MEASURING PERFOMANCE OF THE ECONOMY

STUDY UNIT 5

EXPECTED OUTCOMES

Explain the 5 main macroeconomic goals

Explain what national accounts represents

Explain the three ways of calculating GDP

Show how these accounting concepts are linked (GDP,

GNP, NNP)

Explain difference between real and nominal GDP

MACROECONOMICS

The major macroeconomic objectives are to achieve:

High levels of economic growth

High levels of employment

Price stability (low inflation)

Balance of payment stability

Equitable distribution of income

According to the UK government a healthy economy leads to higher

standard of living and greater prosperity for individuals. It also helps
business to be profitable, which generates employment and income.
3

GROSS DOMESTIC PRODUCT

Best measure of how well the economy is doing.

Defined as:

Total value of all final goods and services produced in a

country over a period of one year.

GDP is a flow not a stock

Measured by SARB and Stats SA.

.
4

METHODS OF CALCULATING GDP

There are basically three ways:

THE PRODUCTION/ OUTPUT METHOD

Gross Value Added in various economic activities is known as GDP at factor

cost

EXPENDITURE METHOD

GDP = Private consumption + gross investment + government spending +

(exports imports)

INCOME METHOD

GDP = Compensation of employees + gross operating surplus + gross mixed

income + taxes less subsidies on production and imports.

These are theoretically supposed to yield the same answer.

5

INCOME MEASURES

GDP:

Best measure of the level of economic activity

Potential for creating jobs

GNP:

Measure for standard of living and looking at

performance over time.

INCOME MEASURES

NNP:

Correct measure of economic performance

Takes care of capital consumption.

GDE:

Measures domestic expenditure.

INCOME MEASURES

The difference between GDP and GNP is net factor

income from abroad or net primary income payments
(Payments > Receipts)

GNP = GDP + primary income receipts less primary income

payments

NNP = GNP depreciation of assets.

MARKET PRICES, BASIC PRICES AND

FACTOR COST

Different valuations of GDP will yield different values:

Production method..Basic prices

Income methodFactor cost

Expenditure methodMarket prices

This is due to indirect taxes and subsidies

9

GROSS DOMESTIC PRODUCT

GDP at market price is the value of GDP calculated by

taking the price and quantities of the current year.

GDP at market price = C + I + G + (X - M)

GDP market prices less product taxes add product

subsidies = GDP basic prices

GDP basic prices less production taxes add production

subsidies = GDP factor cost
10

NOMINAL AND REAL GDP

GDP measured at current prices is called nominal GDP

Not a good measure of well being.

If quantities of goods remain the same but all prices

double then GDP will double but economic activity will
not doubled

GDP measure not influenced by changing prices or

inflation is called REAL GDP or constant price GDP.
11

NOMINAL AND REAL GDP

Real GDP is measured by valuing goods using base year

prices.

In SA the base year is 2005

Thus each year GDP is valued using year 2005 prices or

by deflating it with the level of inflation.

This is a good measure of economic growth

12

STUDY UNIT 6

INCOME DETERMINATION IN A
SIMPLE KEYNESIAN MODEL

LEARNING OUTCOMES

List the basic assumptions of the Keynesian macro

model

Explain the three important characteristics of the

consumption function

Explain the equilibrium level of income (using diagrams)

Calculate private consumption expenditure, autonomous

spending, multiplier and equilibrium income.

ASSUMPTIONS OF THE SIMPLE KEYNESIAN MODEL

There are only households and firms

[we have consumption (C) and investment spending (I)]

There is no government.
(Therefore no government spending and taxes)

No foreign trade.
(No exports, imports and exchange rates: Thus no trade policy)

Prices and wages are given

Money supply and interest rates are given

Spending drives economic activity.

KEYNESIAN MODEL

This model consist of only HOUSEHOLDS and FIRMS

Households: consume goods and services

Firms: invest in capital goods

KEYNESIAN MODEL

Given these assumptions Aggregate spending in this

economy is a function of Households consumption and
Investment expenditure.

Thus A = C + I

Therefore in equilibrium Y = A

Implying that Y = C + I

KEYNESIAN MODEL

Total Spending = C + I

Features of consumption spending

Consumption spending is a significant part of aggregate

demand

Constitute a stable proportion of total income.

