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
How much inequality is accepted
Too much inequality. Gross inequality in the distribution of income and wealth leads to poverty and feelings of unfairness and of being excluded. the feelings cause doubt and dispair and often result in inactivity, making people dependent on social welfare or even crime.
Too little inequality. In terms of the law of diminishing marginal utility an equal distribution of income would be ideal. However, incomes are also incentives. In order to get people to work harder, accept greater responsibility, develop new ideas, undertake long and difficult training, and carry out unpleasant tasks, it may be necessary to offer higher rewards
international redistribution methods
taxation Cash benefits benefits in kind labour market policies macroeconomic policy
Cash benefits
In SA, old-age pensions, disability grants, child support grants, and unemployment grants are the most important cash benefits
Benefits in kind
include provisions of healthcare, education, school meals, protection, municipal services, and insurance. In SA, limited quantities of free electricity and water are also provided
labour market policies
minimum wages, anti-discrimination legislation, and training subsidies reduce income inequality. In SA, similar policies and laws are in force
macroeconomic policy
Such policies influence the distribution of income and wealth in a number of ways. for example, measures to create employment may benefit low-income households and regional development policies reduce geographical inequalities in income and wealth
Redress redistribution methods
BBBEE
land restitution and land redistribution
Property subsidies
BBBEE
The pinnacle of the government’s redress programme was the publication of the Broad-Based Black Empowerment Act no. 53 of 2003. this act provides the foundation for the transformation of the South African economy so that the numbers of black people who own and manage the country’s economy can increase significantly and racial income inequalities will decrease substantially
Land restitution
originated from the constitution. the purpose is to return the land to those who lost it as a result of racially discriminatory laws and practices after 19 June 1913
Land redistribution
focuses on land for residential and productive use. It is based on a willing- buyer willing- seller principle
Property subsidies
Subsidies are used to help beneficiaries acquire ownership of fixed residential property. The government’s housing subsidy scheme provides six funding options to all eligible people earning less than R3 500 per month. Fixed residential properties are ideal wealth assets because they can also be used as collateral for loans of any kind
Meaning of economic growth
an increase j=in the production of goods and services in a country over a year in physical terms meaning if you count them there must be more.
How is economic growth measured
Economic growth is measured and expressed in real GDP
Importance of economic growth
The achievement of high growth is one of the five main objectives of macroeconomic policy. The significance of economic growth lies in its contribution to the general prosperity of the community
Method of growing the economy
SA’s approach to growing the economy is embodied in its National Growth Plan
Increases in productivity
Output increases while input remains the same
Output increases while input declines
Output increases faster than the input
Output remains constant while input declines
Output declines at a slower rate than the input
How are productivity improvements achieved
By managing organisational activities more purposefully
Availability and utilisation of factors of production
In terms of the labour force, growth will occur if the ratio of the working population to the total population increases
In terms of capital, capital widening and deepening should be pursued to achieve growth
In terms of land and natural resources an increase is rarely possible but land can be used for new purposes that will render better returns
Technological change
Technology is any instrument or technique product or process, physical equipment, or method whereby something is made or done, which extends the human ability
Technology refers to the ways in which goods are produced and services are rendered. If new ways are discovered so that more goods and services can be produced with similar inputs, technology has improved. Most of the time, new technology is acquired through capital investments for example cell phones and the internet and electronics
What are effective policies
mean policies that will ensure thAT pre- set objectives are met. Government should have policies in place that will realise for example more exports, growth in tourism, and the expansion of manufacturing industries
What are efficient administration
the policies are executed in a manner that minimizes time, wastage, inconvenience, and costs
What increases transaction costs for enterprises
Nepotism, corruption, and the indifference or laziness
How are investments determined?
Political factors such as political stability, the freedom of doing business, and low crime levels
Economic factors such as profitability, taxes, and interest rates. The level of interest rates is critical
What are the important constraints on economic growth in South Africa
HIV and AIDS
Inadequately qualified labour
Low levels of savngs and investments
Low level of savings and investments
savings
South African savings amount to about 15% of GDP. Household savings, are very low- less than 1% of disposable income. Too grow at an annual rate of 6% SA needs a savings rate of about 21% of GDP
Low level of savings and investments
Investments
South Africas fixed investment rate would have to increase from 15% to at leats 25% if the economy is to grow at more than 5% per annum. Because foreign direct investment is only about 3% domestic savings have to provide most of the funds
Inadequately qualified labour
school education
66% of South Africans 20 years and older in 2009 had only completed 10 years of schooling. School literacy and numeracy are low in terms of international standards. The numbers of senior certificates candidates qualifying for university admission for a bachelors degree was only 20% of those who passed
Inadequately qualified labour
learnerships
The numbers writing and passing learnerships trade tests in 2009 were increasing, but only 40% of those who wrote passed. the numbers that qualify are altogether inadequate for the needs of the economy
HIV and AIDS
working age population
the rate of infection is higher among people in their economically active years. Once infected, they become less productive and if they die thei knowledge and experience are lost prematurely
HIV and AIDS
medical costs
the costs of medical treatment for those who are HIV poitive is escalasting at an enormous raate. This will impact increasingly on savings, taxes and profits. eventually, economic growth may come to a halt as the surviving population struggle to continue working and care for the ill
Non- monetary factors
four factors
personal freedom- the freedom to visit friends, to travel, and to voice an opinion
Freedom from fear of violence- if a person does not feel safe walking the streets or even at home, then no number of microwave ovens or CD players will compensate for this loss
The working environment- how many hours and how hard people have to work
The social and cultural environment- to speak the language of your choice and to practice your religion
Factors that must be considered with regard to the standard of living
the size of the population
Per capita income
Assets and location
Non- monetary factors
