Module 1

Economic fundamentals

Economics defined

Economics

The study of how individuals,

businesses and other organisations

make choices that affect the allocation

and distribution of scarce resources.

Three driving forces

1. Demand

2. Supply

3. Price

• Production factors

• Goods and services

• Money

Markets

Input markets• Natural resources (land)

• Human resources (labour)

• Capital (machinery and equipment)

• Entrepreneurship

Markets

Output markets (Goods and services)

Types of consumer goods:

• Non-durable; semi-durable; durable

• Final or intermediate

• Private or public

• Free or economic

Circular flow

Injections and withdrawals

Exercise 1

1. What does the economic system try to

balance?

2. How does the economic system try to

balance these items?

3. What role did the consumer play with

reference to the recent credit crisis?

Adam Smith Karl Marx John M Keynes

Individual demand

Price

Quantity

Factors:

• Price

• Income

• Preference

• Size of household

• Quality

• Advertising

• Substitutes

• Complements

• Weather

• Expectations

Distinguish:

• Movement up / down the curve

• Movement of the curve

D

Firm supply

Price

Quantity

Factors:

• Price

• Change in costs of production

• Change in number of producers

• Change in capacity

• Change in supply of a related good

• Climatic conditions

• Technology

• Taxes and subsidies

Distinguish:

• Movement up / down the curve

• Movement of the curve

S

Equilibrium

Price

Quantity

D S

P1

P2

Pe

AE and Y

AD and AS

What will happen if:

• Consumers spend more / less?

• Businesses invest more / less?

• The government spends more /

less?

• The government increases /

decreases tax?

• Imports increase / decrease?

• Exports increase / decrease?

• Productivity increases /

decreases?

• A natural disasters occurs?

• Agriculture produces a great

harvest / experiences a bad year?

• Technology improves /

deteriorates?

Exercise 2

1. What affects the demand for gold

internationally?

2. When will you expect the demand for

gold to increase?

3. How does the demand for gold differ

from the demand for platinum?

Macro vs Micro economics

Micro economics is concerned with:

• Supply and demand in individual markets

• Individual consumer behaviour

• Individual labour markets

• Externalities arising from production and consumption

Macro economics is concerned with

• Monetary / fiscal policy

• Reasons for inflation, and unemployment

• Economic growth

• International trade and globalisation

• Reasons for differences in living standards and economic

growth between countries

• Government borrowing

Exercise 3

Establish the equilibrium price and quantity:

Financial system Components:1. Surplus and deficit units

2. Financial intermediaries

3. Financial instruments

4. Financial markets

Sectors:• Banking

• Insurance

• Investment

• Retirement

Banking

InsuranceLong-term

Short-term

Pension and Provident funds

Financial markets

Risk and Return

Risk and Return

Economic indicators

Inflation• What is inflation?

• What causes inflation?

• How is it calculated? (note % change vs basis points)

• Inflation, disinflation and deflation

• Nominal vs real

• CPI and PPI

Exercises 4 and 5

1. What happens to house prices during deflation?

2. What is the risk to banks if this happens?

3. How do you think banks will respond to reduce

the risk?

A pen costs R100 at the beginning of year 1 and the

price increases by the inflation rate (10% for year 1

and 8% for year 2). How much will the pen cost at

the end of year 2?

Economic indicators

GDP• What is GDP?

• How is it calculated?

• Nominal vs real (with reference to a base year)

Economic indicators

Money supply• the entire stock of currency and other liquid instruments circulating in a

country's economy at a certain point in time.

• M1A, M1, M2 and M3

Economic indicators

Credit extension• Money multiplier

• 1 / R

Economic indicators

Interest rates and the demand for money:• Transactional demand

• Precautionary demand

• Speculative demand

i

Q

Ms

Md

Economic indicators

Interest ratesInterest rates on the SARB website (home page):

• Repo rate: the rate at which private banks borrow

rands from SARB

• Prime rate: benchmark rate at which private banks

lend out to the public

• R208: the daily percentage closing yields on

government stock issued at a fixed rate of 6,75%

maturing in 2021

• R186: the daily percentage closing yields on

government stock issued at a fixed rate of 10,5%

maturing in 2026

• Sabor: SA benchmark overnight rate on deposits.

Provides the market with benchmarks for rates paid

on overnight interbank funding and serves as a

reliable indicator of liquidity conditions in the

overnight market.

Exercise 6

What is the effect of the current local

interest rates on:

• Credit extension?

• Inflation?

• Future interest rates?

Economic indicators

Balance of Payments• Current account

Merchandise exports

Net gold exports

Service receipts

Income receipts

Merchandise imports

Service payments

Income payments

• Capital accountCapital transfer account

Financial account

• Unrecorded transactions

• Gross gold and foreign reservesChange in net gold and forex reserves (due to BOP transactions)

Changes in reserves and IMF SDR allocations

Valuation adjustments

Trade balance = merchandise exports + net gold exports

- merchandise imports

Financial account= direct foreign investments

= portfolio investments

= other investments

Economic indicators

Economic indicators

Exchange rates• Fixed vs floating

• Spot rates

• Derivative market: forward / futures / options (call and put)

• Factors that influence exchange rates:

= differentials in inflation

= differentials in interest rates

= current account deficit / surplus

= public debt

= terms of trade

= political stability

= economic performance

Economic cycle

Phases:

• Upswing

• Peak

• Downswing

• Trough

Indicators

• Leading

• Coincidental

• Lagging

Economic cycle: upswing

Economic cycle: peak

Economic cycle: downswing

Investment strategy

Economic objectives

1. Economic growth

2. Full employment

3. Stable prices

4. Stable real interest rates

5. Balance of payments

6. Fair distribution of wealth

Distribution of wealth

Distribution of wealth

Policy

Monetary policy• Interest rates

• Open market operations

• Moral suasion

Fiscal policy• Taxation

• Borrowing

• Spending

Junk status?

Questions / Overview

What happens next

Thank you