The relationship between households consumption

expenditure and total income is called a CONSUMPTION
FUNCTION

CONSUMPTION FUNCTION

The consumption function has three major characteristics

Consumption increases directly with income (there is a

positive relationship between the two)

Consumption is positive even if income is zero (case of

dissaving or credit)

An increase in income will result in an increase in

consumption but the increase in consumption is less
than increase in income (part of additional income is
saved).

MARGINAL PROPENSITY TO CONSUME

Thus MPC

C
c
Y

lies between 0 and 1

Can never be greater than 1

0<c<1

MARGINAL PROPENSITY TO CONSUME

Induced
consumption
Autonomous
consumption

CONSUMPTION EQUATION

Consumption equation is

C C cY
Where

= autonomous consumption
c = MPC
C
Y = Income
C = Total Consumption

INVESTMENT SPENDING

The production and purchase of capital goods (building,

plant, machinery, equipment)

Interest rates: This is because a large proportion of

investment spending is financed by borrowing.

High interest rates will result in low levels of investment.

Profit expectations: if probability of making profits are

very high then investment might increase, reverse is true

Unlike consumption, investment is not influenced by

income.

INVESTMENTS

EQUILIBRIUM LEVEL OF INCOME

Equilibrium level of income (Keynesian closed economy

model)

AC I
C C cY
I I
Equilibrium requires that Y A
Therefore Y C I
Y C cY I

EQUILIBRIUM LEVEL OF INCOME

Y cY C I
Y (1 c) C I
C I
Y
(1 c)

EQUILIBRIUM LEVEL OF INCOME

Autonomous
consumption +
Investment

EXAMPLE

Using equations, assume:

C = 100 + 0.8Y
I = 200

Find equilibrium income?

EXAMPLE
A=C+I
A = 100 + 0.8Y + 200

At equilibrium: A = Y
Y = 300 + 0.8Y
Y - 0.8Y = 300
Y (1 - 0.8) = 300
Y (0.2) = 300
Y = 300/0.2
Y = 1500

THE MULTIPLIER

We now want to look at what happens if the equilibrium is

disturbed

This helps us predict what will happen if aggregate

spending changes

Explain what happens (chain of events) if investment

increases by 100 million rands

Show how we calculate equilibrium income if

investment changes by 100m rands.

EXAMPLE 2
C = 100 + 0.8Y
I = 300 (increased from 200 by 100)
A = C + I 100 + 0.8Y + 300
At equilibrium: A = Y
Y = 400 + 0.8Y
Y (0.2) = 400
Y = 400/0.2
Y = 2000
Increase in Y is 2000 - 1500 = 500
Increase in Investment is 300 200 = 100

THE MULTIPLIER (BOX 18-8)

Y
1
multiplier

I
1 c

Y 500

5
I
100

c marginal propensity to consume

1
1
1

5
1 c 1 0.8 0.2

STUDY UNIT 7

KEYNESIAN MODELS INCLUDING

THE GOVERNMENT AND
FOREING SECTOR

LEARNING OUTCOMES

Explain how government spending affects the level of

consumption and equilibrium income

Describe how the introduction of a proportional income tax

affects the multiplier

Explain the impact of fiscal policy in the model

Explain how exports and imports affect the level of income in

the domestic economy

Explain how the size of multiplier is affected by induced

imports.

Analyse the effects of imports and exports on the multiplier

THE SIMPLE KEYNESIAN MODEL WITH A

GOVERNMENT
We consider the impact of government spending (G) and

taxes (T) on:

The level of aggregate spending A

The multiplier

Equilibrium income Y
Determine how G and T can be used as policy instruments
to affect the level of income (Y)

THE SIMPLE KEYNESIAN MODEL WITH A

GOVERNMENT
Government spending (G)

Government spending is essentially a political issue

No systematic relationship between G and Y

(autonomous w.r.t. Y)

G is an INJECTION into the circular flow

GOVERNMENT SPENDING

THE IMPACT OF G ON AGGREGATE

SPENDING

A=C+I+G

Affects the position of the A curve

The slope of the curve remains unchanged

The size of the multiplier is not affected

Equilibrium level of income increases

AGGREGATE SPENDING IN AN ECONOMY

WITH GOVERNMENT

EXAMPLE
C = 100 + 0.8Y
I = 200
G = 500

Calculate and show that equilibrium level of income is

4000

EXAMPLE
A=C+I+G
A = 100 + 0.8Y + 200 + 500

At equilibrium: A = Y
Y = 800 + 0.8Y
Y - 0.8Y = 800
Y (1 - 0.8) = 800
Y (0.2) = 800
Y = 800/0.2
Y = 4000

THE SIMPLE KEYNESIAN MODEL WITH A

GOVERNMENT
Taxes (T) a withdrawal / leakage

Impact of T opposite to that of G

G affects the level of spending and income in a direct

way

T in an indirect way by reducing disposable income,

therefore reducing consumption.

