Topic 1: Economic growth and development: economic growth Flashcards
What is wealth?
Wealth is assets that are owned by individuals enterprises and the state. Anything that satisfies a want is an asset and therefore wealth
Physical wealth
Assets such as clothing, furniture, houses, vehicles and land
Financial wealth
Assets such as cash, money, investments, shares and assurances
Wealth renders income
Wealth assets, both physical and monetary, render income. In fact, their value often depends on the income they render. To obtain a value for an asset, it’s income is capitalized. Capitalized means dividing the income by desired interest rate
Wealth is measured at a specific date
Wealth is measured at a specific date because it’s value fluctuates. The asset shown above can repeat the same profit year after year, but if the interest rate increases its value will decrease and vice versatile. The value of the family home will increase complementary to the inflation rate in building costs. The value of the family car will depreciate year after year because of wear and tear
Wealth needs to be maintained
Physical assets need to be cared for: houses must be painted and timber need varnishing. Farm land needs to be fertilized and cattle require food and water must be dipped. Financial wealth also needs attention, which requires time and knowledge. A notice deposit will need to be moved to where it can earn the highest interest. Investments in shares need to be reconsidered as risks and returns change. All this maintenance costs time and money
Wealth may have strings attached
Physical assets are often attached. The family house is usually mortgaged and the motorcar and the furniture may be on hire purchase. Financial assets are often ceded
Source of wealth
Main sources of wealth are inheritance, savings, entrepreneurial activities and work
Source of wealth
Individual savings
When they abstain from consuming all their income. They accumulate wealth when they hold onto cash, make deposits, pay premiums on assurance policies and carry out investments
Source of wealth
Businesses save
When they do similar things with their income that individuals do. The physical wealth they acquire may also include things such as buildings, machines and tools
Source of wealth
The government saves
When it budgets for current surplus, meaning that its current income exceeds its current expenditures. The current surplus is used to acquire physical wealth such as buildings, equipment and infrastructure
The process of wealth creation
Wealth is created by means of savings. Even if wealth is inherited, someone from a previous generation must have saved money for the purpose of buying the asset in question
Distribution of income
We all know that people can survive without wealth, but no one can survive without income
Income earned
Total income of individuals and households is transfer payment such as pensions. However income among households is often distributed unequally
Reasons for the unequal distribution of income
Unequal holdings of wealth:As wealth generates income in the form of profits, interest, and dividends, differentials in wealth cause difference in income
Differences in the composition of households: some households are big and others are small
Differences in skills and qualifications: those with advanced skills are likely to earn high incomes
Discrimination: the income of some groups is adversely affected by discrimination in terms of employment opportunities, pay and promotion chances
Inequality of income
In SA, during colonialism and apartheid, black people were subjected to inferior education and they were not allowed to be trained as artisans. They were not allowed to do professional work in white areas and were barred in general from management positions. Their incomes were less than white peoples income. Black people earned no income from wealth because they had no wealth . In general, people with higher income are more able to save
Inheritance
Since time immemorial, it was customary for wealth to be passed on from one generation to the next. The inheritance of wealth is only possible if people have a general right to own property and if the law protects such a right. For many decades in South Africa, only whites had property rights in the sense that they were allowed to own land and businesses outside the homelands. Black people were denied this right. In fact, many people were forcibly moved to homelands and thus deprived of the little wealth they had.
The market system
The market system rewards successful people. Generous rewards motivate people to use and develop their entrepreneurial talents, acquire better skills, work hard and save. In the market system, it is essential that sizable pockets of wealth are available and can be used to combine with other factors of production to produce more goods and services and employ more people. Wealthy people are essential for economic growth and development
How to measure inequality
The Lorenz curve and the Gini coefficient
Two methods to measure the extent of income inequality
the Lorenz curve and the Gini coefficient
The Lorenz curve
The degree of income inequality is shown by the deviation from the line of equal distribution. the greater the distance between this line and the Lorenz curve, the greater the degree of inequality
Method of measuring the degree of inequality at different stages of production
the area between the line of equal distribution and the Lorenz curve is called
The area of inequality
The Gini coefficient
is calculated from the information provided by a Lorenz curve and it measures precisely the degree of inequality shown on a Lorenz curve
How is the Gini index
When the Gini coefficient is multiplied by 100
