Business Cycles
What are the 4 stages of the business cycle?
Upswing, boom, downswing, trough
Name 4 F.O.P's and remuneration's
Land, Labour, Capital, Enrepreneurship
Rent, wages, interest, profit
inflation definition
the sustained increase in the general price level of a wide range of G+S over a period of time.
causes of demand pull inflation
-expansionary monetary + fiscal policies. leads to more spending due to decreased interest rates + decreased tax rates
-credit being easily available
-excessive government spending
Participants in circular flow in open economy
1. Households
2. Businesses
3. Government
4. Foreign Sector (open-economy only)
Define Recession
A decline in real GDP for at least 2 consecutive quarters
Why only add market values when using the production method?
to avoid double counting
Inflation definition
a basket of G+S that an average South African will consume. each item is weighted according to their importance. CPI is measure of the change in price of these G+S.
causes of cost push inflation
-rising labour costs, decrease in productivity in workers
-increase in input costs (oil/electricity). knock-on effect on prices of other goods
-fall in exchange rate leads to price of imported G+S to increase
Real flow
Flow of F.O.P and goods & services
Name two Exogenous variables
climate, technology, variables outside the market system
production method?
primary sector (farming)
+ seconday sector (building)
+ tertoiry sector (services)
= GDP @ basic prices (GVA @ basic)
+ taxes on products
- subsidies on products
= GDP @ market prices
+ primary income from rest of the world
- primary income to the rest of the world
= GNP @ market prices
- consumption on fixed capital
= NNP @ market prices (net national product)
Differentiate deflation and disinflation
negative inflation rate
positive inflation rate that is decreasing
how to combat inflation (demand side)
-monetary policy: increase interest rates, decrease the money supply
-fiscal policy: increase in tax, decrease in government spending
Money Flow
Flow of payment for F.O.P and goods and services
Name two Endogenous variables
change in consumption spending, change in production, Variables inside the market system
income method (GDI)
wages (compensation to employees)
+ profit (net operating surplus)
+ rent (consumption of fixed capital)
+ interest (consumption of fixed capital
=GDP @ factor cost (GVA @ factor)
+ tax on production
- subsidies on production
= GDP @ basic prices (GVA @ basic)
+ tax on products
- subsidies on product
= GDP @ market prices
+ primary income from rest of world
- primary income to rest of world
= GNP @ market prices
-consumption of fixed capital
= NNP @ market prices (net national product)
Name 3 consequences of inflation
-consumers purchasing power is reduced
-R.O.I may be lower. (return on investment)
-benefits debtors (borrowers) at expense lenders
-social and industrial unrest
-those on fixed income are negatively effected
-countries can lose competitive advantage
how to combat inflation (supply side)
-improve productivity of workers
-promote competition to increase efficiency
-improve infrastructure to decrease supply inefficiencies
Leakages and Injections
savings
taxes
imports
investments
government spending
exports
Name one leading, lagging, and coincident indicator
Number of new cars sold; Share price
Retail Sales; Economic growth rate
Unemployment rate; Cement sales
expenditure method
consumption (C)
+ goverment expenditure (G)
+ gross capital formation (I)
+/- change in inventories
+ residual items
= GDE
+ exports (X)
- imports (M)
= GDP @ market prices
+ income from the rest of the world
- income to rest of the world
= GNP @ market prices
- consumption of fixed capital (depreciation)
= NNP @ market prices ( net national product
Name two winners of inflation
- Strong bargaining power
- Debtors (those who owe money)
philips curve (explanation)
-as more people are employed aggregate demand increases
-this leads to increase in production and increase in economic growth
-leads to firms employing more people and therefore a decrease in unemployment rate
-leads to increase demand therefore increase inflation
Relationship between savings and investments
- Households save money through commercial banks in the financial sector. This is a leakage.
- Businesses take that money saved by households out in the form of loans and credit from commercial banks in the financial sector and invest that money into their business. This is an injection.