THE SIMPLE KEYNESIAN MODEL WITH A

GOVERNMENT
Assume taxes are a certain proportion of income (t).
[ T = tY)

How will the introduction of T affect:

The level of aggregate spending A (falls)

The size of the multiplier (falls)

The equilibrium level of income Y (falls)

TAXES

TAXES, SPENDING AND INCOME

Taxes reduce disposable income

Disposable income (Yd) = Y - T

Yd = Y tY
= Y(1-t)

TAXES, SPENDING AND INCOME

The introduction of a proportional tax:

Leaves autonomous spending A unchanged

Affects consumption:

Consumption is now a function of disposable

income (Yd) not Y

C = C* + cYd

Look at how this affects the consumption curve.

TAXES AND THE CONSUMPTION

FUNCTION

If c = 0.8 and t = 0.2,

then
Slope = 0.8 (1- 0.2)
= 0.8 x 0.8
= 0.64

TAXES, GOVERNMENT SPENDING AND THE

EQUILIBRIUM LEVEL OF INCOME

SOLVING FOR EQUILIBRIUM INCOME

A C I G
A C cYd I G
Yd Y tY Y (1 t )
A C cY (1 t ) I G
At equilibrium ( A Y )
Y C cY (1 t ) I G
Y c(1 t )Y I G C
Y [1 c(1 t )] I G C
I GC
Y
(I G C ) x
[1 c(1 t )]

[1 c(1 t )]

THE KEYNESIAN MODEL OF AN OPEN ECONOMY

We now introduce the foreign sector into the model

We investigate how imports (Z) (leakage) and exports

(X) (injection) affect:

The level of aggregate spending A

The multiplier

The equilibrium level of income Y.

KEYNESIAN MODEL OF AN OPEN ECONOMY

Exports (X)

The demand for exports depends on:

economic conditions in the ROW

International competitiveness

Exchange rates

No systematic relationship between X and Y in the domestic

economy

We realistically assume that X are autonomous

Introduction of X increases aggregate spending

EXPORTS

KEYNESIAN MODEL OF AN OPEN ECONOMY

Imports (Z)

There is a positive relationship between domestic

economic activity and imports

Can assume that

Imports vary with income (realistic assumption)

Z = mY (INDUCED IMPORTS)

Imports are autonomous

If imports are autonomous then they are shown

diagrammatically as follows:

THE IMPACT OF AUTONOMOUS NET EXPORTS

INDUCED IMPORTS
YA
A C I G X Z
C C c(1 t )Y
Z Z mY
Therefore
Y C c(1 t )Y I G X Z mY
Y c(1 t )Y mY C I G X Z
Y (1 c(1 t ) m) C I G X Z
1
Y
C I G X Z
1 c(1 t ) m
Y A

EXAMPLE 3
Use the following information to answer the following questions
C = 2 500 + 0.5Yd
I = 1 500
G = 2 000
X=
6 000
Z = 5 000 + mY

What is the value of total autonomous expenditure/spending?

If we are told that the tax rate is 20% and marginal propensity
to import is 20%. What is the value of the multiplier in this

EXAMPLE 3

Assume that t=0.2 and m=0.2. What is the value of induced

consumption expenditure/spending at the equilibrium level of
income?

Given that full employment income is reached at a level of

14

300, by how much should we change investment so as to

achieve full employment income?

What is the value of the budget deficit or surplus at the

equilibrium level of income (Assume t =20% and m =20%)

What is the value of Net Exports or trade balance at the

equilibrium level of income assuming taxes = 20% and marginal
propensity to import (m) = 20%

WHAT IS THE VALUE OF TOTAL AUTONOMOUS

EXPENDITURE?

AC I G X Z
= 2500 + 1500 + 2000 + 6000
5000
= 7 000

WHAT IS THE VALUE OF THE MULTIPLIER?

