (to provide them with the necessary purchasing power) and large-scale government investment in housing and infrastructure such as electricity.

Question 29

Exports

Answer 29

An increase in exports raises the growth rate and also relieves the balance of payments constraint. It is therefore generally accepted that the promotion of exports is a sensible growth strategy.

Question 30

South African government can take certain steps to stimulate exports

Answer 30

From a policy point of view, the main problem is that the demand for exports is largely determined by economic conditions in other countries
These steps include the establishment or maintenance of a realistic exchange rate of the rand against other currencies (or perhaps even a slightly undervalued domestic currency) and the provision of finance, marketing and other assistance to South African exporters.

Question 31

Import substitution

Answer 31

reduce imports by manufacturing previously imported goods domestically. This is called import substitution, and it played a significant role in the initial growth of the South African manufacturing sector. Nowadays many of the consumer products that were previously imported are manufactured in South Africa. the composition of imports has changed – the level of imports has not been reduced.

Question 32

Import substitution has a number of other drawbacks

Answer 32

To make domestic production viable, local firms usually have to be protected against foreign competition during the initial stages. This protection (eg by means of import quotas or high import tariffs) should be withdrawn once local manufacturing has been established. In practice, however, the protection tends to continue, with the result that local manufacturing often becomes an inefficient and high-cost exercise
Firms established to manufacture previously imported goods locally tend
to neglect export opportunities and, being used to protection, seldom develop into enterprises that can compete
effectively in the international market.

Question 33

Some fundamental causes of low economic growth

Answer 33

Institutions
a. Humanly devised constraints shaping human interaction and providing the incentives to which people to act
b. Political, legal and regulatory framework, property rights, laws, constitutions ,traditions and markets
Geography
a. Physical and geographical environment including climate and ecology
b. Climate may affect productivity and health
Culture
a. Societies differ culturally due to differences in shared experiences and religions
b. Culture influences values, preferences and beliefs which in term affects economic performance