circular flow model

Base year

A year with very small price changes or price fluctuations. The current base year used by the Reserve Bank is 2005

Basic prices (bp)

Used when GDP is calculated according to the production method and represents the production costs of firms

Capital market

Market for long-term financial instruments, for example, bonds, shares

Circular flow model

Continuous flow of spending, production and income between different sectors

Closed economy

An economy that has no foreign sector as a participator

Consumption

the total money households spend on final goods and services

Domestic figures (GDP)

Value of all final goods and services produced within the borders of a country for a specific period

Economic equilibrium

The economy is in equilibrium if leakages are equal to injections: L-Jor S+T+M-I+G+X

Expenditure method

When the national accountants add together the spending of the four major sectors of the economy: C+G+I+(X-M)

Exports (X)

Goods and services produced locally and then sold for consumption outside the borders of the country

Factor market

Market where factors of production are traded, e.g. labour market

Factor prices/factor cost/factor income

These terms can be used interchangeably and refer to the cost of or price paid for the factors of production (land, labour, capital and entrepreneurship) used by firms.

Financial market

The market where both short-and long-term financial assets are traded

Financial sector

Those financial institutions that are not directly involved in the production of goods and services, e.g, banks, insurance companies, pension funds and the JSE

Foreign exchange market

The market in which one currency can be traded for another, e.g. rands for dollars

Goods market

Market where goods and services are traded, e.g. cars, milk (also known as Product market)

Government

the system to govern a state or community

Imports (M or Z)

Goods and services produced in other countries and purchased by local firms or households.

Income method

Gross Domestic Income is derived by adding all income earned by the owners of the factors of production - GDP(I)

Injections (J)

The introduction of additional money into the economy by investment (I), government (G), and payments for exports (X)

Investments

Spending by firms on capital goods

Leakages(L)

Money withdrawn from the circular flow, e.g through savings (S), taxes (T) and import expenditure (M)

Marginal propensity to consume (mpc)

The marginal propensity to consume (mpc) indicates that, as disposable income increases, an increase in personal consumer spending (consumption) occurs. For example, a marginal propensity to consume of 0.65 indicates that for every extra rand earned, the household will spend 65 cents and save 35 cents

Market price (mp)

Prices actually paid by consumers for goods and services plus all taxes less subsidies. Calculated according to the expenditure method

Money flow

The flow of income and expenditure between the participants in the circular flow

Money market

The short-term and very short-term market for savings and loans

Multiplier

A small initial increase in spending produces a proportionately larger increase in aggregate national income

National figures (GNP)

Value of all final goods and services produced by the permanent citizens of the country for a specific period

Net figures

Net indicates that some amount has been taken away, e.g. net exports reflects the value of exports less imports

Open economy

An economy that trades with the foreign sector

Production method

The adding of final values of all goods and services calculated as gross value added -GDP(P)

Real flow

The flow of goods and services between the participants in the circular flow

Savings (S)

Income that is not consumed

Subsidies on production

Refers to subsidies that are not linked to specific goods or services, e.g. subsidy made on employment

Subsidies on products

Financial incentives to help struggling industries produce, as well as direct subsidies payable per unit exported to encourage exports (e.g. government subsidy on bread)

Taxes (T)

Compulsory payments made by private individuals or business enterprises to the government sector with no direct benefit

Taxes on production

indirect levies on goods and services as they're made, sold, or imported, like VAT/GST, excise duties, and payroll taxes

Taxes on products

Taxes that are payable per unit of some good or service (e.g. VAT, import duties)