C = 2500 + 0.5Yd
Yd = y T
= y ty

Multiplier

=
=

1
1 0.5(1 0.2) 0.2
1
1 0.5(0.8) 0.2

1
1 0.4 0.2

=
=

1
= y (1-t)
1 c(1 t ) m

1.25

WHAT IS THE VALUE OF INDUCED CONSUMPTION

EXPENDITURE/SPENDING
Equilibrium level of income (Y)

1.25 7000
8750

c(1 t )Y

= 0.5 (1 - 0.2) x 8750

= 0.5 x 0.8 x 8750
= 3 500

BY HOW MUCH SHOULD WE CHANGE INVESTMENT SO AS

TO ACHIEVE FULL EMPLOYMENT INCOME?
Equilibrium level of income should be increase by
14 300 8 750
= 5 550

Therefore Y ( I )
5 550 =

1.25 I

5500
1.25

I = 4 400

WHAT IS THE VALUE OF THE BUDGET DEFICIT

OR SURPLUS
Value of government surplus/deficit

= Government Budget
= Total Taxes Government expenditure
= tY G
= (0.2 x 8 750) 2000
= 1 750 2000
= -250.

WHAT IS THE VALUE OF NET EXPORTS

OR TRADE BALANCE

NX ( X ( Z mY ))
= 6 000 (5 000 + (0.2 x 8 750))
= 6 000 (5 000 + (1 750))
= 6 000 6 750
= - 750

STUDY UNIT 8

MORE ON MACROECONOMIC
THEORY AND POLICY

LEARNING OUTCOMES

Explain the reasons for using AD AS Model.

Explain how changes in AD and AS affect

equilibrium position in the model.

Use the AD-AS model to illustrate and explain the

monetary transmission mechanism.

Explain the impact of monetary and fiscal policies

in the model.

ASSUMPTIONS
The

basic Keynesian cross model typically assumes

that prices are fixed.

The model fails to explain inflation

We relax those assumptions here:

Variable prices

Variable wages

Variable Interest rates

THE AD-AS MODEL

The AD-AS curves are similar to demand and supply

curves.

Based on general price level and total production

Differs from the Keynesian model in that

Explicitly allows for supply conditions

Incorporates a variable price level, P.

THE AD-AS MODEL

The aggregate demand curve

Determined by everything that influences total
expenditure (A), e.g.

Consumption expenditure (C)

Investment spending by firms (I)
Government spending (G)
Taxes (T)
Imports (Z)
Exports (X)

IMPACT OF KEY CHANGES ON THE

AGGREGATE DEMAND CURVE
Change

Impact on AD curve

Price level P increases

Upward movement along the

curve

Price level P decreases

Downward movement along the

curve

Autonomous consumption
increases

Shift to the right

Investment spending increases

Shift to the right

Government spending increases

Shift to the right

Taxes T decrease

Shift to the right

Net exports increase

Shift to the right

Interest rate decreases

Shift to the right

THE AD-AS MODEL

The aggregate supply curve

Upward sloping

Determinants include

Price of factors of production

Price of imported intermediate goods

Productivity

IMPACT OF KEY CHANGES ON THE AGGREGATE SUPPLY

CURVE
Change

Impact on AS curve

Price level P increases

Upward movement along the

curve

Price level P decreases

Downward movement along the

curve

Prices of factors of production

increase

Curve shifts upward to the left

Prices of imported capital and

intermediate goods (e.g. oil)
increase

Curve shifts upward to the left

Productivity decreases

Curve shifts upward to the left

Weather conditions deteriorate

Curve shifts upward to the left

DIFFERENT VIEWS ON THE SHAPE OF THE AS

CURVE: (A) FLAT PART/KEYNESIAN RANGE

Price level

AS

AD2
AD1

Y1

Y2
National output

YF

(b) Vertical Part / Classical Range

Price level

AS

P2

P1

AD2
AD1

Y
National output

Intermediate Range

Price level

AS

P2
P1
AD2
AD1

Y1

Y2

National output

AGGREGATE DEMAND AND AGGREGATE

SUPPLY

MONETARY AND FISCAL POLICY IN THE

AD-AS FRAMEWORK

Monetary and fiscal policy (demand management)

Expansionary monetary policy: rightward shift of the AD

curve

Contractionary monetary policy: leftward shift of the AD

curve

Expansionary fiscal policy: Rightward shift of the AD curve

Contractionary fiscal policy: Leftward shift of the AD curve

SHOW THESE EFFECTS DIAGRAMATICALLY

76

EXPANSIONARY MONETARY AND FISCAL POLICY

IN THE AD-AS FRAMEWORK (POLICY DILEMMA)
Inflation and employment trade-off
BOP problems.

AN INCREASE IN THE PRICE OF IMPORTED OIL

IN THE AD-AS FRAMEWORK (STAGFLATION)

STAGFLATION

AN INCREASE IN PRODUCTIVITY WITHOUT ANY INCREASE IN

REMUNERATION

MONETARY TRANSMISSION

A change in the interest rate changes investment spending

The change in investment spending leads to a change in

aggregate demand

The change in aggregate demand results in a change in

total production, income and the price level

The effectiveness of monetary policy depends on elasticity

of investment to interest rates.

80

THE MONETARY TRANSMISSION

MECHANISM

The way in
which changes
in the monetary
sector are
transmitted to
the whole
economy

STUDY UNIT 9

INFLATION

LEARNING OUTCOMES

Define inflation

Define the consumer price index (CPI)

Use CPI data to calculate inflation rates

Explain why policy makers regard inflation as a problem

Explain the causes of inflation: demand-pull and costpush inflation.

Explain how inflation can be combated

83

WHAT IS INFLATION?

Is a sustained, persistent and considerable increase in the

general price level over a period of time mostly after a year:
(neutral definition)

Can also be described as a decline in purchasing

power or real value of money

Causal definitions:

Is when too much money is chasing too few goods

(monetary inflation)
84

MEASUREMENT OF INFLATION

Most widely reported measure of inflation is changes in

Consumer Price Index (CPI).
It measures the cost of purchasing a market basket of

goods and services by a typical household during a time

period relative to the cost of the same basket during a base
year.
Inflation is therefore a change in CPI.

The annual rate of inflation is computed using the following

formula:

[(CPIc - CPIb)/CPIb] x 100

85

EFFECTS OF INFLATION

Distributive

Income redistributed from creditors to debtors

Redistribute income from private sector to government

Progressive tax system and bracket creep and fiscal dividend

Economic

inflation stimulates SPECULATIVE PRACTICES

Inflation also discourages savings in fixed deposits and

pension funds.

Creates BOP problems

Creates uncertainty and therefore affects investment

86

CAUSES OF INFLATION

Demand-pull: caused by pressure on prices originating

from the buyers side of the market

Excess of total spending (demand) from C, I, X, G

Cost-push: caused by pressure on prices originating from

the sellers side of the market

Increase in the cost of production; labour, cost of

imported capital and raw materials, borrowing,
reduction in productivity, natural disasters etc.
87

DEMAND PULL INFLATION

AD for goods and services

increases

As long as there is excess

capacity in the economy the
increase in the price level is
accompanied by an increase in
production

When

full

employment

is

reached, further shifts in the

AD

curve

lead

to

price

increases only
88

COST-PUSH INFLATION

The cost of producing at

each

level

of

total

production increases

Upward shift of the supply

curve

Increases in the price level

are

accompanied

by

reductions in income and

therefore

increases

in

unemployment
89

COMBATING DEMAND PULL INFLATION

AD has to be reduced

Use contractionary
monetary and fiscal policy

Leftward shift of AD curve

Undesirable

side

effects

include the reduction of of

total production, income or
employment

in

the

economy.
90

COMBATING COST PUSH INFLATION

Contractionary
policy

will

monetary
succeed

in

lowering the general price

level

but

will

increase

unemployment even further

The

appropriate

strategy

would be to raise aggregate

supply

Leftward shift of the supply

curve
91

STUDY UNIT 10

UNEMPLOYMENT

LEARNING OUTCOMES

Define and calculate the rate of unemployment

Identify the costs of unemployment

Distinguish between the different types of

unemployment

Suggest policies to tackle the unemployment problem

93

UNEMPLOYMENT

Definition:

Generally defined as the total number of people willing

and able to work but can not find employment.

People not actively looking for a job are not defined as

unemployed.

94

MEASURING UNEMPLOYMENT

The rate of unemployment can be calculated by finding the

ratio of
# of unemployed people
# of people willing and able to work (EAP)

Unemployment rate = Unemployed workers x 100

Total labour force

95

COSTS OF UNEMPLOYMENT

Costs to an individual:

Loss of income, shock and frustration.

Cause hunger, ill health and even death.

Psychologically unemployment demoralises and results

in low self confidence and self esteem.

Long periods of unemployment may sometimes lead to

divorces and criminal activities.
96

COSTS OF UNEMPLOYMENT

To society

Results in crime, demonstrations and other violent forms

of unrest.

High expenditure on unemployment benefits at the

expense of public goods and services.

Can also lead to overthrow of democratic institutions

97

TYPES OF UNEMPLOYMENT

Voluntary: choosing unemployment because of low wages.

Involuntary unemployment: Case where the unemployed want

to work, but are unable to find work.

All unemployment is classified as Involuntary

unemployment

Seasonal: caused by recurring changes in hiring due to changes

in weather conditions etc

Examples include workers employed during farm harvest

times, festive seasons or summer jobs such as life-guarding at
outdoor pools (beach).
98

TYPES OF UNEMPLOYMENT

Frictional: normal search time required by workers with

marketable skills who are changing jobs, entering or
reentering the labour force.

Due to imperfect information in the labour market

This kind of unemployment is unavoidable and not

considered serious

This kind of unemployment is temporary

99

TYPES OF UNEMPLOYMENT

Structural unemployment:

Involves a mismatch between the sufficiently skilled

workers looking for jobs and the vacancies available

Mismatch may be due to lack of relevant skills

needed for the jobs

Technological unemployment is also part of structural

unemployment.

100

TYPES OF UNEMPLOYMENT

Cyclical / demand deficiency:

Arises due to inadequate effective aggregate demand

and varies with the business cycle (periods of booms and
slump/recession)

During a boom, unemployment is low but when we have

a downturn in economic activity unemployment is high.

101

POLICIES TO REDUCE UNEMPLOYMENT

Unemployment is normally a result of a rapid increase in

the supply of labour being greater than the demand for
labour. Measures should therefore stimulate demand or
restrict supply. SL > DL

Thus use supply and demand side policies

102

UNEMPLOYMENT REMEDIES

Supply side policies:

Limit population growth (effects will be felt in the long

term)

Strict immigration control measures

Structural: improve the quality of labour through training

(reduce unskilled and semi skilled labour)

103

REMEDIES

Demand side policies:

Can be stimulated by raising aggregate demand through

increased government expenditure consumption and
investment spending (through low taxes and interest rates)

Could also spur demand by increasing exports

Encourage the use of labour intensive methods of production

Promote the growth of small businesses and informal sector

(these are normally labour intensive)

Use tax incentives or subsidies.

104

UNEMPLOYMENT AND INFLATION

THE PHILIPS CURVE

AD AS Models shows a negative relationship between

unemployment and the price level.

AD YP ..and Yemployment or
unemployment.

ADYP and Yemployment or

unemployment.

Thus P unemployment, vice versa.

This relationship can be shown using a Phillips Curve.

However, it is important to note that this relationship does
not hold in the long run and only holds with unexpected
inflation (price increases).
105

Study unit 11

ECONOMIC GROWTH AND

DEVELOPMENT
106

EXPECTED OUTCOMES

Define economic growth

Explain how economic growth is measured

Explain and illustrate business cycles

Identify sources of economic growth

107

ECONOMIC GROWTH
Definition: this is the annual rate of increase in total

production or total income in an economy.

Income is measured in real terms or we use constant price

GDP or GNI

Economic growth figures should be adjusted for population

growth to get growth per capita

Thus positive economic growth occurs when total real

production or income is growing at a faster rate than
population growth.
108

MEASURING ECONOMIC GROWTH

Economic growth is equal to:

GDP current year less GDP previous year x 100

GDP previous year

To calculate annual rates of growth we use real GDP, real

GNI, real GDP/GNI per capita

109

BUSINESS CYCLE

This is the downward/contraction and upswing/

expansion in economic activity over time.

They are short run fluctuations in economic activity.

A complete cycle is composed of a trough, an upswing,

a peak and a downswing.

These are shown diagrammatically as follows:

110

BUSINESS CYCLES
Long run
trend

Economic
activity

peak
peak

upswing
upswing

downswing
downswing

trough
trough
Tim
e
111

SOURCES OF ECONOMIC GROWTH

Business cycles are just deviations from long run trend in

economic activity and illustrate the fact that economic growth
is not a smooth process.

Sources of long run growth trends are grouped into

DEMAND AND SUPPLY FACTORS

Increase production or increase demand.

112

SUPPLY FACTORS

These relate to factors of production, natural resources,

labour capital etc

Improve the quantity and quality of labour, capital

entrepreneurship etc.

113

DEMAND FACTORS

The supply side factors can boost growth if accompanied by

sufficient demand for goods and services produced.

Demand can be stimulated by demand management

policies (expansionary fiscal and monetary policies)

Use import substitution strategies (reduce imports)

114